Osborne’s new budget law is about politics, not economics

The chancellor has presented the next Labour leader with an impossible choice

George Osborne ncr


George Osborne’s plan to enshrine in law the requirement to generate a budget surplus is one of those ideas that sound great when you first hear it. But the more you think about it, you realise that it really serves no useful purpose whatsoever, and that what it’s actually trying to achieve is something very different to what you first thought.

At his annual speech to the city’s top bankers at the Mansion House last night, the chancellor outlined his plan to create a new fiscal framework, in which future governments will be prohibited from spending more money than they receive in tax revenues. Budget deficits will be, quite simply, against the law.

This sounds, on the face of it, like a reasonable idea. We all pretty much agree that it would be preferable to operate within our financial means and that, in an ideal world, we wouldn’t spend more than we earn.

So what’s wrong with turning this thinking into a more formal arrangement? Well that, I suspect, is what the chancellor would like us to think. Because there’s actually a lot more to his plan than first meets the eye.

For a start, let’s ponder the fact that George Osborne is proposing to pass a law forcing himself to eliminate the deficit when he’s already committed to balancing day-to day spending by 2018. Quite a challenge as it is, given that only in seven of the last 40 years have governments actually achieved a budget surplus. Why would anyone create a rod for their own back in this way?

Furthermore, borrowing to fund investment has long lain at the heart of modern economics. And many economists argue that the ability of governments to borrow and spend can provide valuable financial stimulus in times of hardship. Yet the chancellor is proposing to give up this powerful economic lever.

Or is he? In his speech, Osborne explained that this new rule would apply ‘in normal times’. But what does this mean? It seems that the Office for Budget Responsibility would play some role in determining what is and is not normal, but the details are far from clear. The opportunities for fudging are legion.

As an economic plan, Osborne’s proposals sound distinctly odd. But this isn’t about economics. It’s about politics.

By reaffirming his commitment to eliminating the deficit and balancing the budget, the chancellor is using a narrative of strong fiscal responsibility to combat criticism of his performance.

Public sector net debt has more than doubled since 2008. And despite years of austerity, the deficit has fallen by only a third since its peak in 2010. A frustrated Osborne is also, one could argue, using this opportunity to stick up two fingers to those who say that austerity has gone too far.

Just this week, both the OECD and the IMF urged the government to reduce the scale and speed of spending cuts.

At the same time, the chancellor is throwing a bone to those at the right of his own party who yearn for a more traditional approach to public finances, harking back to the era of the late 19th and early 20th centuries when balanced books were the norm. He is also sending a clear warning to colleagues who might be thinking about arguing against his stark fiscal agenda.

But it’s not just about the Conservatives. Osborne’s proposals appear designed to exert maximum influence on the selection of the next Labour leader, too. As the BBC’s Nick Robinson has pointed out, by announcing these measures now but delaying a vote on them until the Autumn, the chancellor has made the leadership campaign all about public spending.

And he has presented the new Labour leader with an impossible choice: assent to his proposals or risk compounding the party’s reputation for poor financial discipline.

Finally, Osborne is using these proposals – and the inevitable hand-wringing that they will cause over the coming months – to distract us from the detail of the cuts and of their impact on the delivery of public services.

While we are occupied with this non-argument about who is or isn’t for or against doing what we’re already doing, our school system, our welfare state and our health service are being dismantled around us.

The argument for or against balanced public sector budgets is an argument that is worth having. But it is not a black and white issue. And by attempting to turn it into one, the chancellor is putting political ambition before the economic responsibility that he claims to champion.

Simon Perks is a writer, speaker and advisor focusing on public finance and the delivery of public services. Follow him on Twitter.

28 Responses to “Osborne’s new budget law is about politics, not economics”

  1. Dave C

    I would love to see a real debate between Osborne and Richard Murphy. Murphy would tear him to shreds. That is almost certainly why the Chancellor would decline this debate

  2. Torybushhug

    People always resist change. Living within that we produce will become normalised and expected. I still see vast waste in the public sector such as social workers in Haringey absent for much of the time and when they are at work, chatting about their latest buy to let seminar or Gods great plan (see this a lot), very little actual work taking place.

  3. Matt Booth

    Yeah, no. Osborne doesn’t understand any of the basic tenets of economy. This proposed law, coupled with the insistence of austerity, is just proving it.

    When the economy is in a recession, the government needs to use the low interest rates to borrow money to pump into the economy to get it moving. When there is growth, it works to save money and repay debts. That is how it works. That is how it is proven to work.

    Refusing to borrow money is just literally insane. It’s not how a fractional reserve system works. At all.

    And I have no problem with trimming the fat off the nation, but the problem is that there is the actual meat of society that is being cut away.

  4. Matt Booth

    If the rest of the parties come out against this, which I sincerely hope they will, this can be smashed down out of Parliament. This is total rubbish and lacks the basic understanding of how an economy works.

    All too often people seem to think being part of a global economy is anything like a household, or even a small business. It’s not. While you could not continuously run a budget deficit in a small business or household, countries can, do, and will.

