Chancellor plans permanent budget surplus

George Osborne has announced plans to limit UK governments to running balanced budgets in all but exceptional circumstances. Is it irresponsible for governments to spend beyond their means?

When seven party leaders gathered in Salford for the election debates in early April, it was predictable that the first question would focus on the most significant issue in the campaign. The UK’s budget deficit — the amount which the country had to borrow each year in order to make up the shortfall between its tax revenues and the amount it planned to spend — had dominated the political agenda since its alarming growth in the wake of the financial crisis of 2008.

Five weeks later, the Conservative party’s victory appeared to vindicate its strategy of emphasising its perceived strength on the issue. And in a major speech in the City of London last night, the Chancellor of the Exchequer, George Osborne, indicated his view of the public’s decision: it was a watershed moment for the way the UK runs its public finances. Not only is he aiming to eliminate the deficit and run a budget surplus by 2018; he also plans to enshrine future governments’ requirement to do so in ‘normal’ times in law.

The Chancellor’s plan would mean that governments were bound to bring in more money than they spent each year, which has not happened since 2001-2 and has only been true in seven of the last 50 years. Such a measure would prevent the government from having to borrow money, to be paid back with interest later on. Mr Osborne cites Sweden and Canada as examples of countries which have been relatively resilient in the face of the recent tough global economic circumstances thanks to their responsible approach to public finances.

With the deficit reaching £100.9bn in 2010 and the national debt now nearly £1.5 trillion, concerns over fiscal discipline assumed a particularly prominent place in both the 2010 and 2015 elections. The candidates in the current Labour leadership election still face a barrage of related questions, with the deficit remaining £53.1bn in 2014-15. But reducing it has required the policy of austerity, or cutting back levels of public spending.

Deficient economics?

Mr Osborne and his supporters say that running a budget deficit is fundamentally irresponsible. The public do not want to see their money being spent on interest payments on unnecessary debts. They would far rather pay less in taxes or see more of the money they spend invested in services they use.

But Pete Wishart, a Scottish National Party MP, says that the plan will ‘set austerity in concrete’. Running a deficit may be the best thing for a democratically elected government to do in the interests of the country. Borrowing money may be the best way to stimulate the growth to make people better off. And sometimes essential services simply need money which is not immediately available.

You Decide

  1. Should governments be able to spend more money than they collect in taxes?
  2. How significant is fiscal responsibility to governing a country?

Activities

  1. Choose five words to describe George Osborne’s idea, and write a brief explanation of why you chose each of them.
  2. Write a speech either agreeing or diagreeing with the idea.

Some People Say...

“We should aim for a permanent change in our approach to fiscal responsibility.”

George Osborne

What do you think?

Q & A

Isn’t this rather removed from day-to-day life?
It has a knock-on impact on everyone’s lives. Running a permanent surplus will mean that the government starts paying off its debt, requiring it to spend less on public services (like health, education and policing) or raise taxes. The Conservative government has promised not to raise taxes before 2020, but future governments may feel the need to do so.
What if we just keep running deficits?
The problem is that running a deficit enlarges the national debt, which is already around 80% of our GDP. This means that the government owes more money to its creditors. Eventually that money will need to be repaid. And businesses are anxious about investing in countries with large debts as they fear that they may suddenly need to repay large amounts.

Word Watch

The first question
A 17-year-old politics student named Jonny Tudor asked how the leaders proposed to cut the budget deficit without raising taxes or making substantial cuts to public services.
The financial crisis of 2008
The British government was running a small deficit in the middle of the decade, which grew rapidly after the crash in global financial institutions. This was because the government spent money nationalising Northern Rock and bailing out banks such as RBS as they faced the threat of closure.
Major speech
Mr Osborne was speaking at the Mansion House dinner, an annual black-tie event at which the Chancellor and Bank of England address prominent professionals in the world of finance.
National debt
See The Day’s briefing on the issue, written in April (available in the expert links).
Fiscal discipline
Fiscal policy relates to the government’s use of taxation and expenditure.
Austerity
This refers to a programme of cutting government expenditure. A particularly acute case of austerity in Britain came after the Second World War, when the country was nearly bankrupt.

Subjects

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