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