  5. Torybushhug

    The Government is borrowing vast sums and paying something like £150m per day in interest.
    We spend hugely more than we produce.
    We are nowhere near austerity.
    The greedy entitled British need to learn a little humility.
    It’s a very uncertain world out there, borrowing even more as the old fashioned Keynesians propose could prove catastrophic if the world went into a tail spin.
    This quaint old idea we were able to borrow and prosper after WW2 missis a critical point;
    We were in a club of few nations that had the industrial capability to supply the world.
    Now we face masses more competition.
    Why does the left always want things to be even better than we entitled Brits already enjoy? It’s like some sort of Puritan sense of superior worth.

  6. Jason Pettitt

    Impossible choice or open goal? Even the FT has dismissed Osborne’s Law as political gimmickry in a scathing editorial.

    Mind you, is Labour up to scoring an open goal?


  7. Dark_Heart_of_Toryland

    This isn’t about ‘change’, or indeed, economics. It’s simply a cynical ploy by Osborne to perpetuate the myth of his own competence (a myth which, astonishingly, seems to remain intact in the face of all the evidence to the contrary). It plays to the evident economic illiteracy of the public, the Tory party, and – unfortunately – of the Labour party.

  8. Dark_Heart_of_Toryland

    ‘The greedy entitled British need to learn a little humility.’

    Quite. So why has Osborne so signally failed to tackle the financial sector, who caused the deficit in the first place?

  9. Dark_Heart_of_Toryland

    Regretably, Labour appear to be too busy scoring own-goals to bother with the Tories’ gaping empty goal mouth…

  10. Torybushhug

    Regulation is ever tougher, but yes the FS industry still needs further regs. Retail FS such as IFA’s and Mortgage Brokers were much more heavily regulated from 2004, and the reason these areas became markedly more compliant was because each player has personal responsibility. Each month the FCA publishes a hall of shame list of names that have transgressed the rules and in all cases they lost their license, had a significant fine (life changing sums) and often had their assets and home taken under the proceeds of crime provisions.

    Once the City faces this same regime you will see massive change.
    I’ve been arguing for this for an age as a lone canary.

    One other point in passing; Even at the peak of the crash the British mortgage market was highly ordered and repossessions ran at just 0.2%. Labours 2008 toughening of the mortgage market I warned would lead to millions being frozen out of home ownership in favour of ever richer landlords. This is precisely what has happened. We have slightly fewer repossessions, but to the detriment of millions of would be home buyers.

  11. Torybushhug

    The FT failed to spot the Banking crash, whilst ordinary idiots like myself on a website called housepricecrash were not only predicting the crash from 2005 and on, but some even argued the cause would be something new fangled called credit crunch.
    Experts all too often fail to see whats round the corner, they tend to extrapolate their vision from a current scene.
    Keynsian economics is an old and tired idea, but people like clinging to familiarity.

  12. Dark_Heart_of_Toryland

    Unlike Neoliberalism, Keynsian actually worked; and for the benefit of the entire economy not just one narrow sector of it.
    Neoliberalism, on the other hand, has catstrophically failed – yet you do not seem to be excoriating the Tories, or indeed Labour, for clinging so desperately, and so disastrously, to this particular form of familiarity.

  13. Cole

    We’re all (or mostly!) against waste and inefficiency, and you see a lot of it in large public companies too, especially the ones that are semi-monopolies. Osborne’s balanced budget idea is of course pure politics. Economically, it’s taking us back to the 19th century as are most of his policies. It’s largely useless old claptrap that was intellectually discredited decades ago. Still, it suits the interests of the City types that back the Tories – which is why it’s being peddled it if was a smart and modern approach. Quite why Liz Kendall backs balanced budgets is a mystery, but she seems a silly and vacuous person.

  14. Dark_Heart_of_Toryland

    I await the implementation of tougher regulation with suitably bated breath. In the meantime, how many of those in the UK responsible for the financial crash of 2008 actually suffered any real penalty?

    Mortgages are a very minor symptom of an increasingly desperate housing problem. Fiddling with the ease of availability of mortgages is not going to address the fundamental failure of the market in this area. Indeed, making mortgages more easy to obtain would only lead to even higher house-price inflation.

  15. Matt Booth

    We are in the very definition of austerity.

    This government is borrowing vast sums of money, that is true, and none of that is going into the economy.

    We can keep borrowing money, and we could run a budget deficit indefinitely if we wanted to. We’ve been running one, near enough, for about 300 years.

    There is no harm in running a surplus. Hell, it’d be great if we did. Norway have a huge surplus, because they nationalised their share of the North Sea Oil (tell me, what did the Tories do with our share?). They took a hit during the financial crash, but it barely dented them. We could be like that, maybe, one day.

    But today is not that day. We need growth before we can start to save. Simple fucking economics.

    This article is saying that Osborne’s plan to enshrine it in law is there to mess with the Labour leadership more than it’s there for the good of the country.

  16. Cole

    Keynesianism isn’t the old and tired idea; it’s the rubbish that Osborne and friends peddle that’s largely out-of-date twaddle, The economy was actually beginning to recover in 2010, but Osborne’s daft policies and silly announcements stalled it for about 3 years. Interestingly, the US economy, presided over by Obama, recovered much faster, in spite of endless bleating from right wingers about his stimulus policies.

