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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Recess confidential: Labour's liquid party

Sniffing out the best stories from Westminster, including Showsec, soames, and Smith-side splits.

If you are celebrating in a brewery, don’t ask Labour to provide the drinks. Because of the party’s continuing failure to secure a security contractor for its Liverpool conference, it is still uncertain whether the gathering will take place at all. Since boycotting G4S, the usual supplier, over its links with Israeli prisons, Labour has struggled to find an alternative. Of the five firms approached, only one – Showsec – offered its services. But the company’s non-union-recognition policy is inhibiting an agreement. The GMB, the firm’s antagonist, has threatened to picket the conference if Showsec is awarded the contract. In lieu of a breakthrough, sources suggest two alternatives: the police (at a cost of £59.65 per constable per hour), or the suspension of the G4S boycott. “We’ll soon find out which the Corbynites dislike the least,” an MP jested. Another feared that the Tories’ attack lines will write themselves: “How can Labour be trusted with national security if it can’t organise its own?”

Farewell, then, to Respect. The left-wing party founded in 2004 and joined by George Galloway after his expulsion from Labour has officially deregistered itself.

“We support Corbyn’s Labour Party,” the former MP explained, urging his 522,000 Facebook followers to sign up. “The Labour Party does not belong to one man,” replied Jess Phillips MP, who also pointed out in the same tweet that Respect had “massively failed”. Galloway, who won 1.4 per cent of the vote in this year’s London mayoral election, insists that he is not seeking to return to Labour. But he would surely be welcomed by Jeremy Corbyn’s director of communications, Seumas Milne, whom he once described as his “closest friend”. “We have spoken almost daily for 30 years,” Galloway boasted.

After Young Labour’s national committee voted to endorse Corbyn, its members were aggrieved to learn that they would not be permitted to promote his candidacy unless Owen Smith was given equal treatment. The leader’s supporters curse more “dirty tricks” from the Smith-sympathetic party machine.

Word reaches your mole of a Smith-side split between the ex-shadow cabinet ministers Lisa Nandy and Lucy Powell. The former is said to be encouraging the challenger’s left-wing platform, while the latter believes that he should make a more centrist pitch. If, as expected, Smith is beaten by Corbyn, it’s not only the divisions between the leader and his opponents that will be worth watching.

Nicholas Soames, the Tory grandee, has been slimming down – so much so, that he was congratulated by Tom Watson, Labour’s deputy leader, on his weight loss. “Soon I’ll be able to give you my old suits!” Soames told the similarly rotund Watson. 

Kevin Maguire is away

I'm a mole, innit.

This article first appeared in the 25 August 2016 issue of the New Statesman, Cameron: the legacy of a loser