Robert Skidelsky
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Budget Speech, 25th March 2015
Monday, March 30, 2015

 
 My Lords, at the time of his first Budget in June 2010, the Chancellor said:
 
“The most urgent task facing this country is to implement an accelerated plan to reduce the deficit”.
 
He committed himself to achieving a “cyclically-adjusted current budget balance”—the relevant part of that deficit standing at 4.8%—by the end of this Parliament.Instead, today, we still have a deficit of 2.8%. Of course, as a good politician, the Chancellor left himself wiggle room by talking about a “rolling five-year period” for achieving his goal. We are still rolling, but always “on target”. In last week’s Budget Statement he said that he will hit his original target three years late. He is like the runner, who, when the race is finished, gets to decide when it started.
 
In 2010, the Chancellor said that:
 
“Reducing the deficit is a necessary precondition for sustained economic growth”.
 
Had he said, “sustained economic growth is a necessary condition for reducing the deficit”, he would have been nearer the mark. The main reason for his failure to balance the books is that the economy did not grow according to plan. His 2010 deficit reduction programme presupposed an average GDP growth of 2.7% between 2011 and 2013. Actual growth in the period was 1.3%.
 
Understandably, the Chancellor does not say much about the growth failure and never talks about the possible connection between his own plans and the failure of growth to materialise. Instead, the Chancellor and his supporters say that this poor growth record was bad luck: his entirely correct policy was undermined by “headwinds”. The noble Lord, Lord Deighton, mentioned a couple of them today—the eurozone crisis and our higher oil prices. However, the Chancellor’s own watchdog, the OBR, disagrees with the headwinds theory. It concludes that austerity reduced UK GDP growth by 1% in both 2010-11 and 2011-12—2% altogether.
 
Using this analysis, Professor Simon Wren-Lewis of Oxford University has shown that austerity has produced a cumulative loss of GDP since 2010 of 5%. That means five years of British output and income permanently lost—we cannot get it back. And that, as Professor Wren-Lewis, points out, is a conservative estimate. No “accelerated plan to reduce the deficit” was required in 2010; just a rate of public spending growth somewhat less than the pre-crash GDP growth rate would have done the job.
 
The Chancellor’s new rolling five-year deficit elimination programme forecasts GDP growth of just under 2.5% for the next five years. Why on earth do we think that these forecasts will be any better than those of the previous five years, given the continued drag of the proposed cuts on the growth rate and the highly unstable GDP growth pattern since 2013? I accept that there has been a lot of progress in the north-east but the main driver of growth in the last couple of years has been rising asset prices. Where is the Chancellor going to find the £35 billion of cuts that he needs to meet his 2018-19 target? The noble Lord, Lord Deighton, referred rather airily to spending cuts and efficiency savings. I look forward to hearing details of these rather nebulous plans. In fact, what we suffer from is a candour deficit, not a budget deficit.
 
In conclusion, I enter a protest against the Chancellor’s slippery use of the word “deficit”—a slippery use that has spread throughout the public conversation on the matter and confounds public understanding of what he is doing. In 2010, George Osborne committed himself to eliminate the “cyclically adjusted current deficit”—the word “current” being crucial. However, this was going to be politically difficult, as it meant cutting public services. So his project soon morphed into one of cutting the “structural” deficit—that is, cyclically adjusted current spending plus net investment.
 
This was politically easier, as cutting investment just means scrapping or slowing down investment projects, not cutting actual services. Nearly all the cuts in the Chancellor’s first two years were cuts in public investment, not in current consumption.
 
Now we come to last week’s Budget. In his speech, the Chancellor claimed that he has cut the deficit from 10% to 5% of GDP and will eliminate it entirely by 2018-19. But here he just means public sector net borrowing: no more cyclically adjusted caveats, no more borrowing, full stop. Since raising taxes is not on his agenda, this means only one thing—getting public spending permanently lower. He evidently now feels confident enough to proclaim openly what was probably in his mind from the start: to reduce the size of the state to dimensions which would have brought a smile to the face of the Iron Lady.
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