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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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.

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