When George Osborne told the country last November that he was going to miss the target of eliminating the current structural deficit by 2015, Labour were quick to tell everyone how the chancellor’s economic gamble had failed.
Not only was Osborne having to borrow more to pay for this failure, the opposition claimed that he was even now having to borrow more than Alistair Darling would have done under his deficit reduction plan. That claim was illustrated by this graph, showing the course of borrowing under Darling’s 2010 plan and Osborne’s modified 2011 plan:
But this was always likely to be a tenuous claim to make, as comparing Osborne’s 2011 plan (the black line) with Darling’s 2010 plan (the red line) was pretty unfair. Even if Labour’s plan had less impact on growth and so resulted in a smaller increase in borrowing, it is fanciful to think that given the eurozone crisis and weakness in the US, the economy would have grown at the rate being forecast in 2010 if they were in power.
Now, thanks to the IFS, we have some idea of what Darling’s borrowing would have looked like in reality given the economic context:
It seems likely that in the absence of the additional fiscal tightening announced since the general election, borrowing would have been on course to be closer to £76bn in 2016–17 than to the £26bn that was forecast in the March 2010 Budget.
In effect, to fund its plans as set out in 2010, Labour would have had to borrow £76bn in 2016-17. That compares to a forecast £24bn that Osborne is likely to borrow in that year. And it’s not just in that year that Labour would have been borrowing more, it is every year until then, as shown by this chart:
This would add up to a total of £201bn extra borrowing by the end of 2016-17, the IFS forecasts.
Labour would respond that their plans would mean more growth, which has not been factored in to these forecasts. Perhaps – but as the IFS says:
The error in estimating the size of the policy impact would have to be implausibly large to lead one to conclude that borrowing would actually have been lower in the absence of the additional tax rises and spending cuts that have been announced since May 2010.
It might be that borrowing more to have a slower rate of deficit reduction would make more sense: it might benefit the economy in the longer term and help protect the most vulnerable in society. But it is not plausible, at least in the IFS’s view, to say that Labour would have borrowed less than the government.
What’s more, under the think tank’s forecast, Labour would also have failed to meet its fiscal mandate (as the government has missed its mandate). Instead of halving the deficit over four years, they would have reduced it from 11.2 per cent to 7.7 per cent of GDP, requiring an extra 2.1 percentage points of deficit reduction. That would equate, under the IFS forecasts for GDP for that year, to £35bn.
The other option would have been to change the plan to halve the deficit in four years to take account of the worsening outlook (which is effectively what the coalition has done). That would have been made difficult, however, by the fact that Labour not only planned to cut at that pace, but legislated to do so. Liam Byrne has previously said that specific orders could be made to override that legislation, but it wouldn’t have been easy.
Jim Pickard
Kiran Stacey