George Osborne cannot possibly know how long austerity will last

The Chancellor's strategy is based on faulty rules and unproven assumptions about the deficit.

Next week George Osborne will hold forth on the size of the underlying deficit and reveal whether austerity will now extend until at least 2018. When he does, he won’t know what he’s talking about – and he’ll be in good company.  Neither will Ed Balls when he responds, nor will the phalanx of city economists who rush to comment, nor indeed will establishment economic institutions such as the IMF and the OECD.

This isn’t because our current crop of politicians and economists are unusually uninformed. Rather it reflects the fact the debate on fiscal policy is being driven in no small part by an economic concept – the structural deficit - that is very close to being unmeasurable. It’s an example of how what sounds like a sensible idea in theory can go wrong in practice.  

The structural deficit is that bit of the deficit that would still exist even if the economy was running at full capacity: the part that can’t be explained away by the fact that the economy is under-performing.  Giving it consideration is sensible and important. Few would disagree that running a deficit when the economy is stuttering along far below its peak capacity is a very different matter to running one when the economy is booming. The trouble arises, however, when we pretend we can decipher exactly how much of a deficit is cyclical and how much is structural.

Estimating the size of the structural deficit is, to put it mildly, something that sensible people can come to sharply different views on. Last week the Social Market Foundation  think-tank (led by former Treasury official Ian Mulheirn who is no fiscal virgin) published a neat bit of work replicating the methodology used by the Office for Budget Responsibility (OBR) to estimate the gap between the economy’s current output and its full potential. They conclude the output gap is pretty modest: under 2%.  If correct, it’s bad news for our economy, as we’ve had a bigger permanent loss in productive capacity than many realise. And it’s bad news for austerity: the return to growth won’t fill the fiscal gap - further painful changes will be needed to meet the objective of eliminating the structural deficit over five years. The SMF estimate that massive extra spending cuts or tax-rises of around £22bn (over and above all of those already planned) would be needed by 2017/18.

Or maybe they won’t be.  Another plausible report – this time by the respected Capital Economics – tells a very different story. It estimates that our flatling economy might be running as much as 6% below its full potential. If that’s the case the structural deficit is far smaller than we are being led to believe – and Osborne may be planning to tighten fiscal policy by too much, way too much – to the tune of around £35bn - in order to meet his own rule.

So that’s all clear then.

In addition to recognising the confusion over the size of the structural deficit it is worth asking whether setting a target that no-one can agree on is likely to result in further economic damage? You’d think so. But the answer depends on whether you believe that the chancellor’s target on eliminating the structural deficit is going to drive new spending and tax decisions that wouldn’t otherwise have been taken.

This question arises because the target is formulated in a way that means, as Jonathan Portes, Director of the National Institute for Economic and Social Research, has highlighted, it never actually bites. Because it is set on a rolling timetable all the chancellor ever needs to do is demonstrate he plans to get rid of the structural deficit five years from a given point in time. He doesn’t actually need to achieve these plans. Each year the date at which the target will be met can just be pushed back by another twelve months (as happened in last year’s autumn statement). Promises rather than delivery will suffice.

Now, a target without a fixed date is clearly a flexible thing. But I doubt this makes it irrelevant to real decisions.  Politics and the chancellor’s craving for ‘credibility’ are likely to result in the target affecting the cuts Osborne actually makes in the here and now.  He won’t want his target to become a joke – the mañana target. Say, for instance, Osborne announces next Wednesday that an extra £15bn of consolidation is needed in 2017/18 - will that really have no impact on the real choices made about the next few years? He may well believe it is vital that he demonstrates additional fiscal resolve –by implementing extra cuts, not just making more promises.  

But in deciding on the timing of any new cuts Osborne faces contradictory pressures. On the one hand, he may well want to bolster credibility as well as build up the size of spending reductions by acting quickly, for instance freezing spending now on aspects of welfare in order that savings accumulate over the forthcoming years.

Alternatively, there are strong arguments for thinking he’d want to push cuts down the road (as his target allows him to do). Most obviously this is because the economy is currently so weak only a fool would contemplate further undermining it.  But there is another subtler reason for playing it long. If the chancellor has a hunch that the true output gap is actually larger than the OBR currently believes he may want to defer cuts – particularly those cuts that he doesn’t actually want to make – in the hope that over the next few years the OBR revises its view. If this hunch turned out to be correct, then at some point the OBR would end up announcing that the output gap is larger (and the structural deficit smaller) than they previously thought.

The result? A return to growth would solve more of our fiscal problems than we currently expect and Osborne (or indeed Balls) would be in the happy position of being able to scale back some of the cuts that have been pencilled in.  Of course, things could turn out worse rather than better than current OBR assumptions. No-one knows. But in an uncertain world one thing is clear: the current target on the structural deficit magnifies rather than minimises the confusion.      

