George Osborne announced new budgetary rules for the government on Monday in an attempt to highlight the gap between what the chancellor sees as Tory prudence and the profligacy of Labour.
The Charter for Budget Responsibility, which parliament must approve, aims to eliminate the current structural deficit within three years and ensure public sector net debt is falling as a share of national income by 2016-17.
Mr Osborne hopes the new rules will highlight the responsibility of the government at a time when the Tories are under fire for “ extreme and ideological” cuts in the sole pursuit of running large budget surpluses.
The updated charter is similar to the existing fiscal rules but the time horizon for eliminating the current structural deficit, excluding net investment, has been shortened from five years to three years. It remains a rolling target but implies that the current budget will be in surplus in 2017-18, in line with the latest forecasts from the Office for Budget Responsibility, which predicts a current surplus of £10bn in that year.
The secondary rule is for public sector net debt as a percentage of gross domestic product to be falling by 2016-17, a year later than under the existing rules, which the Treasury accepts it will break. The new rule is also in line with the latest OBR forecasts and requires no change in policy.
The coalition’s budgetary rules are up to £27bn a year tighter than those of Labour — equivalent to 1.2 per cent of national income by 2019-20. Ed Miliband, Labour’s leader, has said he will balance the current budget “as soon as possible within the next parliament”.
Mr Osborne has, however, suggested the Tories would run a much tighter fiscal policy than the new charter implies. In the Autumn Statement, the chancellor outlined spending plans that generated a £23bn absolute surplus by 2019-20, implying that public spending would be £50bn a year lower than under Labour by the end of the next parliament.
Mr Miliband last week seized on these assumptions to describe the Conservatives as “extreme and ideological, committed to a dramatic shrinking of the state and public services, no matter what the consequences”.
The chancellor highlighted on Monday what he saw as the benefits of a rapid reduction in the deficit. “International experience has shown that is the only reliable way to reduce high levels of public sector debt when inflation is low,” he said. “The alternative would be to leave our debts for our children to pay off and leave our economies dangerously exposed to the next crisis — and we know better now than to assume there won’t ever be another crisis.”
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