“We met our structural deficit borrowing target three years early.”
Philip Hammond, Budget Speech, 29 0ctober 2018
Mr Hammond has chosen to focus on the government’s targets for reducing borrowing to fund the UK’s structural deficit, which looks at what would happen to the public finances if everyone in the economy was employed. The government’s target is to get the structural deficit down so that it is worth less than 2 per cent of UK GDP.
And he is right: the independent Office for Budget Responsibility has confirmed that the structural deficit is now below 2 per cent. But that’s only part of the story.
Remember, the austerity policies of the Conservative coalition and majority governments were launched on the basis of balancing the books.
When he took office in 2010, George Osborne declared that the government’s aim was to eliminate the day-to-day budget deficit by 2015 (that’s different to the structural deficit). But he wasn’t even the Chancellor when that target was actually met in 2017, two years behind schedule.
And returning to the present, let’s look at the government’s current fiscal objective: to “return the public finances to balance at the earliest possible date in the next Parliament”.
As the OBR point out, “When this objective was set, the ‘next Parliament’ was expected to run to May 2025, so the ‘earliest possible date’ could have been anywhere up to 2025-26.”
Although the 2017 snap election rearranged the dates of the next Parliament, the objective still stands: the Conservative Party manifesto committed to “a balanced budget by the middle of the next decade”.
The OBR only forecast five years ahead, but they say that based on the trajectory we were on until today’s Budget, they would have expected the government meet its objective of balancing the books in 2023-24.
Indeed, until today’s announcements, they were anticipating a budget surplus (i.e. more revenue than spending) in 2023-24. But today’s giveaways – without sufficient tax hikes to offset them – mean that it could be 2028-29 before the books are balanced.
Philip Hammond is right that the government has met its target to reduce the “structural deficit” to below 2 per cent of GDP ahead of schedule.
But the structural deficit is only one part of the wider story of balancing the books.
The government’s fiscal objective is to “return the public finances to balance” by the mid-2020s (on one interpretation, by 2025-26).
Today’s Budget comes with significant spending commitments and without commensurate tax hikes.
According to Office for Budget Responsibility figures, this means the Chancellor has missed an opportunity to achieve a budget surplus in 2023-24 – and it may be 2028-29 before the public finances are in the black.