Coffee House

Why George Osborne will miss his debt target

12 September 2012

12 September 2012

Much is being made today of reports that George Osborne will drop his fiscal target in his autumn statement on 5 December. Isabel reported earlier that, faced with breaking his own rule, Osborne will abandon it rather than implement more cuts to meet it. All the fuss seems to stem from a note by Citi Reasearch last Friday. You can read the whole thing here, but here’s a summary.

Like Gordon Brown, Osborne has two fiscal rules. Neither says anything about eliminating the deficit, or even halving it. The first — called the ‘fiscal mandate’ — is ‘to balance the cyclically-adjusted current budget by the end of a rolling, five-year period’. It’s a moving target, simply requiring that at any time the government plans to eliminate the structural deficit within five years. So whereas in the last Budget Osborne had to show the structural deficit at zero by 2016-17, in the next one it only has to get there by 2017-18. But this isn’t the rule today’s reports are referring to.

It’s the second rule that Osborne will probably have to break: his so-called ‘supplementary target’, which is ‘to see public sector net debt falling as a share of GDP in 2015-16’. Crucially, this does not mean that debt will be falling. It just means that debt will rise at a slower rate than GDP will grow. So in March, the OBR had the Treasury on track to meet this target while still borrowing £52 billion in 2015-16. This allows the Treasury to play a verbal trick: to say it will be ‘cutting the debt’ even though it will actually be adding to it. You’d be surprised to hear how defensive the Chancellor’s team is when challenged on this.

Now, back to Osborne’s woes. It’s almost hard to believe now, but when Osborne first set that rule back in June 2010, the OBR predicted he would meet it with a year to spare, with debt falling from 70.3 per cent of GDP in 2013-14 to 69.4 per cent in 2014-15. But the forecast growth hasn’t materialised. Lower growth means not only a smaller denominator for the debt-to-GDP ratio, but also lower tax receipts, and hence more borrowing and more debt. On the OBR’s latest forecasts, Osborne will meet his target by a whisker:

Subscribe from £1 per week


The problem is, things now look even grimmer. The latest independent predictions for growth are much worse than the OBR’s March forecasts:

This means the OBR is certain to cut its forecasts (again) come December. And lower growth means bigger deficits:

And where will that leave Osborne’s all-important debt/GDP ratio? Well, Citi forecasts that it’ll rise to 85.2 per cent in 2014-15 and then — crucially — by another 4.8 points to 90 per cent in 2015-16, missing Osborne’s target by a wide margin. The IMF predicts we’ll miss it too, albeit less badly: it has debt rising from 78.8 per cent of GDP in 2014-15 to 79.7 per cent in 2015-16. While the OBR may not forecast as bad a miss as Citi does, it seems almost certain that it will forecast a miss.

Citi says that Osborne has a choice: to cut even more, or tear up his targets and feast on humble pie. It predicts he will do the latter.


More Spectator for less. Subscribe and receive 12 issues delivered for just £12, with full web and app access. Join us.

Show comments
  • dalai guevara

    Love the movie poster. But it implies there will be a sequel…

  • Succulent Lamb

    If UK debt to GDP is 60%, Craig Whyte is a billionaire. The real numbers (as per ESA 95 defintion) are closing in on 100%.

  • Daniel Maris

    JJ – the way you describe it, you’d think no one ever warned that Osborne was behaving in a way which would make it more difficult to tackle debt. I certainly did and I recall others did. In particular he spread fear across the land by targetting all public sector workers for potential redundancy, rather than say introducing a recruitment freeze. Remember, even if there are only 8 million public sector workers there are probably something like 12 million household with a public sector worker in them – maybe half the households in the land. This led directly to reduction in consumer spending and accelerated a loss of confidence.

    He still hasn’t learned and by continuing to target public sector workers with way below inflation increases, he is still exacerbating the problem.

    We need an immediate stimulus. The first thing to do is give public sector workers pay increases in line with inflation.

    Secondly, direct QE funds towards poorer people and pensioners – people who will spend their money on products and services which benefit the UK economy.

