POLITICS

George Osborne's Budget Surplus Rule Is 'Madness' And 'Risible', Say Experts

15/01/2015 12:04 GMT | Updated 15/01/2015 12:59 GMT
Dan Kitwood via Getty Images
LONDON, ENGLAND - JANUARY 06: Chancellor of the Exchequer George Osborne leaves Downing Street after a cabinet meeting on January 6, 2015 in London, England. The cabinet meeting is the first since the Christmas recess. (Photo by Dan Kitwood/Getty Images)

George Osborne's proposed law to ensure the public finances should be in surplus in "normal years" has been panned as "risible" and "madness" by experts.

The chancellor used a speech to the Royal Economic Society on Wednesday to pledge to make Britain the richest economy in the world by the 2030s under his plans, suggesting that he would bring in his budget surplus rule once he is nearly finished with his cuts.

"I believe that, once the public finances are close to balance, we should introduce this fundamental and simple principle for fiscal policy in the UK: in normal times the Government should aim to run an overall budget surplus each and every year," he said.

Under the "good housekeeping" blueprint, the Office for Budget Responsibility watchdog would be given a trigger to define when the country was outside of normal times - such as recession - which will oblige the government to set out how and when they will return the finances to a surplus.

"So in the good times we stay in surplus - raising more money than we spend and using that to pay down our debts," Osborne said. "And when the bad times come, the Government will have to set out a clear plan to get back to health."

However, economists and other experts have rounded on the chancellor's proposal. Speaking to the Huffington Post UK, former Treasury adviser James Meadway said: "Osborne's aim to generate a surplus is foolish but, I'd suggest, unlikely to be achieved if it is attempted - on current evidence, the economy will crash before that surplus is ever achieved."

Meadway, now senior economist at the New Economics Foundation think-tank, went on: "Osborne's rule may make for good headlines, but it's risible economics.

"A government surplus comes out of the money we give it in taxes. If we are giving it more in taxes than it is spending back into the economy - the definition of a budget surplus - that implies the rest of us are spending more than we are giving back into the economy. That implies yet more borrowing by British households - who are already amongst the most heavily-indebted in the world."

"Debts on this scale are inherently risky. The more households borrow, the more exposed they are to economic trouble, and, as we saw over 2007-8, high debts make the economy more likely to crash.

"So it's perfectly all right for the government to run a mild deficit, indeed arguably a good thing - it stops the rest of us having to borrow so much."

Others, like Financial Times economics editor Chris Giles, have been similarly scathing. "Dogged insistence on absolute surpluses is madness in today’s world," he wrote in the paper.

Ben Southwood, head of research at the free-market Adam Smith Institute think-tank, told HuffPost UK: "It is not necessary to run a budget surplus in normal times to make the national debt sustainable, or even to make it fall steadily, as long as the UK economy is growing healthily.

"What's more, it's highly implausible that any government would be able to keep itself to such tight strictures given the temptation to boost spending or cut taxes.

"On top of this, we would usually think efficiency is best achieved when the government runs as balanced a budget as possible, letting people make their own decisions how much to spend and how much to save."

Southwood conceded that there was "one decent argument" for the proposed budget surplus, explaining: "if UK citizens are not saving enough for their old age, given a shrinking population and the promise of unconditional unfunded retirement income, then we might need the state to do extra saving in order to fund those costs."

The chancellor's budget surplus idea was inspired by Tory backbencher Ben Gummer, who called in 2012 for budget deficits to be made against the law.

Writing in the Financial Times, the Ipswich MP warned that "balancing the books at all will have been a significant achievement" without laws imposing spending limits.

Ryan Bourne, head of public policy at the Institute of Economic Affairs, said it was "good" to aim for a budget surplus in the next few years, but added: "There is nothing especially clever or necessary about running a continual surplus beyond achieving that ambition.

"Indeed, doing so could lead to a situation where the government starts buying up private sector assets. Politicians should instead pledge to always have no structural deficit rather than instituting an overall budget surplus.”

Howard Archer, chief UK economist at IHS Global Insight, said that he endorsed Osborne's proposed budget surplus law in principle, but doubted whether he could hit his "optimistic" and "ambitious" targets.

"I do question if he's going to achieve the cuts at the pace that he expects to do given what he has outlined so far. Some departments are going to take an almighty hit," he told HuffPost UK.

"I think his targets are optimistic but in principle I think you should aim to run a surplus when times are good as when we came into the last downturn, the public finances were in a pretty dire state so we had pretty little room to manoeuvre."

General Election 2015

Osborne's proposed budget surplus law comes as his Labour rival Ed Balls is launching a report in Washington on bringing greater prosperity to the world.

In a blog for the Huffington Post UK, the shadow chancellor wrote: "The fact is the delayed return to growth in the UK - after the recovery was choked off in 2010 - has not been accompanied by the sustained rise in living standards for most people which the Conservatives promised. Far from it. ‎Stagnating wages explain both why people are £1600 a year worse off since 2010 and why the Chancellor's deficit reduction targets have been so badly missed as lower tax receipts have led to billions more borrowing than planned."

"Without a strong and progressive response, the danger is that our politics will tend toward populism and insularity. But a better future is possible, one that combines openness with solidarity, dynamism with security and innovation with equity. That is what we mean by a new Inclusive Prosperity for the 21st Century.‎"