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Tuesday, 16 December 2014

Updated Charter for Budget Responsibility

The Chancellor of the Exchequer, George Osborne, and Chief Secretary to the Treasury, Danny Alexander have published and laid before Parliament an updated Charter for Budget Responsibility.

The Charter for Budget Responsibility sets out the government’s approach to operating fiscal policy transparently and managing sustainable public finances in the long-term interests of the UK. The purpose of the Charter is to commit the government to reducing the deficit and debt, and to establish transparent arrangements so that it can be held to account for delivering that commitment.

The fiscal mandate in the current Charter for Budget Responsibility was first set in 2010 and reflected the exceptional fiscal challenge the government faced. The mandate targets returning the cyclically-adjusted current budget to balance over a rolling five-year period, supplemented by a target to put debt on a declining path by the end of financial year 2015-16. Since then, the government has made significant progress on its fiscal consolidation.

Public sector net borrowing as a percentage of GDP has fallen by more than a third since 2009-10 and is forecast to have fallen by half by the end of 2014-15. The government is forecast to meet its fiscal mandate 2 years early in 2017‑18, having reduced the cyclically-adjusted current budget deficit from its peak of 4.7% of GDP in 2009-10 to 2.6% of GDP in 2013-14. On the OBR’s central forecast, the cyclically-adjusted current budget will be in surplus by 0.7 per cent of GDP in 2017-18.

At Autumn Statement 2012, the OBR forecast that the target of having debt falling by 2015-16 was likely to be missed. The Chancellor explained to parliament that he would maintain the current fiscal plan, rather than change plan to meet the target. At each fiscal event since, the OBR has passed a similar judgement. Indeed, they forecast that debt is likely to be falling one year later in 2016-17. This demonstrates that the Charter and its targets have been an effective tool at publicly holding the government to account.

The current fiscal mandate will lapse at the end of this parliament and so The Autumn Statement 2014 update presents a new fiscal framework, following a review by the Government.

The updated Charter commits the coalition government to two objectives:
  • The fiscal mandate will now target returning the cyclically-adjusted current budget to balance over a three year rolling horizon. At Budget 2015, therefore, the target year for the fiscal mandate will be 2017-18. This reflects the progress that has been achieved in tackling the deficit, which means that the mandate can be safely shortened to create a tighter constraint on future fiscal policy choices.
  • The revised Charter for Budget Responsibility sets a new supplementary target for debt to be falling as a percentage of GDP in 2016-17. The OBR forecast that PSND will peak in 2015-16 at 81.1% of GDP.

A debate and vote on the Charter will be scheduled in the House of Commons for early in the New Year.

Meeting the fiscal mandate and putting debt on declining path will require further difficult decisions to be made by government. The government has set out detailed spending plans for 2015-16. Choices will need to be made about the composition of further consolidation beyond 2015-16. In order to meet the fiscal mandate and supplementary debt target set out in the updated Charter the government estimates that on current forecasts around £30 billion of discretionary consolidation is likely to be required over the following two years 2016-17 and 2017-18.

The Chancellor of the Exchequer, George Osborne said: "Thanks to our long term economic plan, we will have halved the deficit by the end of this parliament. I have always been clear that more tough choices will need to be made in the next parliament to eliminate the deficit and get debt falling. This Charter entrenches the commitment to finish the job and maintain economic stability.”

Chief Secretary to the Treasury, Danny Alexander said: "Our country entered the financial crisis and recession with the largest structural deficit of any major economy. Thanks to the difficult decisions that we’ve taken, we have taken a giant leap towards eliminating our structural deficit and setting debt on a declining path. By updating the Charter today, we set out what it means to finish that job, which is crucial for creating a stronger economy, and fairer society".

Shadow Chancellor, Ed Balls, responding to publication of the Charter for Budget Responsibility, said: "Once again, a silly political stunt by George Osborne has totally backfired. David Cameron has just given a speech attacking Labour's target to get the current budget into surplus. But this is exactly what they are putting to a vote in this new Charter. In the Budget George Osborne talked about a vote on balancing the overall budget. Today he and David Cameron have done a staggering U-turn on this vote and are now proposing a vote on the current budget, excluding capital investment. This is the same measure of the deficit the Labour Party has been committed to targeting for the last three years. They have also changed the fiscal mandate from being a 'target' to an 'aim'. We said in January that we want to get the current budget into surplus and national debt falling as soon as possible in the next Parliament. This Charter is consistent with our position so we'll vote for it. We're not going to change our view about what's in Britain's best interests because of one of George Osborne's silly games."

Continuing Mr Balls said: "Labour will cut the deficit every year and get the current budget into surplus, and the national debt falling, as soon as possible in the next Parliament. How fast we can go will depend on the state of the economy, including what happens to wages, growth, the housing benefit bill and events around the world. But our approach will be very different to the Tories. There will need to be sensible spending cuts in non-protected areas, but we will make fairer choices including reversing the Tory tax cut for millionaires and our plan will deliver the rising living standards and stronger growth needed to balance the books. In contrast the Tories are pursuing an increasingly unbalanced and extreme approach. They have chosen to pencil in even deeper spending cuts, which would return public spending to a share of GDP last seen in the 1930s."

"They are refusing to ask those with the broadest shoulders to make a greater contribution and ignoring the need for a plan to deliver the rising living standards that are vital to getting the deficit down. And they have now made £7 billion of unfunded tax promises, which can only be paid for by even deeper cuts to public spending or another Tory VAT rise. This is a complete own goal for the Chancellor. Perhaps George Osborne should spend less time thinking up silly political games which end up backfiring and more time sorting out the economy and trying to make his sums add up." Ed Balls added.