As soon as Theresa May said she was ready to ditch the deficit target I knew the game was up. Sure enough, a day later, George Osborne announced that he was abandoning the 2020 budget surplus target. A Brexit vote was always going to be fatal to the goal of eliminating the public deficit. It was tough enough even after the chancellor gave himself an extra year to do it. The weak economic growth and disappointing tax revenues forecast by the OBR in March made it look even more of a tall order. Now, with even the most optimistic projections showing that Brexit will do serious damage to the public finances, the 2020 deficit target is beyond reach. The flagship policy which has defined the Conservative Party for the last eight years and on which two election victories and the trouncing of the Labour party have been based, has been sunk by the Brexit vote.
None of that come as a surprise to me but the reaction of some on the left did. They seemed to be claiming this is some kind of victory.
Today Osborne has bowed to Labour pressure by scrapping his failed spending target https://t.co/Y1PsN63vya
— Jeremy Corbyn MP (@jeremycorbyn) July 1, 2016
That’s politics, I suppose, but make no mistake, George Osborne did not drop his cherished deficit policy because he suddenly realised the left had been right all along. He dropped it because the hit to the public finances from Brexit will be so big that even he won’t be able to brazen it out any more. Furthermore, the woman most likely to be his next leader made it quite clear she wouldn’t back him if he tried.
This isn’t a triumph for the left. It’s as much of a disaster for Labour as it is for the Tories. Another recession, or even, at best, more of a slowdown than we thought, means less tax revenue. That means less money for public services and social security. Sure, the government may borrow more than it might otherwise have done but it will only do so to plug a gap we didn’t expect and to forestall a recession that is almost entirely self-inflicted. Over the next few years, this will create more pressure on the public sector. Any thought of taking public spending back to what it was in 2010, which was always the left-wing mirror image of the right’s deficit pipe-dream, has gone from being highly unlikely to damn near impossible.
IFS Director Paul Johnson remarked:
We’ll have a few more years of more borrowing, but my guess is this is not the end of austerity, actually this means austerity will just go on for longer because we’ll probably have the spending cuts and tax rises right through the 2020s to pay for this.
In other words, if we get a Labour government in 2020, it will be in the fiscal doldrums too.
The pressure on public spending hasn’t gone away. The rising demands on public services, stubbornly high benefit costs, low productivity and low tax revenues are still there but the brutal arithmetic of public spending just got that bit worse.
Right now, I’d trade where we are now for where we were a couple of months ago. Growth chugging along at a lacklustre 2 percent for the rest of the decade and the chancellor pretending he is suddenly going to eliminate the deficit in 2020 but no-one really believing him, suddenly looks like a rather benign scenario.
It may be fun to laugh as George Osborne’s flagship sinks but there is no joy here for anyone, left or right. The next few years are going to be even tougher than we thought.