Responses to Osborne’s Choice Related publications
Osborne’s Choice: Combining fiscal credibility and growth
George Osborne is at least as interested in the political as he is in the economic cycle. The Conservatives’ key campaign strategist, his priority is to get the economy into the sort of shape that will be required to win an outright election victory in the Spring of 2015. And if past form is any guide, his approach to this challenge will not be timid.
When he moved into the Treasury in 2010, his hope was that two or three years of fierce austerity would be enough to create the fiscal room that would be required for crowd-pleasing budgets in the run up to 2015. That turned out to be much too optimistic.
So as he prepares next month’s budget, his thinking will be guided instead by four different principles: we could call them “golden rules”.
Rule number one is to do nothing today that could make his problems worse in 2014-15. The impact of any significant loosening fiscal policy this year would be forgotten well before the voters made their decision, and could create the kind of market uncertainty around the time of the election that he must want at all costs to avoid.
Rule number two: don’t leave any painful measures that may have to be made until late in the election cycle. Last November, the Office for Budget Responsibility said that another £15bn of annual spending cuts or tax rises might be required by 2016-17, and that could turn out to be an underestimate. Whatever the economics might suggest, the politics say that he will need to address this problem well before the campaign gets going.
Rule number three: if you are going to do anything really unpopular –especially in the heartland of your voters – 2012 is going to be about your last opportunity. That gives time for the bad memories to fade, and for the benefits you are hoping to flow from such policies to kick in.
So if benefits for better-off taxpayers are ever going to be trimmed, now is the time – especially if such changes are likely to have little impact on demand in the economy. Maybe the pill could be sweetened by doing something bold with the 50p top rate of personal tax, which is both wildly unpopular and very inefficient as a revenue raiser.
Rule number four: retain your hard-won policy credibility. That means sticking to the overall spending limits – and even being ready to tighten further if necessary. That’s why a further spending review next year already looks quite probable.
But credibility requires two other qualities as well. It needs a reasonable measure of economic growth in the years ahead, without which the numbers won’t add up. And it means convincing the markets that the Government will continue to stick on its fiscal course, which will be hard to do if it is not on track when the campaigning season starts to draw close.
For all these reasons, Mr Osborne could just be gearing himself up for a little budget excitement next month.
Sir Richard Lambert is the former Director-General of the CBI, the present Chancellor of the University of Warwick, and a former member of the Bank of England’s Monetary Policy Committee. He was editor of the Financial Times from 1991 to 2001.