    The moving into the medium term, back infrastructure projects that will benefit the country and make us more productive.

  • Justathought

    Just as there is good cholesterol and bad cholesterol so also there is good and bad debt. Gordon Brown fed the country on bad debt which clogged our arteries and gave us a heart attack. It is the job of this government to see that any additional debt is ‘good debt’ that will see us through to a sustained recovery.

  • Daniel Maris

    Why does no one at the OBR get fired for being so useless? Are they George’s mates by any chance?

  • Daniel Maris

    Why does no one at the OBR get fired for being so useless? Are they George’s mates by any chance?

  • Jim

    Don’t bother with the article. Run the headline and then just use the word ‘incompetant’

  • http://twitter.com/John_J_C_Moss John Moss

    New round of public sector pay cuts required. -20% for those on over £200k, -10% for those on over £100k, -5% for those on over £50k (including MPs) 0% for those between £25k and £50k. #CPI for those below £25k.

    Plus, do pensions properly. Close Final Salary schemes completely. If you want it, you quit. If you want to stay, they are all converted to money purchase schemes at what you paid in plus 3%pa growth.

    • http://twitter.com/Shinsei1967 Nick Reid

      The trouble with cutting salaries is that though it reduces government expenditure it also reduces GDP (as people spend less) so you don’t necessarily decrease the debt/GDP ratio.

      It’s the same problem (in reverse) as with Labour’s idea of borrowing more to grow GDP. Yes, you can grow GDP by spending borrowed money but you also increase the debt levels faster than GDP grows. So debt/GDP ratio continues to rise.

      • Daniel Maris

        That’s why inflation makes sense.

        • james102

          Which is the real plan

          • telemachus

            I can believe that this is the plan
            Screw pensionners every which way-‘they are a “conservative” bunch and will forgive us’
            Not this time chum

        • james102

          Which is the real plan

      • Daniel Maris

        That’s why inflation makes sense.

      • Daniel Maris

        That’s why inflation makes sense.

      • james102

        Not if you use the levels suggested and the savings are passed on as tax cuts increasing the disposable income of those not included.

        • http://twitter.com/dangroveruk Dan Grover

          I’m all for tax cuts, but you have to acknowledge that doing what is suggested here would actually not reduce the deficit or debt at all. Making cuts and using the savings to fund tax cuts leaves a net 0 change to the deficit. Of course, it’ll encourage growth which in turn will increase revenues etc, but this article is all about his debt *now*.

      • AnotherDaveB

        It reduces government spending, so it reduces the budget deficit.

        Doing away with public sector defined benefit pensions would improve the long term budget health.

      • dalai guevara

        That’s precisely what Obama has done, Nick. You are right to ask whether it is sustainable.

        What G Borne has signed off is money printing to bail out derivative trades gone sour. Nothing at all to do with the real economy or GDP. It is quite frankly a disaster.

    • http://twitter.com/Shinsei1967 Nick Reid

      The trouble with cutting salaries is that though it reduces government expenditure it also reduces GDP (as people spend less) so you don’t necessarily decrease the debt/GDP ratio.

      It’s the same problem (in reverse) as with Labour’s idea of borrowing more to grow GDP. Yes, you can grow GDP by spending borrowed money but you also increase the debt levels faster than GDP grows. So debt/GDP ratio continues to rise.

  • LB

    public sector net debt

    =============

    It’s bollocks. It’s a work of fiction.

    e.g Take money from people. Spend it. Make sure there is no debts on the books.

    Then when it comes to pay out, sorry we have no money. Go away and die, because we’re not paying out.

    Same with any savings or insurance run by the government.

    It’s pure fraud.

    Take the money, refuse to pay out.

    Debt is not just borrowing. Debts include all the pensions.

    So the real debts are 7,000 bn on tax revenues of 570 bn. They are bust.

    For the Spectator to swallow hook line and sinker government figures on debts when they are clearly wrong shows that you must be in on the scam or complete ignoramuses.

