George Osborne’s plan to enshrine permanent budget surpluses in law is a political gimmick that ignores “basic economics”, a group of academic economists has warned.
Responding to the chancellor’s Mansion House speech earlier this week, they said a law forcing the government to cut spending or raise taxes every year to generate a budget surplus, characterised as Micawber economics, would suck the economy dry and within a few years could trigger another credit crunch.
In a letter to the Guardian, coordinated by the Centre for Labour and Social Studies, 77 of the best-known academic economists, including French economist Thomas Piketty and Cambridge professor Ha-Joon Chang, said the chancellor was turning a blind eye to the complexities of a 21st-century economy that demanded governments remain flexible and responsive to changing global events.
Piketty, who rose to prominence last year after his book Capital became a bestseller, signed the letter alongside eminent economics professors from many of Britain’s top universities.
Other signatories of the letter include former Bank of England monetary policy committee member David Blanchflower, Diane Elson, emeritus professor of economics at the University of Essex and chair of UK Women’s Budget Group alongside professors of economics from Oxford, Leeds and London universities.
In a swipe at what they said was a “risky experiment with the economy in order to score political points”, they argued Osborne was guilty of adopting a gimmick designed to outmanoeuvre his opponents.
The tough message follows the chancellor’s annual Mansion House speech in the City, during which he said the government should be forced by law to bring down the UK’s debt mountain to protect the economy against future shocks.
Outlining plans for a law that forces the Treasury to run a surplus in “normal times”, he said: “With our national debt unsustainably high, and with the uncertainty about what the world economy will throw at us in the coming years, we must now fix the roof while the sun is shining.”
The chancellor argued that the discipline imposed by a new law would support future generations who faced being saddled with sky-high debts.
Osborne said he planned to hand the job of determining when the UK was enjoying “normal times” to the Office for Budget Responsibility.
But, in a first blow to his plan, the OBR said it would be for parliament to devise a definition, while its boss Robert Chote described the plan as “ambitious”.
The academics said Osborne was shifting the burden of debt from the government to ordinary households because “surpluses and debts must arithmetically balance out in monetary terms”.
“The government’s budget position is not independent of the rest of the economy and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant,” they said.
“Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed.”
The OBR also dented Osborne’s scheme when it predicted that the UK’s ageing population would place an increasing burden on the public finances. It forecast that by 2023, only three years after the first expected budget surplus, the Treasury would be forced to borrow again to finance its Whitehall spending and welfare payments.
The letter effectively supports Labour’s pre-election policy of borrowing to invest in the economy.
Former shadow chancellor Ed Balls argued that the government should play a role in supporting apprenticeships and the development of a higher skilled workforce to overcome a flatlining of the UK’s productivity.
Without state support, he said businesses and households must rely on their own resources or extra borrowing, making the economy more unstable. The UK economy’s reliance on consumer spending to drive growth has worried many of the country’s most eminent economists in academia and the City.
For the past four years, businesses have proved reluctant to invest, leaving consumers to shoulder the burden with higher spending on mobile phones, cars and weekend breaks.
The OBR has predicted a dramatic increase in household debt over the next five years to levels last seen before the financial crisis. In the wake of the Lehman’s crash, borrowing declined from 169% of GDP to about 135% of GDP before rising again. The OBR says it will breach the ceiling set in 2008, rising to more than 173%, by 2019.
Osborne pledged in his speech to tackle productivity and rebalance the UK economy away from borrowing. He said a law that forced governments to deliver budget surpluses was necessary because “with our national debt unsustainably high, and with the uncertainly about what the world economy will throw at us in the coming years, we must act now to fix the roof while the sun is shining”.
He added: “Indeed we should now aim for a permanent change in our political debate and our approach to fiscal responsibility – just as they have done in recent years in countries like Sweden and Canada.”
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