IFS urges Osborne to develop a Plan B

The respected Institute for Fiscal Studies think tank today urged George Osborne to prepare a 'Plan B' for fiscal consolidation in case growth prospects deteriorate.

The respected Institute for Fiscal Studies think tank today urged George Osborne to prepare a ‘Plan B’ for fiscal consolidation in case growth prospects deteriorate. The Chancellor told the BBC Politics Show on Sunday that there was no alternative to his planned cuts.

Early headlines from the Telegraph, Standard, and Guardian have reproduced the IFS’ press release which outlined that there was “little room for Budget easing”. But as reported on Sky, the small print of the document and discussion at the event clearly called for the development of a Plan B in the medium term.

The Summary of the Green Budget document says:

“It may therefore make sense for the government to consider ways of reducing the pace of fiscal consolidation should demand conditions deteriorate significantly – enabling it to ‘trim the sails’ again in the same manner that it did so last November.”

Chapter 5 of the Green Budget includes a graph (reproduced below) showing how different growth scenarios would impact the budget balance forecasts. On both the central and pessimistic case developed by Barclays for the IFS, growth would come in lower than anticipated by the OBR with a knock on effect on the deficit.


The report says:

“Although there may be no need to implement an alternative short- or medium-term plan at this stage, the Chancellor would be best advised to consider how he would respond to a changing – and, in particular, a worsening – outlook for the economy, the public finances or the quality and quantity of public services being enjoyed. Having such alternative plans to hand could prove useful.”

Responding to a question from the Financial Times’ Chris Giles, Michael Dicks of Barclays Wealth said:

“[The Chancellor] shouldn’t commit to cuts in stone. If growth was weaker than expected [the Government should] cut more slowly.”

While Carl Emmerson of the IFS added:

“It would be unlikely that the optimal spending decision in October 2010 would be optimal in 2012.”

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18 Responses to “IFS urges Osborne to develop a Plan B”

  1. Mehdi Hasan

    RT @leftfootfwd: IFS urges Osborne to develop a Plan B: http://bit.ly/eQvLdB reports @wdjstraw

  2. Jenni Willows

    RT @leftfootfwd: IFS urges Osborne to develop a Plan B: http://bit.ly/eQvLdB reports @wdjstraw

  3. Emma Jackson Stuart

    RT @leftfootfwd IFS urges Osborne to develop a Plan B: http://bit.ly/eQvLdB > in the words of @willself: "what's the plan, guys?"!

  4. Sean

    So basically the graph shows that after 16 years of uninterrupted economic growth, Labour decided to borrow money over a 6 year period (before the crash) to spend? If you run a poor budget before the crash no wonder the deficit blew out after the crash.

  5. Mark Stevo

    I don’t know why you’re so dismissive of the IFS’s statement that there’s limited wiggle room to relax the budget. The IFS are saying that if conditions weaken below what they’re currently projecting (which to remind you is a growth of a little less than 2%).

    This is quite different from what I understand your position to be, which is an immediate relaxation of the budget irrespective of conditions.

    Am I right in concluding that you disagree with the IFS on this point? It seems like you’re cherry-living the bits you like and downplaying or ignoring the bits you don’t.

  6. Mark Stevo

    Oh FFS I hate typing on the iPhone. Cherry-living indeed…

  7. Ed Jacobs

    Probably worth remembering that in December Cabinet Secretary, Gus O’Donnell was reported in the FT to be drawing up contingency plans in case Osborne’s plans don’t work out. See http://www.ft.com/cms/s/0/79089788-06f3-11e0-8c29-00144feabdc0.html#axzz187Th6gO8

  8. Will Straw

    Sean – Rowena Crawford of the IFS was very clear this morning that the deficit was due to the recession not to Labour’s (very modest) borrowing before the financial crash which the Tories supported. This ippr report contains more information.

    Mark – Good question. I’m not dismissing the IFS’ claims at al. They say two distinct things: (i) given where expectations currently lie, Osborne should not make the forthcoming Budget a giveaway, and (ii) that he should develop a Plan B in case things turn out worse than the OBR expects in 2 years time. My position has always been that Osborne should have started on a different trajectory. I think his judgment was wrong to take such a severe course but now that we are where we are, the markets probably would punish any short-term deviation. But that does not mean that he should not develop a Plan B setting out an alternative strategy in case growth falls below 2%.

    All the best,

    Will

  9. Mark Stevo

    Thanks Will, especially for bearing with my ill-constructed missive.

    What you seem to be saying is that there is no practical alternative to the cuts right now (not withstanding your desire for a publicly declared Plan B), which would seem to be a divergent view from what we read in other articles on this website.

  10. Jane Davidson

    RT @leftfootfwd: IFS urges Osborne to develop a Plan B: http://bit.ly/eQvLdB reports @wdjstraw

  11. Mr. Sensible

    The government should be looking at putting that plan B in to action given the figures from last week.

  12. Kevin Richards

    "Osborne, you may not want to have a plan B but you're being advised to do so" -: IFS urges Osborne to develop a Plan B http://bit.ly/e1OYO8

  13. Mark Stevo

    A quarter’s estimated performance aren’t enough to justify any significant change in action given the inaccuracy in the first estimate (take, for example, Brown’s Q4 09 GDP figure). Given how these figures are put together, it’s quite extraordinary how much faith is vested in them.

  14. Mr. Sensible

    True, Mark, but I think this should be starting the alarm bells ringing for Osborne.

  15. Mark Stevo

    He should be accounting for all available evidence, yes.

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