The iron rule of Conservative deficit targets is that they are missed. George Osborne originally aimed to achieve a budget surplus in 2015, before delaying this ambition until 2020. When Philip Hammond replaced Osborne in 2016 following the Brexit vote, the new Chancellor pushed the target further back to 2025. In next month’s Budget, many expect Hammond to name 2027 – the end of the next parliament – as the new year of salvation.
Though the deficit has been reduced by two-thirds since 2010 (from £153bn to £46bn), Brexit is imposing new strain on the public finances. As Paul Johnson, the director of the Institute for Fiscal Studies, recently told me: “I think it’s extremely unlikely that we’ll end up with a surplus in the near-future. I don’t necessarily think that’s a problem, we’ve very rarely had a surplus in the last 70 years [the last was in 2001/02]. The only way we’re going to get anywhere near a surplus is if growth turns out to be very strong. That is possible but unlikely. A more likely outcome is that we’ll bump along with a deficit for a prolonged period.”
The IFS has today forecast that the UK will run a little-reduced deficit of £36bn in 2021/22 (more than twice the OBR’s original estimate of £17bn). In view of the political and fiscal pressures that the Chancellor faces (£1bn for Northern Ireland, the abolition of the public sector pay cap, a £2.3bn cut in student loan repayments, dismal productivity growth), the IFS concludes: “It is perhaps time to admit that a firm commitment to running a budget surplus from the mid 2020s onwards is no longer sensible”.
Hammond’s allies emphasise that he is a committed fiscal conservative. Asked last week about Community Secretary Sajid Javid’s proposal of a £50bn housing investment fund, the Chancellor said: “It is not responsible to make so-called hard choices by loading the price on to the next generation and the generation after that.
“We have to make the difficult decisions and we have to bear the consequences of those decisions and at £65,000 per household our public debt in this country is still far too high so I can confirm … that we will continue with the plans that we have announced to reduce the deficit in a measured and balanced way to ensure that debt is falling as a share of GDP.”
But the Tories now have every excuse they need to abandon the surplus target. As in the case of the net migration goal, a promise that is repeatedly broken lacks credibility. After seven years of austerity, and the loss of their parliamentary majority, an increasing number of Conservatives prioritise investment over deficit reduction. That bodies such as the IMF and IFS, rather than Labour alone, are now recommending this course, gives Hammond the cover he needs to retreat. Like the Opposition, the Conservatives could commit to eliminating the current budget deficit (covering day-to-day spending) within five years, leaving themselves with room to borrow for investment (in housing and other infrastructure projects).
Should the Tories maintain their surplus target they risk being stranded in a political no-man’s land, one in which they can credibly champion neither fiscal conservatism nor activism.