The chancellor looks set to miss his self-imposed goals
By Kitty Ussher
—When George Osborne delivers his autumn statement on 5 December he will have a tricky task to pull off. On the one hand, things could be a lot worse for him. Recent data shows unemployment falling and the economy slowly emerging from recession. He may yet succeed, therefore, in instilling a more buoyant mood in the run-up to the 2015 election. Expect a lot of crowing about this, and challenging Labour as to whether it welcomes it or not.
On the other hand, the Office for Budget Responsibility will show that the targets he set in his emergency budget of June 2010 have been missed. His initial aim to eliminate the structural deficit by 2015 will be way out. However, since he had made it a rolling five-year target, the year in question will now be 2017. But estimates of the ‘output gap’, that is, the amount of cyclical bounceback in the economy, may come in lower, which will make the target even harder to reach.
Osborne’s real problem relates to his second target, that the absolute level of government debt as a proportion of GDP should be falling by 2015-6. When set, this target seemed very lenient, but it has now come back to bite him.
In a nutshell, the chancellor’s tough talk about draconian cuts in 2010 contributed to an erosion of already-fragile consumer confidence that pushed the economy back into recession. Tax receipts were lower and the benefit bill higher, extending the period that the government budget would be in deficit, making it impossible for the overall level of debt to fall in the next few years.
Whether he tries to gloss this over or amend the target, we will hear the same old attempt to blame events in Europe, the broken-record assertion that interest rates are low because of his plans, and the usual gamut of supposedly pro-growth micro-initiatives gleaned from the long-standing wish list of business groups. But Labour should ram the point home: the difficulties in Europe were known at the time of the emergency budget, yet he still chose to scare consumers about the levels of cuts. Financial Times columnist Janan Ganesh’s recent biography of Osborne makes clear that reducing debt was a political priority, not an economic judgement. As a result his ‘get tough’ approach has backfired and he is missing the very target he tasked the entire government to achieve.
Labour could also ask why, if we are seen as a safe haven in relation to Europe, the eurozone government bond yield curve is even lower than ours? Perhaps our borrowing rates are actually low because investors do not anticipate the Bank of England raising rates, simply because the economy is so weak? And if demand is weak and borrowing is cheap, why is the government not taking this opportunity to invest in skills and green infrastructure so that we can emerge from the recession in a stronger position? Instead it is confused over windfarms and raising the cost of higher education.
The chancellor has another problem too: a large proportion of his cuts have yet to feed through. And, with government revenues coming in lower than he had hoped, and the structural deficit possibly being revised up, he will be under pressure to cut further. But that would risk a repeat of his 2010 mistake: tough talk is depressing news for a nervous population and could choke off the recovery he needs. Labour should reassert a credible fiscal rule and then, within that, talk the language of hope and future for individuals and families.
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Kitty Ussher is a research fellow at the Smith Institute and a former Treasury minister
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