Now, George, about this surplus

At the Conservative conference, George Osborne announced that, assuming his party is re-elected, he is planning to achieve an ‘absolute budget surplus’ by 2020. This is different from his last promise to eliminate the structural deficit, which left plenty of wriggle room because no-one is really sure what the structural deficit is. His latest pledge,though, means getting rid of the entire deficit.

That, as Sir Humphrey might have said, is a very bold and ambitious goal, Chancellor.

Let’s start with the OBR’s projections from July this year. All figures are percentage of GDP.

Screen Shot 2013-10-11 at 18.24.11

Non-interest revenue is forecast to overtake non-interest spending in 2017-18. This means that the government’s Primary Balance will finally be in surplus. That’s not the whole story though. Look at the bottom set of figures. Because of the UK’s large debt, the interest payments are so high that the government still has to borrow. The debt-to-GDP ratio only falls because, by 2018-19, the economy is growing more quickly than the debt. So, though debt appears to be reducing, the government is actually still running a small deficit well into the next decade.

But that’s all changed now. Mr Osborne is talking about going much further. He wants to eliminate the deficit completely, which means that he will need to plug a gap of around 1.3 percent of GDP. That might not sound like much but, at today’s prices, it’s somewhere around £20 billion. (It will be more than that because by 2020 the economy will have grown but let’s not over complicate things.)

Birmingham University’s Chris Game has kindly put this on a graph so that we can see the extent of the shortfall.

Screen Shot 2013-10-11 at 18.46.59

As you can see, eliminating the deficit completely wasn’t part of the original plan.

There’s more though. It seems to have attracted relatively little comment but, as the IFS noted earlier this year, the Chancellor has kicked a lot of his planned fiscal consolidation into the next parliament.

Screen Shot 2013-07-02 at 06.07.32

To achieve this will require further cuts or tax increases of £25 billion.

Screen Shot 2013-06-27 at 17.30.00

Now here’s the good bit. The OBR’s projections start from the assumption that those cuts have already been achieved.

Hopefully somebody with more time and resources than I have will do a detailed projection of this but cutting £25 billion and then, on top of that, trying to jump a gap of 1.3 percent of GDP, looks like a tall order to me. It might even, as Frances says, be downright dangerous.

Now it could be that the OBR’s projections are way off beam. They were up before the beak last week for being too optimistic about growth. Perhaps they have now over-compensated by being too pessimistic. Some people think so and expect the growth forecasts to be revised upwards.

Even so, these revisions, if they turn out to be right, are hardly huge and here we come to the underlying problem. Go back to previous postwar recessions, which were nowhere near as deep as the last one, and we had years of 3.5 and 4 percent growth to undo the damage.

GDP GROWTH

Now, with much more ground to make up, the forecasts don’t even get to 3 percent until well into the next decade. Slightly higher growth than the OBR has forecast will help but it’s not going to change the picture by much.

IFS Director Paul Johnson said that even the Chancellor’s original plans would be unachievable through spending cuts alone. Add in this new ‘absolute surplus’ target and, as Tory LGA chairman Merrick Cockell warned, some councils will probably go bust.

Even with better-than-expected growth, an ‘absolute surplus’ is a  stretch. It’s highly unlikely it can be achieved through spending cuts alone. An ‘absolute surplus’ makes tax increases in the next parliament an absolute certainty.

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5 Responses to Now, George, about this surplus

  1. Pingback: Now, George, about this surplus - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. oldcobbler says:

    You’re taking Gideon too seriously. It’s all just drivel intended to appeal to the Tory conference.

  3. Pingback: The great Tory tax con: why raising tax thresholds won’t help the squeezed middle | Notes from a Broken Society

  4. As any advocate of Modern Monetary Theory can explain, aiming for any specific level of deficit or suplus is raving bonkers. Keynes said much the same when he said, “Look after unemployment, and the budget will look after itself”.

    I.e. the fundamental aim of government should be to keep unemployment as low as is consistent with acceptable inflation. As to the deficit, that will bob up and down depending on private sector confidence. E.g. if the private sector is in a particularly confident or “irrationally exuberant” mood in two years time, government may well need to confiscate money from the private sector (i.e. raise taxes) so as to cool things down.

    But no one knows what mood the private sector will be in in two years time, ergo Osborne’s objective (and any equivalent objectives by Labour) are complete nonsense.

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