We need investment, not cuts, to deal with our fiscal headaches

Rather than using the forecast structural surplus to pay down the national debt, the government should invest it in science, skills and childcare.

The financial crisis and subsequent downturn had a huge impact on the public finances. In two years, from 2007-08 to 2009-10, public sector net debt jumped almost twenty percentage points from 37% to 56% of GDP. So when the current government came into power, it did so promising to mend our public finances. It set itself a fiscal mandate to eliminate the structural deficit and a supplementary target to have public sector debt falling by the start of the next parliament – 2015-16.

Poor growth has made these targets hard to achieve. But finally, after years of additional cuts have been pencilled in, there is some good news ahead of the Chancellor’s Autumn Statement on Thursday. Thanks to growth picking up, borrowing is looking better than expected. There are more cuts to come, but for once it’s looking likely that the government will be on track to meet the targets as set out in the Office for Budget Responsibility (OBR)’s last forecast without having to find more savings. Depending on what view the OBR takes of the growth we have had, the likelihood of meeting the mandate may even have risen.

Earlier this year, the OBR expected the fiscal mandate to be met by 2016-17. But what happens after that? The OBR forecast that the structural deficit would turn into a structural surplus of £15bn in 2017-18. It’s worth stopping to think about what this means. The structural part of the current budget is the part that doesn’t change as the economy goes through its usual cycle of downturns and upturns. A zero structural surplus would mean that the government balances its books over the course of an economic cycle. A structural surplus means that it goes even further than this – allowing it to pay down national debt. The Chief Secretary to the Treasury has pointed to the ageing population as the reason for continued austerity throughout the next Parliament. This could be a reasonable strategy. But it might not be the best one.  

The OBR’s Fiscal Sustainability Report, which looks at the long-term outlook for the public finances, shows the debt-to-GDP ratio nicely falling for around a decade after 2017-18, but as the ageing population kicks in, it’s set to sharply rise again in the 2030s, driven by rising health, social care and pension costs. By the early 2060s, public sector net debt is set to hit nearly 100% of GDP.

These levels make our current problems seem rather small in comparison. And they also raise the question of whether the ageing population is something that can really be tackled through cuts alone. The OBR numbers show that if we can boost the economy’s productivity, debt wouldn’t start rising until around two decades later. But in recent years, our productivity growth has been sluggish. If it doesn’t pick up, we may even fail to meet the OBR’s central case scenario. 

So there are big gains to be had from boosting our long-term productivity. The £15bn could be used to treble the science research budget, treble our adult skills budget or introduce universal childcare, enabling more parents to go out to work – with money still left over. The choice isn’t straightforward.  The Chancellor – and future Chancellors – are facing a new trade-off, one where too little investment now could risk a huge fiscal headache in the future.

George Osborne speaks at the Conservative conference in Manchester earlier this year. Photograph: Getty Images.

Nida Broughton is Senior Economist at the Social Market Foundation.

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Keir Starmer's Brexit diary: Why doesn't David Davis want to answer my questions?

The shadow Brexit secretary on the resignation of Sir Ivan Rogers, the Prime Minister's speech and tracking down his opposite in government. 

My Brexit diary starts with a week of frustration and anticipation. 

Following the resignation of Sir Ivan Rogers, I asked that David Davis come to Parliament on the first day back after recess to make a statement. My concern was not so much the fact of Ivan’s resignation, but the basis – his concern that the government still had not agreed negotiating terms and so the UKRep team in Brussels was under-prepared for the challenge ahead. Davis refused to account, and I was deprived of the opportunity to question him. 

However, concerns about the state of affairs described by Rogers did prompt the Prime Minister to promise a speech setting out more detail of her approach to Brexit. Good, we’ve had precious little so far! The speech is now scheduled for Tuesday. Whether she will deliver clarity and reassurance remains to be seen. 

The theme of the week was certainly the single market; the question being what the PM intends to give up on membership, as she hinted in her otherwise uninformative Sophy Ridge interview. If she does so in her speech on Tuesday, she needs to set out in detail what she sees the alternative being, that safeguards jobs and the economy. 

For my part, I’ve had the usual week of busy meetings in and out of Parliament, including an insightful roundtable with a large number of well-informed experts organised by my friend and neighbour Charles Grant, who directs the Centre for European Reform. I also travelled to Derby and Wakefield to speak to businesses, trade unions, and local representatives, as I have been doing across the country in the last 3 months. 

Meanwhile, no word yet on when the Supreme Court will give its judgement in the Article 50 case. What we do know is that when it happens things will begin to move very fast! 

More next week. 

Keir