It will come as no surprise to many readers that the Government is set to drop its target of running a budget surplus in 2019/20. The Chancellor is set to unveil at least one new target in the Autumn Statement: here we discuss the dropped target and what we may expect from new targets.
Dropping the budget surplus target
The target of reaching a budget surplus by 2019/20 was introduced by the then Chancellor, George Osborne, in the Summer Budget 2015. Meeting the target would have required the Government to move from a position where it was borrowing around £70 billion in 2015/16 – to make up the difference between its spending and income – to one where it was spending less than its income.
In its last forecast before the EU referendum, the UK’s fiscal watchdog – the Office for Budget Responsibility (OBR) – said that the target was more likely than not to be met.
Following the EU referendum, George Osborne announced that the Government would no longer be pursuing the 2019/20 surplus target. The current Chancellor, Philip Hammond MP, and the PM have since confirmed this. The Chancellor has said that it wouldn’t be sensible to aim for a surplus in 2019/20 given the uncertainty the economy faces following the EU referendum result.
It seems likely that meeting the surplus target would have required additional reductions in spending or increases in taxes. The Institute for Fiscal Studies (IFS), an economic think tank, recently forecast a £25 billion deterioration in the public finances in 2019/20. Rather than being in surplus by £10 billion, as the OBR thought likely in March, the IFS expects the government to borrow £15 billion in 2019/20.
Dropping the target hasn’t proved particularly controversial. Even prior to the EU referendum there was scepticism over whether it would be achieved and many have welcomed the end of a target that was seen as being inflexible.
What do we know about the new targets?
The Chancellor hasn’t laid out any specifics for the new target – the detail will come in next week’s Autumn Statement. The Chancellor may also take the opportunity to revisit the Government’s other targets for the public finances, as both the debt-to-GDP ratio rule and the welfare cap were breached in the OBR’s latest assessment. The debt-to-GDP rule requires the government’s debt to fall as a % of GDP each year; the welfare cap sets a limit for spending on welfare.
While nothing specific about the new targets has been announced, the Chancellor has discussed some wider objectives for fiscal policy that the targets may reflect. He wants:
- to reach surplus at some point, so “the task of fiscal consolidation must continue”;
- to control the Government’s day-to-day spending;
- to control the debt-to-GDP ratio;
- a rule that would allow a fiscal stimulus to be delivered if required; that is, if the economy was seen to be struggling, the Chancellor would like to be able to increase public spending or decrease taxes to stimulate growth;
- any fiscal stimulus, should it be required, to focus on “high value economic infrastructure investment”
Targets could be designed in many ways to fit in with the Chancellor’s aims. However his comments suggest that he may focus on the ‘current budget deficit’, this is the difference between government’s current spending – day-to-day spending on running public services, grants and administration – and income. Investment spending isn’t included in the ‘current budget deficit’, so focusing on this measure would give the Chancellor flexibility over investment spending.
If the Chancellor wants further flexibility to respond to changes in the economy he may set a borrowing target that isn’t fixed on a particular data. He could adopt a similar approach to that of the Coalition Government, whose borrowing target always looked to a rolling period in the future. The Coalition Government’s use of a rolling borrowing target was recently praised by Paul Johnson, Director of the IFS.
As the Chancellor would like to control the debt-to-GDP ratio, it looks likely that some form of debt target might remain: such a target would also provide some constraint over investment spending. While investment spending isn’t included in the current budget deficit, borrowing for investment still adds to the UK’s debt.
The desire to reach a surplus one day – shared by both the Chancellor and Prime Minister – could also feature as a longer term target.
Look out for our analysis of next week’s Autumn Statement from the Library; including a briefing on the current economic situation, public finances and infrastructure that we will publish later today.