The update to the Charter for Budget Responsibility was passed by 320 votes to 258 yesterday in what Chancellor George Osborne said was a crucial step to help the UK live within its means and earn its way in the world.
Under the terms of the charter, the Treasury must target a surplus in public spending every year once the public finances reach balance, which is forecast to be in 2019/20.
This target will operate in normal times, which the legislation defines as when there is real gross domestic product growth of at least 1%.
If the Office for Budget Responsibility concludes that a significant negative shock to the economy has either taken place or is likely to occur in the forecast period and will restrict growth, then the surplus rule will be suspended.
If a shock occurs when the economy is already growing at less than 1% annually, the Treasury will review the appropriateness of its fiscal targets for the period until the public finances can return to surplus.
Osborne said the spending restrictions in the charter would ensure that the UK was better prepared for the “next time disaster strikes”, like the financial crash of 2008.
“We resolve to put the livelihoods and living standards of working people ahead of the irresolution of politicians who lack the discipline to control public spending and deliver financial stability. We commit to learn from the mistakes of the past, not to repeat them, and we choose to put security first.”
Shadow chancellor John McDonnell urged Labour MPs to vote against the charter, despite having previously indicated the party might support it.
In yesterday’s debate, McDonnell said he had not changed his mind about the need to tackle the deficit, but warned the charter would be used “as an excuse for the government’s refusal to intervene and invest”.
He added: “It is increasingly clear that the charter and the fiscal mandate are not economic instruments, but political weapons.
“This is not an economic debate. It is about the politics of dismantling the welfare state, the closing down of the role of the state, and the redistribution of wealth from the majority to the minority.”
However, 21 Labour MPs abstained in the vote, including former shadow chancellor Chris Leslie, ex-leadership contender Liz Kendall and the previous chair of the Public Accounts Committee Margaret Hodge.
