Will the Chancellor still be aiming for an overall budget surplus in 2018/19 after the Autumn Statement?

by

In tomorrow’s Autumn Statement, the Chancellor is expected to announce an updated Charter for Budget Responsibility, which would formally commit the government to a balanced cyclically-adjusted current budget by 2017-18. By forcing a vote in parliament, the Chancellor is thought to be drawing Labour out on their potentially looser fiscal policy. Yet this move also risks some confusion over what the Chancellor – with his Conservative rather than Coalition hat on – is proposing for the next parliament. So what do we know?

To some extent, the proposed Charter is nothing new: a balanced cyclically-adjusted current budget has been the Coalition’s goal since its formation – ‘current budget’ meaning excluding net investment and ‘cyclically-adjusted’ meaning trying to account for any temporary under-performance (or over-performance) of the economy.

However, the target so far has not been for a particular date but rather for five years ahead of the current year – on a rolling basis. While a government could within these rules potentially go on indefinitely without ever actually delivering a balanced current budget, there is at its core a sensible intention to avoid a vicious cycle in which an economic downturn and a fixed target force immediate tax increases or spending cuts, worsening the economy further.

The Treasury argues that now that the economy is growing faster, the flexibility of a five-year rolling target is no longer required and that it would be better to provide the certainty – and the political incentive – that a fixed or shorter-term target brings. In a sense then, the only difference between the new target and the existing coalition Charter – approved in the Commons in May 2011 – is that the amount of wiggle room would be reduced. Others have commented on the merits of enshrining policy targets in law, and on the optimal flexibility of fiscal rules.

In the OBR’s last set of projections (Budget 2014), the government was expected to deliver a balanced current budget in 2017-18 with ample room to spare, followed by a small overall surplus (i.e. with no exclusion of the £25-30 billion spent each year on capital investment) in 2018-19. It is this tighter definition that the Conservatives have chosen for their own target, going further than the expected Charter and promising to deliver an overall budget surplus in the next parliament and – slightly more ambiguously – to “balance the books by 2018”.

A big question for the Autumn Statement is the extent to which these goals become harder to reach. It is widely expected that the deficit for the next few years will be revised upwards on the back of disappointing tax receipt growth. In the face of strong GDP growth this suggests that a larger portion of the deficit is ‘structural’. If these predictions are right, will Conservative plans for an overall budget surplus shift to 2019-20? Or will the level of implied spending cuts increase further still to keep the deficit trajectory unchanged?

Any upwards revision in the required fiscal consolidation would be important. Based on figures from the Budget, £17 billion of new tightening would be needed in 2016 or 2017 to (just) balance the cyclically-adjusted current budget by 2017-18, and £37 billion would be needed to achieve a small overall surplus in 2018-19. These figures are on top of the £8.5 billion of departmental cuts already planned for 2015-16. If, say, an OBR downgrade required finding an additional £9 billion – as some have predicted – this would be a tough ask.

And that is before we get to any extra pressures creating by increased spending on the NHS. As well as the permanent £2 billion boost to frontline NHS spending, and investment via recent bank fines, there are suggestions that the Chancellor may put his weight behind the ‘Five Year Forward View’ based around maintaining health services through increased efficiency but also through extra funding of at least £8 billion (a further £6 billion) by 2020. Whatever the merits of this plan, its interaction with the parties’ fiscal policies will be crucial. Resolution Foundation figures have suggested that under Conservative plans for a budget surplus in 2018-19 – even before any negative revisions – many departments would have faced cumulative cuts since 2010-11 of between one third and two thirds, and that assumes that £12 billion can be cut from welfare spending as the Chancellor has proposed. Finding additional resources for the NHS through still bigger cuts would be extremely challenging. Consider for example that a non-ringfenced budget such as non-school education might need to be cut by an additional £0.7 billion to deliver that new NHS total. For Defence it might mean another £1.6 billion, again on top of all cuts achieved or planned so far.

So while the balanced current budget target for 2017-18 looks likely to be put into law, in spite of probable bad news on the deficit, it is unclear what will happen to the hopes of attaining an overall surplus in 2018-19. That will be one of the more revealing things we may learn tomorrow.