George Osborne is in for a really rocky autumn to follow the dismal summer he’s just survived as chancellor. The Times and the Guardian are both reporting this morning that the Chancellor is set to drop his key fiscal target of having public sector net debt as a proportion of GDP falling by 2015 as a result of higher government borrowing and lower tax receipts.
Osborne has decided that the political fallout from abandoning this target, which he has long touted as a sign of the success of his policies, would be smaller than the ‘nightmare’ of further cuts, particularly the £10 billion cuts to the welfare budget. Jonathan wrote in July about the approach of a ‘hideous choice’ for the Chancellor if growth downgrades continue. The nightmare isn’t just that the Liberal Democrats have said they will block any such moves, but that the Prime Minister himself is also opposing attempts to find savings by means-testing the winter fuel payment. Instead, The Times reports that David Cameron has agreed that the target could be dropped, and that the Liberal Democrats will support the decision, too. Osborne will continue to make the case for eliminating the structural deficit.
Even if there is consensus in the coalition on this, though, it will seriously damage the Chancellor, and will be a stick that Labour uses to beat him with whenever he makes the case for his fiscal policy. It will also jeopardise the credit rating that he currently holds so dear. The word from the Treasury is that no firm decision will be reached until the Office for Budget Responsibility publishes its next set of figures which will show whether the extra borrowing will mean the target will not be met. There might be worse nightmares that Osborne is keen to avoid, but this route will still feel like a very bad dream.