Do you remember George Osborne’s first “emergency” budget in June 2010? The chancellor of the exchequer argued that “in order to place our fiscal credibility beyond doubt” his formal, fiscal mandate would “ensure that debt is falling as a share of GDP by 2015-16”.
More than two years and a double-dip recession later, that mandate is looking rather shaky. Reports in both the Times and the Guardian this morning suggest the Treasury is on the verge of abandoning this key target of reducing net debt as a proportion of national income - in order to avoid having to implement “further swingeing spending cuts”. It could be the biggest coalition U-turn of them all.
“Abandoning the target would be a risky political decision," writes the Guardian’s political editor Patrick Wintour. “Current high borrowing figures and lower tax receipts have rapidly reduced ministers' chances of reaching the target, though the Treasury insisted on Tuesday it was premature to come to a final conclusion before further sets of borrowing figures are published.”
Treasury officials are adamant that no decision will be taken before the Chancellor has received the revised borrowing figures from the Office for Budget Responsibility (OBR), ahead of his Autumn Statement.
But based on conversations with “senior sources”, the Times reports how “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. Such a path would mean a huge loss of face for Mr Osborne, and an increased risk of a downgrade from ratings agencies.”
With growth stalled and tax revenues down, city experts, such as the invest bank Citigroup, are now predicting that the Treasury will borrow £48bn more than forecast in 2015-16, which would result in Britain’s debt ratio rising that year to 90%.
Osborne and his allies are expected to argue that the government is still on course to meet its main goal of balancing the structural deficit “in the final year of the five-year forecast period”.
Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR), told the Huffington Post that it had long been clear that the debt target “was unlikely to be hit, and that this does not matter, either economically or to the financial markets. . . [T]he main problem facing the UK economy in the short term is a lack of demand, which is in large part the result of the government's decision to pursue over-rapid fiscal consolidation. To the extent that any change is an overdue recognition and reversal of this mistake, it is to be welcomed.”
Portes, however, also took a swipe at Osborne’s other fiscal target:
“It should be noted that it makes no sense for the government to ditch the secondary debt target while keeping its primary target - to balance the structural current budget five years out, on a rolling basis - unchanged. The point of the secondary target was always not that it made sense on its own, but that it was necessary to make the primary target remotely plausible. On its own, the primary target is always five years away, so it can never really be missed, and therefore imposes little or no real fiscal discipline in the short to medium term. So abandoning the debt target will mean, as a matter of economic logic, rethinking the primary target if it is has to have any economic credibility at all.”
Ian Mulheirn, director of the Social Market Foundation (SMF), told the HuffPost that “it turns out that the Chancellor’s Plan A was never compatible with his debt rule because it didn’t allowed enough growth to boost tax revenues. For that reason he will have to choose between his plan or his rule this autumn.”
He added: “Cutting faster than planned to meet the rule – Plan A on steroids – will have even less credibility given the failure to date. But simply sticking to a failing spending plan and shifting the fiscal goalposts isn’t going to inspire investor confidence either.”
Over the weekend, senior Liberal Democrats piled pressure on Osborne, with the business secretary Vince Cable arguing that “the problem of growth” has “nothing to do with…supply side measures basically. It’s a demand issue”, and deputy leader Simon Hughes saying: “Clearly plan A hasn’t been enough…the levers that have been pulled haven’t adequately worked.”
Today, Labour leader Ed Miliband used Prime Minister's Questions to mock the Chancellor: "Isn't the fact he is failing the very test he set himself the surest sign yet his plan is just not working?"
For George Osborne, it is a question that won't go away between now and 2015.
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