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