Osborne plans to commit future governments to balanced budgets

10 Jun 15

George Osborne will today set out plans to legally bind the government and future administrations into running a surplus when the economy is growing as part of a “new settlement” for the public finances.

At his annual Mansion House speech in the City of London this evening, the chancellor will confirm that the government will introduce provisions so that public spending must be balanced in “normal” times.

Osborne, who first proposed the rule in January, will say that government should run a surplus unless the Office for Budget Responsibility has judged the economy to be facing abnormal pressures.

The plan, which will need to be passed by a vote in the House of Commons, would commit the government to not spending more than they receive in tax revenue when the economy is growing.

Under the proposals for a new fiscal mandate under the majority Conservative government, the OBR would be responsible for monitoring the rule through its forecasts to determine the economic circumstances faced by the UK. It would also be expected to have the power to decide when the government should spend more than it takes in through taxation, such as when the country is in a recession.

This would replace the fiscal mandate passed in January under the coalition government.

In a call for a “permanent change in the debate on fiscal responsibility”, the chancellor will say that although the government plans to close the annual spending deficit in 2018/19, the UK’s total debt burden was “unsustainably high”. The new strictures were required to repair the public finances in the face of uncertainty about the world economy, he is expected to say, and he will call for them to be accepted across the political spectrum.

“Without sound public finances there can be no lasting economic security – and without economic security there can be no lasting economic prosperity. So the new settlement for the British economy I talk about tonight starts with a new settlement in the way we manage our national finances.

“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 now fix the roof while the sun is shining. 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.”

Although no parliament can bind its successor, a future government would likely need to overturn the plan in the House of Commons.

Osborne will also announce that the Committee of the Commissioners for the Reduction of the National Debt is to meet for the first time in over 150 years.

The group was first established to pay down the debt from the Napoleonic wars, but it has not met since October 1860. Members include the chancellor, the governor and deputy governors of the Bank of England, the Lord Chief Justice and the Speaker of the House of Commons.

Osborne’s comments come despite research from the International Monetary Fund concluding that countries like the UK, which do not have unsustainably high levels of debt, should not prioritise cutting the accumulated stock as the impact on the economy could outweigh the benefits.

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