The Institute for Fiscal Studies (IFS) delivered some bad news for Chancellor George Osborne this week. It branded his aim for Britain to be running a balanced budget by 2020 ‘inflexible’. They said that such a fixed deadline in such an unstable financial global context ran the risk of forcing the Chancellor into the position of having to raise tax rates or cut public spending with very little warning.
Such ‘sharp adjustments’, which could cause severe economic hardship for people who would have very little time to prepare for them, might even have to be made in response to forecasts which later turn out to be flawed. Revising of economic forecasts is hardly a rare event these days.
The IFS also pointed out that the Chancellor’s ambition for Britain to begin running a surplus during ‘normal’ economic times had only happened eight times in the past sixty years.
Instead the IFS suggested that he could become more flexible about the deadline even to the extent of temporarily suspending his Charter of Budget Responsibility. This would be an unappetising option for him though as he has already seen his reputation for being the great tactician tarnished. He is unlikely to want his signature policy suspended when it is widely expected that he will be one of those competing for the top job now that we know David Cameron will not be seeking a third term.
The criticism was tempered by some muted praise from the IFS, it did note the Chancellor’s plan’s ‘merit of simplicity and transparency’. Although that still makes it a simple and transparent plan that the IFS thinks should occasionally be suspended.
This bad news follows the unexpected good news that the Chancellor got from the Office for Budget Responsibility (OBR) in November after his budget. The OBR revised upwards its estimated tax revenues which gave the Government more space when it came to tax rises and spending cuts. But the IFS now warns that poor wage growth and a slow growing economy could threaten these increased tax takings.
The IFS was officially set up 1969 but had first produced a report in 1964 in response to then Chancellor James Callaghan’s financial plans which they saw as flawed and uninformed. It has been criticised for supporting tax policies that favour those who are well off and, when he was Deputy Prime Minister, Nick Clegg called its findings ‘complete nonsense’. There has also been criticism from the right with The Spectator calling it ‘the most striking example’ of taxpayer funded studies always arguing for ‘more expensive meddling by the state’.
By contrast the OBR was set up in 2010 by the Chancellor who cited the poor forecasts made under the Labour Government. It is led by three people who are appointed by the Chancellor, this calls into question just how accurate their claim to independence is. In its short history it has been noted that it has delivered some surprisingly good news for the Government.
Forecasts are one thing, grim economic realities quite another. Even if all deadlines are met and Britain does produce a surplus by 2020, the worry for Conservatives will be that this is all too late for the average voter to feel the benefits of a healthier economy. As 2020 is an election year, public opinion is usually more significant than forecasts and figures.