The reality behind George Osborne's new public finances pledge
Here’s a useful way of thinking about George Osborne’s new surplus target. Back in 2010 the Chancellor was committed, through one of his fiscal rules, to reducing Britain’s national debt by 2015. Today, the Chancellor has committed, through a brand new fiscal rule, to reducing Britain’s national debt by 2020.
I know that doesn’t sound quite the same as the version in the Chancellor’s speech, but that’s precisely what’s happening here. Achieving a surplus on the annual budget is precisely the same thing as paying back the national debt rather than adding to it. And today’s surplus target will replace the old “supplementary” rule on reducing the national debt – the one he ditched last year.
Now in fairness, the new rule he unveiled today is more stringent, in some ways, than the previous one: it involves reducing the national debt in cash terms (rather than as a percentage of GDP). All the same, it’s clear that, far from this being a new, pioneering, ambitious fiscal target, it is merely a rehashed, rebranded version of the Government’s old target. And, set against the fact that it’s more stringent, it’s also going to be met far later than the old one.
Moreover, it isn’t even as if the Chancellor’s new rule will involve any kind of change in his existing fiscal plans. Based on the current trajectory of Government spending, the Treasury is already heading for a surplus in the budget deficit by around 2019. So: eye-catching it may be, but the new surplus rule is hardly a game-changer.
More interesting, from an economic standpoint, is his commitment to “ensure that capital spending grows at least in line with GDP”. One of the major problems facing the economy in recent years has been the complete collapse in both private sector and public sector investment just when it was sorely needed. However, this was at least partly due to the coalition government itself, which (as most governments, including Labour, do) found that public investment was far easier to cut than benefits or the Health budget.
Now, don’t get the impression from all of the above that the Government is barking up the wrong tree. It’s certainly laudable for the Chancellor to be aiming to reduce the scale of the national debt. Britain, as you can see from the chart above, has faced annual deficits (eg an ever-increasing national debt) every year since the turn of the millennium. But, however the Chancellor dresses this up, it is simply another fiscal rule, there to replace the one he broke last year.