As you all know, George Osborne set himself two fiscal rules upon the release of his Emergency Budget in 2010. The first was to eliminate the current structural deficit within five years. The second was for the debt to GDP ratio to be falling by the end of the Parliament. Given the figures released from the OBR today, will these targets be met?
1) Eliminating the current structural deficit
The March Budget earlier this year suggested that the Chancellor would meet his first fiscal target by 2014/15 – when the cyclically adjusted budget balance would move into surplus. But Osborne appears to have re-interpreted his target to some degree, claiming that the target is a five year rolling target, giving him some breathing room to meet it. Revision to previous assessments of prior growth by the OBR now suggests that the structural deficit was larger than initially thought. Adding to this lower growth, it is perhaps unsurprising that the current cyclically-adjusted budget will move into balance later than thought. It is now forecast not to move into balance until 2016/17.
VERDICT: many interpreted Osborne’s first fiscal rule as to eliminate the cyclically adjusted budget deficit by the end of this Parliament. Slight re-interpretation of his rule to a ‘rolling target’ has allowed him to suggest the cyclically-adjusted deficit will still be eliminated, even with lower growth, across the next five years.
2) Debt to GDP ratio
Lower growth and the resulting higher borrowing will now mean the debt to GDP ratio will peak in 2014/15 at 78 per cent, as opposed to 70.9 per cent in 2013/14, as predicted in the March budget. George Osborne wanted debt to GDP to be falling by the end of the Parliament.
VERDICT: Given that debt to GDP is now forecast to peak in 2014/15 (the last year of the Parliament), this target could still just about be met, though it will be extremely tight.
Lots of commentators will now look over the detail – and these self-create rules must be examined carefully. But it would have been far better and considerably clearer for the Chancellor simply to commit to balancing the budget by a certain date. Even so, the threat of a eurozone implosion poses severe risks to even the revised targets being hit.