  17. Matt Booth

    Iceland prosecuted the bankers and refused to bail them out… Guess who has economic growth now?

  18. Dark_Heart_of_Toryland

    Quite why Liz Kendall is in the Labour party at all is a mystery. The Tory party seems more like her natural home – or perhaps UKIP, where silliness and vacuity are particularly welcome.

  19. Jason Pettitt

    To be sure, the Tories have an overall majority in parliament. But yeah, small ‘c’ conservatives, if they are paying attention, should recognise that Osborne’s Law is simply silly, against their interest (realistically Osborne isn’t going to get to run a surplus) and, party allegiance aside, vote against it.

    Certainly few others should want to be associated with it.

    Small ‘c’ conservatives also like to think (stretching credulity in my view, but whatever) of Osborne as pragmatic (https://theconversation.com/how-george-osborne-built-a-power-base-from-pragmatism-41704). He’s the chancellor who didn’t double down on austerity after 2012 in an attempt to push through his 2010 promise to pay off the deficit within 5 years. That somewhat generous reputation is now in tatters. Osborne’s first big announcement of the new parliament is to pass a law against pragmatism in the Treasury.

    Steve Bell calls it right: http://www.theguardian.com/commentisfree/picture/2015/jun/10/steve-bell-george-osborne-mansion-house-speech-cartoon

  20. Jason Pettitt

    You mean a website called housepricecrash attracted people who predicted a crashes (in house prices or finance? or everything?) but most of you had no idea how or when or what would cause it? I suppose even a stopped clock is right twice a day.

    Confirmation bias is ace, isn’t it.

  21. MariaJTorres

    nowRead this leftfootforward. ….. Here’s a Blog


  22. Matt Booth

    Yeah, there was no doubt some Tories would vote against this as well. Evne if it does get through, it may get stuck in the Lords.

  23. stevep

    Usual Tory hypocrisy. They borrowed more in 4 years than Labour did in 13 then want to pass a strange law making it difficult for future governments to borrow. It smacks more of political opportunism than rational economic thinking.
    The Tories and their far-right press sycophants seized on the banking crisis in the last decade to play politics with a nation in crisis. Thankfully Gordon Brown got it right (with the grateful thanks of many a nation) and the economy was growing by 1% by the time he left office, A magnificent achievement given the circumstances.
    What has poor old George Osborne achieved in office? Borrowed more than any Labour government in history, took us into two recessions and very nearly into a third with 0.3% growth. No matter what manner of spin is put on it this is a dismal achievement.
    No. Once again they are putting party before country, division before harmony, spin before substance, smoke and mirrors before political honesty and the wealthy elite are grinning all the way to the bank.

  24. Torybushhug

    ‘We need growth before we can start to save. Simple fucking economics’.

    Why do you put so much faith in politicians to deliver more growth, are they all that capable?
    We have fairly decent growth, why the gluttony for even more, are the British really this entitled? We’re amongst the best off on the planet, this lust for ever more seems fairly undignified and spoilt.

    As to Labours death throws debt splurge, well any tool could get a brief growth response from that, but the left always fails to factor in the fact Europe went down the pan from 2010 so of course we weren’t immune to this downward drag.
    Spending money is the most simplistic unimaginative approach one could take. If I were so minded I could back that idea but it would render me a simple minded populist.

  25. Matt Booth

    0.3% growth is not, under any definition, “fairly decent”. IF you aren’t going to actually say anything sensible and would prefer to spout your opinions on things you know little or nothing about you’d be better off posting on The Daily Mail, where people won’t know the difference.

    However, I’m still going to reply to your comments.

    The IMF agrees that austerity has stunted the UK economic growth. The US went in much lighter on the cuts, and has seen sustained growth ever since.

    Labour’s “debt spurge” stopped the economy from collapsing entirely. Spending money to battle a nation out of a recession is literally the tried, tested and proven method. It’s simple minded to think cutting services and starving the economy of money is the solution.

  26. RoyB

    Just call it for the rubbish it is and ask why on Earth would any Chabcellor decide to tax people more than necessary just to achieve a surplus. It’s stupid. Remember that current account deficits and surpluses are policy instruments, not policy objectives.

  27. Riversideboy

    Its all brilliant Westminster babble, yabo corridor politics for the press to write articles about. It means bugger all to the person in the street(voters) who already are having working tax credits slashed and support for their sons and daughters going to University taken away. keep blowing raspberries at each other in the corridors of Westminster. The real world out there will sort Osborne out when they eventually realise what many realise now, he is a right wing fanatic only interested in the very rich.

  28. Harold

    Neoliberalism has worked but only for a few, mainly because we as a society have not yet made the richest rich enough as yet, so that trickle down can start to work. Hence the need for bigger cuts and more of them along with the odd tax rise and increase in borrowing by another name. Once neoliberalism has achieved this we will all see what a great idea it was but as we were told at the election the job is not yet finished.

Leave a Reply