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George Osborne’s ‘budget surplus’ rule is ill-defined and unenforceable

George Osborne’s ‘budget surplus’ rule is ill-defined and unenforceable

In a speech to at the Mansion House on 10th June 2015, the Chancellor of the Exchequer announced his intention “that, in normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future”, and that “in the Budget we will bring forward this strong new fiscal framework to entrench this permanent commitment to that surplus, and the budget responsibility it represents.” This ‘fiscal surplus’ law is ill-defined and is essentially unenforceable. It appears without any economic rationale as to why a budget surplus would be either desirable or indeed achievable in a sustainable manner. 

It is difficult to believe that credibility is to be regained through commitment to achieving a budget surplus which is rarely feasible and without demonstrating how there will be a sustainable increase in investment, how the trade account can be improved and how to limit ballooning household debt which would have to accompany a budget surplus. It is the height of irresponsibility to accept the straight jacket of a ‘budget surplus’ rule without confronting those issues and to commit to a ‘budget surplus’ which leads to unnecessary cuts in socially useful public expenditure.

It would be rather more useful to address the causes of economic and financial crisis. Appropriate regulation of the banking and financial system, and also policies designed to damp down asset price bubbles and rapid growth of credit and debt. The path to a budget surplus can itself be a contributory factor to such growth of credit and debt. It was remarked above that, according to the OBR forecasts, the path to a budget surplus in 2019/20 would be accompanied by and indeed enabled by a continuously rising household debt. That is a recipe for a downturn in the economy when the debt to income ratio becomes unsustainable.

In the background there is the view that beyond some level debt to GDP ratio is harmful, and that a large increase in the budget deficit which would come from a crisis would push the debt ratio beyond its harmful limit. The academic work on which such views were based has now been largely discredited, yet the idea lingers. Mention can be made of the 250 per cent debt to GDP ratio with which the UK exited World War II enabling it to launch the National Health Service, nationalise key industries and embark on a period of sustained growth and low unemployment.

The objections to ‘budget surplus rule’ are:

          (i) It is put forward without any economic rationale: there is simply no reason to think that a long term budget surplus is appropriate for the economy, desirable or even achievable;
          (ii) It is unachievable without major and dramatic changes to investment, savings, exports and imports: there is sparse evidence that those changes are on the horizon or would be sustainable. If those changes did occur, then the budget deficit would diminish by itself;
          (iii) It is advanced to be a political trap seeking to lure Labour into committing to such a rule where there is scant possibility that it can be achieved in this Parliament and it would undermine the economic plans for the next Labour government;
          (iv) It seeks to bind future governments and to prevent them from responding to changing economic, political and social circumstances;
          (v) It would limit the government’s ability to borrow funds in order to invest;
          (vi) It is an attempt at a public relations exercise with the introduction of a law which would lack any clarity, be unenforceable,  and lack any effective sanctions if the law were not adhered to;

The central purpose of government fiscal policy should be provision of high quality public services and a progressive tax system with the balance between public expenditure and tax revenues designed to secure high levels of employment. It should not be the purpose of fiscal policy to meet some arbitrary budget rule which is drawn more by plucking numbers out of the air than any serious analysis.

This is an extract from Professor Malcolm Sawyer’s ‘The budget surplus rule scam’ thinkpiece for Class as part of our coverage of the July 2015 Budget. You can read the full piece here: