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.

John Moore
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The man who created the fake Tube sign explains why he did it

"We need to consider the fact that fake news isn't always fake news at the source," says John Moore.

"I wrote that at 8 o'clock on the evening and before midday the next day it had been read out in the Houses of Parliament."

John Moore, a 44-year-old doctor from Windsor, is describing the whirlwind process by which his social media response to Wednesday's Westminster attack became national news.

Moore used a Tube-sign generator on the evening after the attack to create a sign on a TfL Service Announcement board that read: "All terrorists are politely reminded that THIS IS LONDON and whatever you do to us we will drink tea and jolly well carry on thank you." Within three hours, it had just fifty shares. By the morning, it had accumulated 200. Yet by the afternoon, over 30,000 people had shared Moore's post, which was then read aloud on BBC Radio 4 and called a "wonderful tribute" by prime minister Theresa May, who at the time believed it was a genuine Underground sign. 

"I think you have to be very mindful of how powerful the internet is," says Moore, whose viral post was quickly debunked by social media users and then national newspapers such as the Guardian and the Sun. On Thursday, the online world split into two camps: those spreading the word that the sign was "fake news" and urging people not to share it, and those who said that it didn't matter that it was fake - the sentiment was what was important. 

Moore agrees with the latter camp. "I never claimed it was a real tube sign, I never claimed that at all," he says. "In my opinion the only fake news about that sign is that it has been reported as fake news. It was literally just how I was feeling at the time."

Moore was motivated to create and post the sign when he was struck by the "very British response" to the Westminster attack. "There was no sort of knee-jerk Islamaphobia, there was no dramatisation, it was all pretty much, I thought, very calm reporting," he says. "So my initial thought at the time was just a bit of pride in how London had reacted really." Though he saw other, real Tube signs online, he wanted to create his own in order to create a tribute that specifically epitomised the "very London" response. 

Yet though Moore insists he never claimed the sign was real, his caption on the image - which now has 100,800 shares - is arguably misleading. "Quintessentially British..." Moore wrote on his Facebook post, and agrees now that this was ambiguous. "It was meant to relate to the reaction that I saw in London in that day which I just thought was very calm and measured. What the sign was trying to do was capture the spirit I'd seen, so that's what I was actually talking about."

Not only did Moore not mean to mislead, he is actually shocked that anyone thought the sign was real. 

"I'm reasonably digitally savvy and I was extremely shocked that anyone thought it was real," he says, explaining that he thought everyone would be able to spot a fake after a "You ain't no muslim bruv" sign went viral after the Leytonstone Tube attack in 2015. "I thought this is an internet meme that people know isn't true and it's fine to do because this is a digital thing in a digital world."

Yet despite his intentions, Moore's sign has become the centre of debate about whether "nice" fake news is as problematic as that which was notoriously spread during the 2016 United States Presidential elections. Though Moore can understand this perspective, he ultimately feels as though the sentiment behind the sign makes it acceptable. 

"I use the word fake in inverted commas because I think fake implies the intention to deceive and there wasn't [any]... I think if the sentiment is ok then I think it is ok. I think if you were trying to be divisive and you were trying to stir up controversy or influence people's behaviour then perhaps I wouldn't have chosen that forum but I think when you're only expressing your own emotion, I think it's ok.

"The fact that it became so-called fake news was down to other people's interpretation and not down to the actual intention... So in many interesting ways you can see that fake news doesn't even have to originate from the source of the news."

Though Moore was initially "extremely shocked" at the reponse to his post, he says that on reflection he is "pretty proud". 

"I'm glad that other people, even the powers that be, found it an appropriate phrase to use," he says. "I also think social media is often denigrated as a source of evil and bad things in the world, but on occasion I think it can be used for very positive things. I think the vast majority of people who shared my post and liked my post have actually found the phrase and the sentiment useful to them, so I think we have to give social media a fair judgement at times and respect the fact it can be a source for good."

Amelia Tait is a technology and digital culture writer at the New Statesman.