The first reckoning for any Budget is when the Office for Budget Responsibility releases its estimates of the fiscal and economic impact of the measures. The second is when the Chancellor appears in front of the Treasury Select Committee and explains the reasoning behind the Budget. George Osborne’s Summer Budget appearance happened yesterday and shed light on a number of his more controversial fiscal policies. This is my summary of his answers, presented without comment.
Osborne claimed that his rapid deficit reduction improved confidence across the economy, which caused demand to recover and growth to return.
Why a fiscal rule requiring an overall surplus in every year?
- Paying down debt in time of growth makes sense, so a surplus is required.
- Rules based on cyclically-adjusted measures and forecast targets—such as the present, five-year rolling structural current balance requirement—have huge measurement problems, which makes them a less effective constraint on Government policy.
- He felt that the debt targets, which were anchored to a particular year, were the harder constraint on his actions in the past Parliament. The new requirement for a surplus each year is a similarly hard constraint and is intended to be so to effectively constrain future Chancellors.
- The overall surplus is used instead of the current balance for two reasons: splitting current from capital expenditure allows gaming of the rules, and also leads to an undesirably negative framing of current expenditure.
Osborne was unapologetic about using ring-fences to protect particular areas of Government spending. He characterised them as simple heuristics that clearly set out the spending priorities of the Government.