By Peter Hoskin
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could be the most significant political story of the day revolves, more or
less, around the graph above. It shows our national debt as a share of GDP —
and you'll notice how it tails off slightly towards the end of this Parliament.
That is to comply with George Osborne's second fiscal rule, which is to “ensure
that debt is falling as a share of GDP by 2015-16.”

there's a problem — and a big one at that. The Chancellor is coming closer and
closer to breaking that rule. At the time of his original Budget, the debt was
expected to fall from a peak of 70.3 per cent in 2013-14 to 67.4 per cent in
2015-16. In the latest Budget, the peak is now forecast to arrive a year later,
in 2014-15, and be much higher at 76.3 per cent. And the subsequent fall is
only to 76 per cent. Without growth, the tax receipts and lower borrowing on
which Mr Osborne’s fiscal plan rests have become far less certain.

will he ever break the rule? I warned that he might in an article
for the Times (£)
last year. And now, today, the same newspaper reports
that Osborne is so concerned about the prospect that he is prepared to
just ditch the rule by the time of the Autumn Statement. He will not know what
the Office for Budget Responsibility’s latest forecasts are until November, but
it’s fairly likely that they will show the debt rising as a share of the economy
in 2015-16.

so, it would be a horribly abrupt resolution to the dilemma that Mr Osborne has
faced over the past two years. His debt rule was written, in the first place,
to satisfy the credit-rating agencies: they made falling debt-GDP ratios a
condition of most country’s AAA-ratings, and they demanded
something similar of Alistair Darling
before the election. Breaking it
would certainly risk a downgrade.

the alternative — “austerity squared,” as I called it in my Times article;
another round of spending cuts and tax rises to keep the debt in check — would
be politically poisonous as the election approaches. And so, as the Times
report puts it this morning, “Senior sources said Mr
Osborne, with Mr Cameron’s agreement, was ready to take a political hit on
missing the target rather than face the ‘nightmare’ of further cuts.”

Of course, breaking the rule would be embarrassing for the
Chancellor and for the government. That’s what happens when you make yourself a
hostage to fortune, and your fortune turns sour. But let’s end with two
mitigating points, nonetheless. First, after Gordon Brown’s endlessly malleable
fiscal rules, it would be quite a novelty to see a politician stand up and
admit that he’s missed his original target. Such is the power of the Office for
Budget Responsibility: its forecasts cannot be fiddled by those in power, so
they just have to be yielded to.

And then there’s the fact that a credit-rating downgrade, if that’s
what followed, needn’t rock our economy too badly. As a recent study by
Bloomberg — which I mentioned in a post here
— concluded, “in about 47 per cent
of cases, countries’ borrowing costs fall when a rating action suggests they
should climb, or they increase even as a change signals a decline.”
Britain might still keep the low interest rates of which the Chancellor is so

Of course, an immediate and significant spurt of growth would
invalidate much of the above — but, at the moment, that’s like hoping on
England winning the football World Cup. Far better to take the realist’s route,
as Mr Osborne appears to be.

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