George Osborne has set out plans requiring the government to operate an overall budget surplus in normal times, as he held out the hope that Britain will become the richest country in the G7 industrialised group of nations by the 2030s.
In a speech designed to give voters a more optimistic vision of a second term Tory government, after years of austerity and spending cuts, the chancellor also said it was within Britain’s grasp to become the wealthiest country in the G7 measured by GDP per head of population.
Delivering the Royal Economic Society lecture, Osborne set out a new fiscal rule for the Conservative government in the next parliament – “in normal times the government should aim to run an overall budget surplus each and every year.”
He added: “The only way to keep our economy secure is with a credible plan to reduce our debts.” He said future governments would operate a surplus rule in normal times, with the Treasury watchdog, the Office of Budget Responsibility, given a trigger by the government to define when we were outside of normal times, allowing a deficit to be run.
The new rule would begin in the financial year 2017-18 when Osborne projects there will be a budget surplus for the first time since the financial crash.
The OBR assessment of normal times would be based either on the UK falling below a given rate of economic growth or a given size of the output gap. If the OBR trigger was activated following an economic shock, the government would have to set out to parliament a strategy and a timescale over which it planned to return the public finances to surplus.
The chancellor insisted there were sound economic arguments for running a surplus in normal times, and insisted this was not based on an ideological desire to shrink the state. In the aftermath of the last autumn statement, analysis showed that the coalition’s economic projections would take UK public spending to levels not seen since the 1930s.
A confident Osborne also talked up the country’s economic prospects. He insisted “the case for optimism is strengthening. If we are willing to take on the vested interests and pursue the right policies with consistency and discipline then there are no limits to what Britain can achieve.”
He added: “There is no reason why Britain cannot be the richest major economy in the world.”
The chancellor also argued that Britain could become more immune to boom and bust, promising a Bank of England bill in the new parliament designed to make the Bank and UK more resilient to the economic cycle.
Osborne also attacked Labour suggesting it believed the bulk of the fiscal consolidation could be achieved through growth. He said: “Politicians are always tempted to make over-optimistic assumptions about trend growth and borrow against them. The fiscal consequences are always disastrous.
He said: “The argument for a surplus has two parts: first, high levels of national debt are risky and damaging for an economy like the UK; and second, the only reliable way to reduce debt levels when inflation is low is to run an absolute surplus.
“High debt leaves you vulnerable to shocks – and if recent years have taught us anything it is that there will be other shocks. Imagine if we had entered this crisis with debt at 80% of GDP; by now it would be approaching 125% – similar to Italy.”
He added: “High debt means higher debt interest which squeezes out future spending and disadvantages future generations.”
Osborne also rejected suggestions that the UK could “afford to run deficits indefinitely and allow the ratio of debt to GDP to drift down over time”.
The problem, he said, “is that it’s difficult to find examples of countries that have successfully achieved a significant reduction in this way without the help of high inflation, financial repression or both – solutions that we cannot and should not seek today.
“It also complacently assumes that economic conditions will remain benign for several decades.”
Treasury analysis, he said, showed running a balanced current budget alone, as opposed to a surplus, “would only reduce debt as a share of GDP by 5% over the next 20 years.”
He argued that while people must never be deluded into thinking it was possible to abolish the economic cycle, politicians do have it within their power “to curb Britain’s age-old vulnerability to banking and housing booms.”
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