A few months ago I wrote about what the Budget implied for the fiscal rules which George Osborne set himself at the start of the Parliament. Just to recap, there are two of them:
1) the cyclically-adjusted current budget should be balanced by the end of a rolling five year period
2) public sector net debt should be falling as share of GDP by 2015/16
In basic terms, the first requires that the part of the current deficit the OBR attributes as 'structural' (which won't be eliminated by a return to sustainable growth) should be eliminated in five years. The second means that by the start of the next Parliament, debt/GDP should be falling.
As I've mentioned before, rule 1 is a bit of a nonsense, because the rule as written and as practiced by the Chancellor has been interpreted to mean that the Government merely has to only ever be five years away from eliminiating the current structural deficit, i.e. in 2010 the Chancellor said it would be met by 2015/16, and this year he said it would be met by 2016/17.
Rule 2 is more definitive.
Forecasts from 2010 and Budget 2011 suggested it would be met comfortably. But large downward revisions to growth forecasts seen in Autumn Statement 2011 suggested the Chancellor would only meet the rule by the skin of his teeth, with public sector net debt at 76.3 per cent in 2014-15 compared to 76.0 per cent in 2015-16.
Today's figures now suggest that this rule is even less likely to be realised. In the first two months of 2012/13 (April and May), the current budget deficit has been £6.5 billion higher than in April and May 2011/12.
With S&P suggesting this week that the OBR's growth forecasts in Budget 2012 are also likely to be over-optimistic, how will the parties in Government be able to go into the next election with a positive message on the public finances if the debt burden is still rising?
My guess is that sometime in this Parliament the Chancellor will still have to make a choice about whether to cut further into public spending. He'll have to balance whether to do everything he can to meet his mandate or to avoid making further cuts close to the election.
From a political economy perspective, it would have been far better to re-open the spending review after the large growth revisions in Autumn Statement 2011, when the independent OBR claimed that commodity price rises and the eurozone had been the primary cause of the slowdown.