A few weeks ago we put out a pamphlet which said that on unchanged policies, it was virtually impossible for the Chancellor to meet his target of reducing debt as a proportion of GDP by the end of the Parliament (pretty uncontroversial given the outlook).
At the time, the Treasury denied this, saying that the OBR’s “most recent assessment is that the government is broadly on track to meet its debt and deficit targets.”
From today's media, it appears the Chancellor is now preparing to abandon this target altogether. Apparently, the Coalition does not want to cut more deeply to stick to its target.
If true, this suggests that a point we made following Autumn 2011 was true: this is no longer a deficit reduction strategy - rather, it is now just a commitment to keep departmental spending as set out in the Comprehensive Spending Review.
This throws up all sorts of questions.
The initial justification for the whole austerity programme was that, without a credible plan to reduce the deficit, there would be a negative reaction from the bond markets. But if that deficit plan is no longer credible (clearly, it isn't), then why wouldn't the absence of a genuine plan to reduce the deficit lead to negative bond market reactions now?
Or you might think that George Osborne was inspired by the important analysis from Rogoff and Reinhart which showed that high debt levels are extremely damaging and hugely inhibit growth. But this, again, would make the abandonment of the supplementary debt target all the more bemusing, because it will be a tacit admittance that we are going to pile yet more debt on future generations.
Of course, might it have been assessed that cutting spending to maintain the targets is just not politically do-able? That the Government can’t bear to take the short-term pain for the longer-term gain?
One thing is certain. Dropping this target will be met with glee by those who don’t want us to live within our means. They will inconsistently claim on the one hand that spending cuts caused the debt to increase whilst also advocating higher borrowing in the form of a stimulus, which unless generating heroic multipliers, will of course add yet more to the debt.
As our recent paper suggested, the Coalition has failed to articulate clearly what is trying to achieve and why. The Conservative Party failed to put out a clear critique of Labour's high spending in opposition. Nor has it made a clear and consistent intellectual case for its fiscal consolidation programme. What it has done is to back-load much-needed current spending cuts and front-load tax rises. It has exaggerated the scale of the restraint in the first two years of the Parliament. Now, when it should be starting to make substantial spending cuts, it has decided to dither – and has abandoned the one firm target it had to get debt under control. Once again, the can has just been kicked further down the road.