The unemployment stats on Wednesday triggered a new round of speculation about whether George Osborne was likely to meet his two fiscal targets: balancing the structural current deficit and having debt falling as a ratio to GDP by the end of the parliament.
Neither target is quite as tough as you might think, however, as the Guardian has pointed out today. On the debt target, technically, the government could borrow billions more than it is currently planning and still not breach it, as long as it slowed borrowing towards the end of the parliament and showed debt was falling by 2015. This is unlikely to happen (partially because it could breach the other target), but it is possible.
The former target is the one most often quoted as defining Osborne’s economic strategy. But even that allows flexibility. For one thing, it is a rolling assessment looking at future spending plans, so there is no final judgement about whether it has been hit. But more importantly, it focuses only on the structural deficit: that part of the deficit that cannot be eliminated by economic growth.
As one person close to the Treasury said to me recently: “The deficit could be as high as you like by 2015 – it could be £1bn, it could be £1 trillion – we would still hit the target as long as the underlying structural deficit was eliminated.”
There is a reason for keeping the target limited to the structural deficit only. The part of the deficit that results from recessionary factors can be eliminated by what are called “automatic stabilisers“. These are policies that automatically iron out fluctuations in growth.
The classic example of this is benefit payments: as unemployment goes up, benefit payments go up. But this is not necessarily a net drain on the economy, as these payments are then spent by claimants, which itself gives a boost to growth and employment.
Some in the Treasury think they have not stressed the importance of these stabilisers enough. That may because they are technical and difficult to explain – that may be true but they are also of vital importance to Osborne’s economic plan.
The real problem however is that more of the deficit is structural than originally thought. Analysis by the FT’s Chris Giles suggested that was the case, with the black hole actually £12bn larger than originally thought.
Now, as he writes in today’s FT, the OBR is poised to suggest Britain’s long-term sustainable growth rate is lower than previously thought, suggesting the structural deficit could be even bigger. This is the real risk to Osborne’s plans, not short-term fluctuations in growth.