- IFS says budget surplus rule is economically irrelevant
- Says chancellor running out of room to hit own surplus goal
U.K. Chancellor of the Exchequer George Osborne came under further criticism from economists for pegging his policies to a legally-binding fiscal target to balance the books, calling his economic credibility into question.
A day after the chancellor delivered his eighth budget, the independent Institute for Fiscal Studies criticized the plans for breaking two of Osborne’s three principal rules and placing undue importance on his goal of achieving a 10 billion-pound ($14.4 billion) surplus by 2019-2020.
“Whether or not he gets into surplus in 2019-2020 is economically irrelevant,” IFS Director Paul Johnson told a news conference in London Thursday. “If the surplus isn’t gone by 2020, it will be very nearly gone unless we have some dreadful economic news.”
In his budget on Wednesday, Osborne unveiled forecasts that allowed him to meet his legally binding commitment to deliver a surplus by the end of the decade. Facing the loss of billions of pounds of tax revenue because of downward revisions to growth projections, the chancellor rescheduled capital investment, promised post-dated spending cuts and shifted a one-time boost to corporation-tax receipts into 2019. The move led to accusations by some economists he was resorting to accounting tricks to meet his own targets.
While predicting a 10.4 billion-pound surplus in 2019-20, the Office for Budget Responsibility, which issues the U.K.’s official forecasts, assessed the chance of Osborne getting the national accounts into the black at all at slightly above 50 percent, “given the size and distribution of past forecasting errors.”
A shift from a budget deficit in 2018-2019 to a surplus in 2019-2020, as forecast by the OBR, would be equivalent to 1.5 percent of gross domestic product. That would make it one of the biggest such moves since World War II, IFS economist Gemma Tetlow told reporters.
Osborne has already failed on two of three self-imposed targets. Instead of falling as promised, debt is set to rise as a share of GDP this year. Meanwhile, a decision to ditch controversial cuts to income top-ups for the low-paid forced him to breach his cap on welfare spending. That puts him under pressure to meet his budget-surplus target. Whereas the fiscal charter requires him only to balance the books by the end of the decade, Osborne has pledged to go further with the 10 billion-pound objective.
“The surplus rule really is the last rule standing,” said Johnson. “He is really running out of wriggle room” to deliver on the 10 billion pounds, he said.
Speaking a few hours earlier, Osborne rejected accusations his figures did not reflect a true picture of Britain’s fiscal trajectory.
“If you hold to the course, if you deliver those plans, if the economy grows as expected, then we will have a surplus towards the end of the Parliament,” he told BBC Television. “We wouldn’t need anything extra like small spending cuts or more tax increases.”
The IFS noted austerity had now been extended to 2020-2021, as opposed to the end of the decade. The chancellor said a deteriorating economic picture had forced him to adjust his plans.
“In the space of four or five months, things have got materially worse in the global economy,” Osborne told BBC Radio 4. “As a result, I have made adjustments to my plans to make sure that debt does fall as a proportion of national income in the coming year. I’ve made adjustments to my plans to make sure that we are going to live within our means and get that surplus.”
The OBR estimated his latest policy measures will raise 13.7 billion pounds in 2019-20 and 13.1 billion pounds in 2020-21. Without them, the public finances would have been in deficit after cheaper debt costs failed to make up for the loss of tax revenue.
“This really is pretty egregious accounting gimmicks and smoke and mirrors,” said Jonathan Portes, an economist at the National Institute of Economic and Social Research. "If you’re going to do this, why have a fiscal target at all. It means you have no credibility.”