Matthew Sinclair

The problem with George Osborne’s debt target

The problem with George Osborne's debt target
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Q: Why will George Osborne miss his debt target?

A: The Government is spending a lot more money than it is taking in taxes.

Q: Why is the Government spending a lot more than it is taking in taxes?

A: Jonathan Jones answered this one yesterday. In short: disappointing growth means that debt needs to be lower to meet a Debt/GDP target, increases spending on benefits and reduces both direct and indirect tax receipts.

Beyond that, things get a lot more complicated and controversial. I won’t get into the debate over supply-side reform versus Keynesian economic stimulus now. That debate has been covered at length elsewhere, particularly in the final report of the 2020 Tax Commission.

Maybe the problem isn’t just the attempts to meet the targets. Maybe there is also something wrong with the targets themselves. The establishment of the Office for Budget Responsibility means that progress against targets is now assessed in a more credible way. Unfortunately, some of the key vices of Gordon Brown’s fiscal framework still lurk in the Treasury under George Osborne.

The deficit target is in danger of becoming a bit of a joke. Andrew Lilico has called it “smoke-and-mirrors deception”; the equivalent of a smoker who never cuts down but always has a target to quit in five years time.

The debt target is more credible but, of course, it is being missed.

What the Government lacks, but research suggests it needs, is a target for spending itself. An OECD survey found that:

Historical observation is consistent with the regression results in suggesting that in general budget-balance rules that are not combined with expenditure rules are less effective. A striking example of this is the United States experience: neither the Gramm-Rudman-Hollings (GRH) Act of 1985 nor its revised version in 1987 succeeded in significantly reducing the fiscal deficit. A further example is the Stability and Growth Pact (SGP), which has not so far led to sustainable positions being attained, notably in large EU countries. On the other hand, when the United States turned to an expenditure-based rule, the Budget Enforcement Act (1990–2002), a surplus was achieved and maintained for a time. Some EU countries (e.g. Netherlands, Spain, Sweden, Finland and Czech Republic) supplemented the SGP by national rules (in most cases including some expenditure ceilings) and also enjoyed success.

A spending target isn’t infallible, of course. They cite France as one example, which introduced multi-year objectives for real government expenditure after 1998 but saw its public finances continue to deteriorate. Nonetheless, setting a target for spending does seem to be the best way of giving politicians, public sector workers and the public a clear sense of what to expect.

The Government does have targets for spending as part of the Spending Review process. The rules are all about borrowing (whether as a debt or a deficit). That means those rules are much more heavily dependent on a range of factors beyond the Government’s control. If things go wrong, the responsibility is argued out in an almost academic debate, rather than clearly lying at the Chancellor of the Exchequer’s door.

Fortunately, it isn’t too late. Another study, by the IMF, found that rules can be effective even if they are introduced after the start of a fiscal adjustment. There is still time to set a firm target to do something about the real problem in the public finances: politicians spending more than taxpayers can afford.

Matthew Sinclair is Chief Executive of the TaxPayers’ Alliance.