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

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


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.

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