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19 July 2012

Osborne is set to break his golden debt rule

The IMF's warning that Osborne will miss his debt target spells trouble for the Chancellor.

By George Eaton

After slashing its forecasts for UK growth earlier this week, the IMF has just delivered its full verdict on the state of the British economy and it makes grim reading for George Osborne. Noting that “the big picture on growth is one of stagnation since late-2010”, the Fund repeats its call for Osborne to prepare a plan B if the economy fails to recover.

The planned pace of structural fiscal tightening will need to slow if the recovery fails to take off even after additional monetary stimulus and strong credit easing measures.

And there’s more. It expects economy to “grow modestly” but warns that “current policy settings” mean the UK could suffer a “permanent loss of productive capacity”.

But worst of all for Osborne, the Fund predicts that he will miss his target for national debt to be falling as a percentage of GDP by 2015-16. The man who mocked Gordon Brown for breaking his “golden rule” is set to do the same. “Under… weaker medium-term growth projections, the net debt target is expected to be met one year late,” the IMF says. Government debt is now expected to rise from 78.8 per cent of GDP in 2014-15 to 79.9 per cent in 2015-16.

While Osborne’s arbitrary targets are of little economic importance they are of immense political significance. Should he abandon his debt rule, the UK could lose its AAA credit rating. Standard & Poor’s, for instance, has previously warned that our top rating is conditional on Osborne meeting his fiscal mandate. But why should we listen to the discredited agenices that rated Lehman Brothers and AIG as “safe investments” days before the crash? The answer is simple: we shouldn’t. But this doesn’t alter the fact that Osborne did. Having adopted the UK’s credit rating as his metric of success (he once boasted that the UK was “the only major western country which has had its credit rating improve”) he can hardly change tact now. 

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The alternative, of course, is for Osborne to announce billions more in spending cuts and tax rises in a desperate attempt to meet his target. But that would only further reduce growth, meaning that he might miss his target anyway, and would hardly endear him to voters already bruised by austerity. The truth is that for Osborne, who arrogantly dismissed well-intentioned critics as “deficit deniers”, there are now no good options.