Nor should we forget that the structural deficit isn’t the only fiscal rule in a spot of trouble. The chancellor’s second target – the commitment to reduce debt as a share of GDP by 2015 - is likely to be breached next week (unless a Treasury accounting fiddle is used to avert this). Either way, the rule is highly arbitrary. If the debt to GDP ratio falls marginally in 2015 but grows thereafter then the rule would have been met but the public finances wouldn’t be sustainable.    

Osborne’s fiscal regime is in a state of disrepair.  The finest minds in the Treasury are currently chasing two faulty fiscal lodestars: a deficit rule which is impossible to accurately measure, resulting in starkly different estimates with very different implications for policy and politics; and a debt rule which is highly arbitrary and tells us very little about the nation’s longer term fiscal health.     

All of which would lead you to think that there would be a major debate – not least on the centre-left - about alternatives to Osborne’s rules. After all, fiscal policy is the issue of our times and will define the next Parliament as much as it has this one. To be fair there are indeed those setting out new and interesting thoughts on the type of framework that might better ensure fiscal sustainability whilst taking account of the strength of the economy  and without falling foul of either false precision or arbitrariness. For now this conversation is only happening at the margins. In the meantime we are stuck with fiscal rules that aren’t fit for purpose. That’s likely to remain the case regardless of what George Osborne says in the Autumn Statement.

Chancellor of the Exchequer George Osborne. Source: Getty

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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If there’s no booze or naked women, what’s the point of being a footballer?

Peter Crouch came out with one of the wittiest football lines. When asked what he thought he would have been but for football, he replied: “A virgin.”

At a professional league ground near you, the following conversation will be taking place. After an excellent morning training session, in which the players all worked hard, and didn’t wind up the assistant coach they all hate, or cut the crotch out of the new trousers belonging to the reserve goalie, the captain or some senior player will go into the manager’s office.

“Hi, gaffer. Just thought I’d let you know that we’ve booked the Salvation Hall. They’ll leave the table-tennis tables in place, so we’ll probably have a few games, as it’s the players’ Christmas party, OK?”

“FECKING CHRISTMAS PARTY!? I TOLD YOU NO CHRISTMAS PARTIES THIS YEAR. NOT AFTER LAST YEAR. GERROUT . . .”

So the captain has to cancel the booking – which was actually at the Salvation Go Go Gentlemen’s Club on the high street, plus the Saucy Sporty Strippers, who specialise in naked table tennis.

One of the attractions for youths, when they dream of being a footballer or a pop star, is not just imagining themselves number one in the Prem or number one in the hit parade, but all the girls who’ll be clambering for them. Young, thrusting politicians have similar fantasies. Alas, it doesn’t always work out.

Today, we have all these foreign managers and foreign players coming here, not pinching our women (they’re too busy for that), but bringing foreign customs about diet and drink and no sex at half-time. Rotters, ruining the simple pleasures of our brave British lads which they’ve enjoyed for over a century.

The tabloids recently went all pious when poor old Wayne Rooney was seen standing around drinking till the early hours at the England team hotel after their win over Scotland. He’d apparently been invited to a wedding that happened to be going on there. What I can’t understand is: why join a wedding party for total strangers? Nothing more boring than someone else’s wedding. Why didn’t he stay in the bar and get smashed?

Even odder was the behaviour of two other England stars, Adam Lallana and Jordan Henderson. They made a 220-mile round trip from their hotel in Hertfordshire to visit a strip club, For Your Eyes Only, in Bournemouth. Bournemouth! Don’t they have naked women in Herts? I thought one of the points of having all these millions – and a vast office staff employed by your agent – is that anything you want gets fixed for you. Why couldn’t dancing girls have been shuttled into another hotel down the road? Or even to the lads’ own hotel, dressed as French maids?

In the years when I travelled with the Spurs team, it was quite common in provincial towns, after a Saturday game, for players to pick up girls at a local club and share them out.

Like top pop stars, top clubs have fixers who can sort out most problems, and pleasures, as well as smart solicitors and willing police superintendents to clear up the mess afterwards.

The England players had a night off, so they weren’t breaking any rules, even though they were going to play Spain 48 hours later. It sounds like off-the-cuff, spontaneous, home-made fun. In Wayne’s case, he probably thought he was doing good, being approachable, as England captain.

Quite why the other two went to Bournemouth was eventually revealed by one of the tabloids. It is Lallana’s home town. He obviously said to Jordan Henderson, “Hey Hendo, I know a cool club. They always look after me. Quick, jump into my Bentley . . .”

They spent only two hours at the club. Henderson drank water. Lallana had a beer. Don’t call that much of a night out.

In the days of Jimmy Greaves, Tony Adams, Roy Keane, or Gazza in his pomp, they’d have been paralytic. It was common for players to arrive for training still drunk, not having been to bed.

Peter Crouch, the former England player, 6ft 7in, now on the fringes at Stoke, came out with one of the wittiest football lines. When asked what he thought he would have been but for football, he replied: “A virgin.”

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 01 December 2016 issue of the New Statesman, Age of outrage