Budget surplus target plays politics with economic growth
Is it possible that anybody thinks the budget surplus law apparently to be announced in the Mansion House speech is about anything other than politics? It’s definitely stupid economics.
Inevitably spending was higher and taxes were lower in the UK after the financial crash, and we had a small budget deficit going into it. In an ideal world a better-balanced economy would have been generating higher revenues before the crash, but the idea that running a small surplus would have done anything to offset the damage done by an international banking crisis is idiotic.
While the financial crisis raised many questions that still remain unanswered, the essential and immediate question for the government budgetary policy is why five years of significant spending cuts have failed in their central objective of reducing the public deficit, and resulted in the slowest recovery and worst living standards crisis on record. Is it really reasonable to consider that another five years of (more severe) spending cuts, under more unstable economic conditions (slowing growth, disinflation), is genuinely likely to turn things round? The same questions go for the eurozone, only moreso. In the meantime the world has become reliant on QE/extensions in central bank balance sheets to an extent that is surely very worrying.
The Chancellor avoids the genuine economic dilemmas of the present, in order to play the ugly political games of the past.
He might genuinely like to pontificate on budget surpluses, but his present strategy is highly unlikely to deliver any such thing. For a budget surplus is an outcome of the interplay between government fiscal policy and the economy as a whole. To spell out the perfectly straightforward detail: austerity reduced growth more than the government (and the OBR) expected and likewise growth in labour income (i.e. employment multiplied by wages); reduced labour income has meant reduced taxes and a failure to reduce the deficit by to anything like the extent planned. For the current financial year (2015-16) the government originally expected to be borrowing £20bn, instead the OBR now expect borrowing of £75bn.
The opposite course of events might be illustrated by the policies of the post-war Labour government. Beginning from the biggest debt on record after the Second World War, they introduced the NHS, universal education, built houses, built infrastructure and set up the welfare state. After demobilisation, spending increased every year, but the post-war deficit had become a surplus by as soon as 1948 and public debt as a share of GDP was on a reducing trajectory throughout. Growth was advantaged both as a result of these spending initiatives as well as a tightly restricted banking sector, focused on the needs of business and industry.
The Chancellor would do better to look closer at the relationship between his spending policies and economic growth, rather than playing political games with the electorate.