    • Daniel Maris

      Having obligations on pensions isn’t “debt”. Pension payments are being balanced and the reduction in public sector employees will help a great deal.
      Anyway, it’s not as though government doesn’t have assets it won’t be able to sell in the future e.g. Northolt airport – how many billions could you sell that prime bit of real estate for?

      • james102

        Most of your council tax goes on funding pension committtments.
        Central government schemes are unfunded and paid from current revenue.
        Then we have PFI…
        Call it whatever you want but children yet to be conceived have their taxes committed.

        • Daniel Maris

          You mean now or over the last 30 years? The Local Government Pension Fund is fully funded. During the good years, local authorities were creaming off the profits from the funds (as they only have to fund the statutory commitments).

          I agree however that PFI was disguised debt. But I’ve no idea how you would calculate it now.

          The important thing is to ensure we never again allow the “misselling” of PFI to the public.

        • http://twitter.com/dangroveruk Dan Grover

          But children not yet conceived always have their taxes committed. Anarchism isn’t the default state. The problem is that children have a *huge* tax burden thrust upon them by a generation that can vote now.

    • Daniel Maris

      Having obligations on pensions isn’t “debt”. Pension payments are being balanced and the reduction in public sector employees will help a great deal.
      Anyway, it’s not as though government doesn’t have assets it won’t be able to sell in the future e.g. Northolt airport – how many billions could you sell that prime bit of real estate for?

    • Daniel Maris

      Having obligations on pensions isn’t “debt”. Pension payments are being balanced and the reduction in public sector employees will help a great deal.
      Anyway, it’s not as though government doesn’t have assets it won’t be able to sell in the future e.g. Northolt airport – how many billions could you sell that prime bit of real estate for?

    • http://twitter.com/dangroveruk Dan Grover

      If my salary never changes (let’s ignore inflation and tax changes for the sake of simplicity), I can expect to pay some £400k in tax and national insurance in my life. Does this mean I have £400k of debt now, today?

  • AnotherDaveB

    “Cut even more”

    ???????

    Government spending has increased since the 2010 election. Mr Osborne has not yet cut government spending at all.

    • George_Arseborne

      Just like his Boss they will be remember as the most reckless Government.

      I thought he said there are no alternative to plan A?

      What a buffoon. I want to see this lot out.

      If they did borrow for growth that would have been good news.

      But Osborne has pile the national debt and yet we are in double dip recession.

      The people of this Great nation are not fools. That is why Gordon Brown whom you right wings lied about him causing the crisis was cheered and George Osborne the debt builder was booed.

      What else can one say about this part time chancellor? Ed Balls saw the failure since 2010 and predicted the double dip recession that we are in it today.

      An by the way I will like to remind you Tory Lots that our low borrowing rate is not as a result of George Osborne failed policy.

      Low borrowing rate is as a result of QE since the nation has the power to print its Money. So the noise coming from the market that frightened Osborne on rating is nonsense.

      America and France were downgraded but their borrowing rate instead drop lower and that is why they are not in recession.

      Borrow for GROWTH not RECESSION George!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    • George_Arseborne

      Just like his Boss they will be remember as the most reckless Government.

      I thought he said there are no alternative to plan A?

      What a buffoon. I want to see this lot out.

      If they did borrow for growth that would have been good news.

      But Osborne has pile the national debt and yet we are in double dip recession.

      The people of this Great nation are not fools. That is why Gordon Brown whom you right wings lied about him causing the crisis was cheered and George Osborne the debt builder was booed.

      What else can one say about this part time chancellor? Ed Balls saw the failure since 2010 and predicted the double dip recession that we are in it today.

      An by the way I will like to remind you Tory Lots that our low borrowing rate is not as a result of George Osborne failed policy.

      Low borrowing rate is as a result of QE since the nation has the power to print its Money. So the noise coming from the market that frightened Osborne on rating is nonsense.

      America and France were downgraded but their borrowing rate instead drop lower and that is why they are not in recession.

      Borrow for GROWTH not RECESSION George!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Archimedes

    I bet Osborne loves that picture, but maybe ‘From Osborne with Austerity’ would be more appropriate for a British chancellor.

Close
Can't find your Web ID? Click here