George Osborne has had a strangely turbulent couple of weeks. I say “strangely” because the turbulence hasn’t really come from the actual contents of his Autumn Statement, but rather from how it has been marketed afterwards. To clarify, as well as to offer my own thoughts on what the bigger problems are, here’s a good ol’ ten-point list:
1) One way or another… Before the Autumn Statement, the Tory leadership used to boast that they had “cut the deficit by a third”. After the Autumn Statement, they now boast that they have “halved” the deficit. Did they make all that progress in the time that Osborne was stood at the despatch box? Not quite. Fraser Nelson contends in this blog-post that they simply moved from one measure of the deficit:
The top graph shows public sector net borrowing reducing by roughly a third since the last election. The bottom graph shows the structural deficit – aka, the cyclically-adjusted current budget deficit – reducing by roughly half in that time, when expressed as a percentage of GDP. The Government has plumped for the measure that looks better.
2) …I’m gonna find ya… It seems that, for Fraser, this is troubling for two particular reasons. First, there’s the simple fact of the inconsistency, which is confusing at best and deceptive at worst.
3) …I’m gonna getcha, etc. And the second reason is that, by moving to a measure of the deficit that is expressed as a proportion of GDP, Osborne is moving away from any proper measure of the deficit. According to Fraser:
“In the Budget, Osborne said that he has ‘halved the deficit as a share of GDP’ which is technically true – but only at a huge stretch of the English language . There is no such thing ‘deficit, as a share of…’. Deficit, like debt, is measured in pounds sterling. Deficit is government overspend – broadly speaking, it’s the amount by which national debt rises each year. It is measured in pounds.”
I made a similar point about the national debt during my own time at The Spectator.
4) A counter-argument. Well, not so much a counter-argument as an observation: this isn’t entirely new. There’s been confusion about the deficit ever since Osborne stepped into Number 11.
Traditionally, “deficit” has meant something like “government borrowing,” which is the “public sector net borrowing” that’s featured in the first graph above. However, Osborne has often used “deficit” to mean “structural deficit”, which is the “cyclically-adjusted current budget deficit” that’s featured in the second graph. When he talks about his “deficit reduction plan, he’s talking about the structural deficit. His “deficit target” is for the structural deficit. His claim that the “deficit” has been halved is also for the structural deficit…
In fact, he might also have meant the structural deficit when he said that the “deficit” had been cut by a third. If you express the cyclically-adjusted current budget deficit in cash terms, the graph comes out like this:
Which is a reduction of roughly a third between the last election and now.
So, Osborne might not have changed measures in quite the same way that Fraser suggests. Or he might have. Confusion reigns.
5) Another counter-argument. I share Fraser’s qualms about politicians using GDP ratios to say that they have “reduced” or “paid down” the deficit or the debt. But that doesn’t mean that expressing the structural deficit as a proportion of the economy is entirely meaningless or malicious in itself. For starters, it says something about the sustainability of our deficits and our ability to bring them down. For seconds, it’s what the Office for Budget Responsibility uses – and has always used – when assessing Osborne’s primary fiscal target. See, for instance, page 195 of their latest Economic and Fiscal Outlook, which is all set out in percentages of GDP. Osborne would have been consistent with his auditors had he done the same all along.
6) A resolution. The solution is, of course, consistency and clarity – but perhaps it is too late for that now. If Osborne had always said that “we have reduced government borrowing by X” or that “we have reduced the structural deficit, as a percentage of GDP, by Y”, then I doubt he would be facing these complaints now. As it is, he should pick one of those formulations and stick with it.
7) The first bigger problem. Or should he? The major problem with Osborne’s deficit measure, as I see it, isn’t that it’s changed or that it’s expressed in terms of GDP. It’s that it focuses on the structural deficit. As I wrote for Bright Blue’s Modernisers’ Manifesto:
“Osborne’s preferred measure, the structural deficit, has always been an unknowable beast. It is, basically, the portion of the deficit that would remain even when the economy has fully recovered. But what is ‘fully recovered’? Or, to put it in econo-speak, what is the size of the ‘output gap’, the difference between current GDP and potential GDP? Various bodies, including the Office for Budget Responsibility, have various estimates for this number – but these vary wildly. The structural deficit could be smaller or larger than the Chancellor expects.”
It’s all guesswork on top of guesswork on top of guesswork. Which is not an ideal way to manage the public finances.
8) Oh, and what about Osborne’s deficit trap? The Chancellor’s other recent scrape has been with Ed Balls. You’ll remember how he prepared a trap for his Labour shadow ahead of the Autumn Statement: an updated “Charter of Budget Responsibility” that would pledge to eliminate the structural deficit by 2017-18. The idea was, clearly, to have Balls vote against it in Parliament – and thereby bare his fiscal irresponsibility to the world.
Except it hasn’t worked like that. At the behest of the Lib Dems, Osborne has had to dilute his budget pledge. It no longer promises to eliminate the structural deficit by 2017-18, but within a rolling, three-year time frame. And it is no longer a “target” but an “aim”. It’s even got to the point that Balls has agreed to vote for it.
9) It might have snared Balls anyway. Even a dilute budget pledge is more than the Shadow Chancellor has committed to before – and this could cause problems for him within and without his own party. As the New Statesman’s George Eaton put it in a fine post on Tuesday, “some argue that Labour has fallen into another trap by siding with the Tories.” Balls is straining to emphasise that this isn’t the case, but will those to the left of him agree?
10) The second bigger problem. Pretty much everything above, as well as every fiscal argument that politicians have, is predicated on the idea that the Government can control the deficit. But it can’t really. It can control spending levels and tax rates, but all the rest is subject to the vagaries of the wider economy. That’s why I’ve suggested, in the past, that Osborne ditch his current fiscal targets and replace them with ones he can properly aim for. A target for overall spending could be a better option.