Theresa May declared her intention of junking George Osborne’s surplus target in her first Conservative leadership election launch speech. The then Chancellor himself abandoned it a day later. And yesterday, Damian Green packed a lot of meaning into a small change of tense: “the period of austerity meant that tough decisions had to be taken across the board,” he said on The Andrew Marr Show. In other words, that time is now over. When Jeremy Corbyn fires off complaints about austerity, he is shooting at a target that no longer exists.
We do not know what will replace Osborne’s aim of achieving a surplus by 2020 – itself a variation on that original Conservative manifesto pledge of 2010: “we will safeguard Britain’s credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament”. Perhaps his successor will announce a plan of that kind in the Autumn Statement, since precisely how much of the deficit is structural and how much is cyclical is an unknown, and that hedging phrase “the bulk of” makes the vague commitment even vaguer.
He is more likely simply to suck it and see: in other words, promise more infrastructure spending (perhaps picking up some of the ideas floated by Sajid Javid) hint at substantial deregulation post-Brexit, and aim for as much room for manouevre as possible on spending and borrowing. This would be controversial. The deficit hawks argue that a budget deficit of about three per cent of GDP is one thing, but that one of five per cent or so would be quite another. Because Government can borrow on easy terms now, they say, doesn’t mean that it can do so indefinitely.
Furthermore, they add, the Government and the Bank of England have over-reacted to post-referendum dangers of downturn: manufacturing has rebounded; so has services. Consumer spending has been buoyant; house price growth is stable. Morgan Stanley, which said that recession would happen in the event of a Brexit vote, now says that it won’t. None the less, the economy is growing more slowly than it did pre-referendum. The Chancellor would be justified in not squeezing spending too tightly, and making the smooth delivery of Brexit his main priority.
Either way, he should be thinking about ways of returning in the medium-term to a more sustainable economic model than one reliant on financial repression. Those deficit and surplus targets, so appealing at first glance, are actually part of the problem. Almost no-one believes the forecasts which claim they will be met; scarcely more believe that government intends to meet them. For example, Osborne’s last Budget figures showed a deficit of £21 billion or so in 2018-19 turning itself into a surplus of £10 billion or so the following year. This assumption stretched credulity.
“Budgets should concentrate much more on the here and now, as well as on those things that the Government has greater control over, such as the levels of spending and taxation.” Peter Hoskin once wrote on this site. ” In a very useful recent report, the IMF looked at the sorts of rules in operation around the world: it might be that a rule setting a target for overall spending might be more applicable to Britain’s current situation.” The Chancellor faces the double challenge of maintaining as much flexibility as possible while simultaneously setting out a firm economic framework.