George Osborne admitted that the government will not meet its supplementary target when he announced his Autumn Statement today. He should now introduce a new rule that is more responsive to the state of the economy
Despite the Chancellor’s boast that borrowing will fall in every year of this parliament, the Office for Budget Responsibility’s figures show the government is making far less rapid progress in reducing borrowing and halting the rise in debt than it hoped even in March this year.
In the June 2010 budget, the Chancellor planned to borrow a total of £322bn between 2011-12 and 2015-16. That figure has now increased to £461bn – and it would be higher still were it not for a £28bn windfall from the transfer of the assets of the Royal Mail pension plan and the Bank of England paying back to the Exchequer excess cash in its asset purchase facility.
As a result of the higher trajectory for lending, the Chancellor has admitted that he will miss his supplementary fiscal target to reduce debt (as a share of GDP) in 2015-16. Net debt, which was projected to be 67.4% of GDP in 2015-16, is now forecast to be 79.9% of GDP – that is £220bn higher than originally planned.
The fact that this massive increase in planned borrowing has been accompanied by a substantial fall in the rate the government pays to borrow blows a hole in the Chancellor’s argument that any conscious relaxation of the deficit reduction path on his part would lead to a loss of confidence in bond markets, and ultimately see the UK on the same path to fiscal ruin as Greece.
Since June 2010 the 10-year UK government bond yield – the benchmark rate in the bond market – has halved from 3.5% to 1.75%.
Borrowing has increased – and interest rates have fallen – because economic growth has been weak and this has led to a shortfall in revenues. The Chancellor’s response – to stick to his spending and tax plans – is the wrong one because it does not inject much needed demand into the economy.
He should, instead, have announced a new fiscal rule that is more responsive to the state of the economy. The extent of discretionary fiscal tightening should be varied with the strength of the economy. When growth is weak – or even worse when the economy is in recession – discretionary tightening should be scaled back; when growth is strong, it should be speeded up.
The economy needs greater stimulus now, offset by more rapid consolidation later, and the fiscal framework should support that approach.
The announced increases in capital investment are welcome, but the fact that they are funded by cuts in other areas of public spending mean the Chancellor is merely shuffling money from one pot to another, which will do nothing for growth. More help with childcare, rather than increases in the Personal Tax Allowance, should have been given to working families, who will also now see their tax credits cut further in real terms.
Tony Dolphin is senior economist at the IPPR