Osborne’s fiscal game playing will drive us off the edge of a cliff

12 Jun 15

While the chancellor plays political games with fiscal policy, he prevents a real debate on paying for an ageing population.

The chancellor’s proposal for a law binding successive governments to run a fiscal surplus during ‘normal times’ has been widely derided.

The Financial Times declared it “political gimmickry”, and many have pointed out it is no better than Gordon Brown’s 2010 Fiscal Responsibility Act that George Osborne himself consigned to the dustbin.

Every fiscal policy observer knows that future governments will make up their own minds about how much to tax and spend: that is why we have general elections to elect governments. And no forecaster – not even the Office for Budget Responsibility – can confidently declare when we are experiencing ‘normal times’. What will the new medium- and long-term growth and productivity trends be as we emerge from the 2008 financial crisis? We simply don’t have a clue.

The real purpose of the chancellor’s ‘surplus law’ is of course purely political: to mark a dividing line with the Labour Opposition, who will now have to choose whether or not to back it.

It’s easy to write off the chancellor’s antics with a chuckle, mutter about politicians playing politics, or even be mildly admiring of his guile and cunning.

But that is the wrong reaction. By turning fiscal policy into a tool of base politics rather than the seat of consensual, grown-up policymaking, the chancellor is driving the country toward the edge of a cliff.

How so? To find ut why, turn to the latest Office for Budget Responsibility ‘Fiscal Sustainability Report’ – published the day after the chancellor proposed his ‘surplus law’ – and look at its projection of public sector borrowing over the next 50 years. It shows the chancellor secures his surplus by 2018, and it lasts for around five years.

But then everything goes downhill, with borrowing steadily growing to 5% of GDP by 2064.  

Why? Population ageing. 

Now, unlike the 2008 financial crisis, we know that population ageing is happening. In fact, the OBR’s annual fiscal sustainability report highlights the challenge around this time every year, dousing us all like an early-summer rainstorm.

We may or may not be in ‘normal’ times now – we simply don’t know. But, we do know that ‘abnormal’ times are just around the corner. This country has never had to face up to an extended fiscal challenge like population ageing.

So, unlike the 2008 financial crisis that caught everyone – even the then shadow chancellor – by surprise, this means that there is no excuse for politicians not to begin preparing now for population ageing. 

The key point is this: to cope with the fiscal challenge of population ageing, we need a real, wide-ranging debate about taxation and spending affecting the older population. But this debate is wholly crowded out by this chancellor’s fiscal game playing, and apparent plan to use fiscal policy as a political tool for the duration of this parliament, just as he did under the coalition.

The irony is that right now, in the heady summer after winning a parliamentary majority, the government has the ideal opportunity to lead that debate. A more responsible chancellor would not be talking about ‘surplus laws’, but would be quickly setting up an independent commission on population ageing to have the debate with the public, take the flak, and clear the political ground for the government to make tough decisions.

There is a real, tangible cost to the chancellor’s game playing: it is the fiscal policy debate we are not having. And the longer this goes on, the worse it will be. We all desperately need the chancellor to move on and find some other policy stick with which to beat the Labour Party. Otherwise, the chancellor simply drives us closer and closer to the edge of a cliff.

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