There have been rumours that the Chancellor may this autumn announce that he is not going to press on with the elimination of the “structural” deficit as planned. The Autumn Statement is in the diary for the rather late date of December 5th. Some think the Chancellor should offer an early Christmas present of a further “fiscal stimulus”, or more spending.
The media, to understand this briefing, need to understand the story so far. The present Plan for cutting the deficit and curbing new borrowing is very different from the Plan announced in the summer of 2010 when the Coalition took over. Each time the Office of Budget Responsibility has revisited its forecasts it has had to downgrade growth for the ensuing period. This in turn has cut tax revenue forecasts and raised spending.
In the first plan in 2010 the government aimed to borrow an additional £451 billion over the five years of this Parliament. The following year they increased this to £485 billion, and this year to £556 billion, or more than £100 billion up in two years. If there is a further increase forecast in the Autumn Statement that would not be a change of trend or a unique event.
Some of this drift can be attributed to the “cycle”. The first Plan assumed faster growth with better and earlier recovery. This meant an expectation of more revenue and less cyclical spending. Each subsequent revision is in part down to a slippage in the speed and direction of travel of output.
Some of this drift can be put down to an overoptimistic forecast of tax revenues. Higher rates have been more damaging, actually cutting revenues for Income Tax and Capital Gains Tax, where the OBR assumed rises.
There is little evidence that the fiscal stimulus applied liberally in recent years through large rises in cash current spending coupled with slow growth of revenues has produced a spurt to growth. It is difficult to see that a small extra fiscal stimulus on top of the large current budgetary deficit would of itself change the speed and direction of travel of the economy.
There is a lot to be said for a policy which drives public sector productivity much higher, and which cuts out questionable programmes or nice to haves which we cannot afford. Eliminating the structural deficit was and remains the best policy. The test is how to do it without damaging the things that matter, and without taxing the country into recession.