What Philip Hammond will say today: the deficit is dead, long live the debt


Philip Hammond is going to give a very short speech at the Spring Statement today. There will be none of the tax and spending announcements we are used to when Chancellors rise to the Despatch Box. But short and largely announcement free as it will be, tomorrow’s speech will nonetheless represent something very significant for the political economy of Britain – a new era. And just as shifts from the era of one monarch to another were encapsulated in a simple phrase, so too can this one: “the deficit is dead, long live the debt.”

Let’s start with the dying bit. The Chancellor will read out the obituary for the deficit that public finances data have written since the Autumn. In short, improved tax receipts mean borrowing this year looks set to come in between £7 and £11bn lower than the £49.9bn projected by the Office for Budget Responsibility back in November. The result, as the chart below shows, is that the current budget deficit (excluding capital expenditure) disappeared on a twelve monthly basis at the end of last year. The thing that has, rightly or wrongly, dominated British economic debate this decade is no more.

But does that mean the Chancellor will simply announce job done and that the public finances can retire from dominating our political economy? Far from it. Instead the central purpose of his speech tomorrow is almost certain to be kickstarting the debate that is likely to dominate fiscal policy for the next decade in the way the deficit has in the last – what is the level of public debt that Britain should be aiming for? The Chancellor’s speech is set to last 15 minutes, but (leaving aside reading out the OBR’s new forecasts and announcing some consultations on tax policy) one chart would do just as well. Here it is.

As the Chancellor told Andrew Marr on Sunday his starting point is that “We have to get debt down.” But you might reasonably say, it’s already falling so what’s he going on about? This chart, which shows different scenarios for public sector net debt over the next quarter of a century, answers that question.

Yes if we maintain our current course and deliver the government’s short term “Fiscal Mandate” of only borrowing 2 per cent of GDP from 2020-21 onwards debt can be projected to fall by around 20 per cent by 2040, from around 85 per cent today (the purple line). If that happened it would be a significant fall – albeit to levels still well above the 30 to 40 per cent seen in the years before the financial crisis (but below those we lived with before the early 1970s). But the crucial word is the ‘if’ in that sentence. Because tomorrow the Chancellor will do something unusual – rather than claiming to have abolished boom and bust he will remind us all that it’s alive and well, with recessions likely to hit the UK economy from time to time.

To show the impact those recessions might have on “getting the debt down” we’ve modelled (in the dashed line) the impact of sticking to that fiscal mandate with one big shock hitting the UK economy every 8 years (roughly the historic norm) and simplistically assuming it adds 10 per cent of GDP to our debt. Far from falling, debt stays exactly where it is today.

That fact is likely to be the Chancellor’s central argument for why Britain can’t simply stop worrying about the public finances. It’s why he hasn’t given up a commitment to George Osborne’s aspiration of running an absolute budget surplus (eliminating all borrowing, which as the blue line above shows would lead to more substantial falls in debt), despite only being able to target meeting this ‘Fiscal Objective’ half way through the next decade. And it’s why, despite some ludicrous claims to the contrary, austerity is far from over. Benefits are still being cut significantly in less than a month’s time. Overall spending is still being held flat right out to 2022, and day to day expenditure per person is set to fall throughout this Parliament – leaving some parts of local government and our prisons in near permanent crisis.

The Chancellor may also note that, crucially, the goal of reducing our debt in the years ahead comes at a time when, unlike the last 30 years, the demography of Britain will be creating upward rather than downward pressure on borrowing – fiscal pressures are not just about the economic cycle. As my colleague David Willetts argued last week, one implication of that fact is that the age of politicians promising tax cuts, rather than debating which taxes to raise, is over.

The Chancellor’s critics will rightly point out that an economy growing faster than our current bottom of the G7 performance league would do a lot to help get debt down more swiftly, or that measures to reduce debt could include tax rises doing a decent share of the work rather than just spending cuts. And as soon as they do they will find that they have entered the political economy of the next decade – of how to deal with our debts. So a good motto, not just for tomorrow’s speech but for the decade ahead, is: “the deficit is dead, long live the debt.”