Chancellor prepared to delay by one year a key deficit reduction target – ensuring debt falls as a proportion of GDP
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George Osborne said his first budget, contained inside Disraeli's original box, had "flexibility built into" it on deficit reduction. Photograph: Peter Macdiarmid/Getty Images
George Osborne struck a more conciliatory note today as an array of economic statistics show that Ed Balls was right to warn last August that the economy is facing "sustained slow growth".
The chancellor told the Today programme that his deficit reduction plans were designed from day one – his first Budget on 22 June last year – to be flexible. Osborne spoke with confidence because he knew that a few hours later the IMF would endorse his plans to eliminate the structural deficit by 2015. The IMF did also issue a sober assessment of the state of the British economy as it downgraded its growth forecast once again.
Stephanie Flanders, the BBC's economics editor who is listened to with great care by members of the Osborne circle, clocked the significance of the chancellor's decision to highlight the "flexibility built into" his plans. Flanders told Radio 4's The World at One she found it "odd" that Osborne had not done more over the past year to highlight this.
There are two main areas of flexibility. Osborne is planning no change in the first but a tweak in the second:
• The "formal mandate", outlined in Osborne's first budget in June last year, to ensure that the structural current deficit is in balance by the final year of the five-year forecast period – 2015-16.
The chancellor said in that budget that he would achieve this one year earlier in 2014-15. This means that Osborne could slow the pace of deficit reduction – by delaying the elimination of the structural deficit until 2015-16 – and still meet his "formal mandate". But he has no intention of doing this because he will abide by the departmental spending cuts and tax increases outlined in the June budget and the autumn spending review.
Fraser Nelson, the editor of the Spectator, made clear there would be no change in the structural tightening – departmental spending cuts and tax rises. Nelson, who has probably had more influence on Tory spending plans over the last four years than anyone bar Osborne and a handful of his senior advisers, blogged this afternoon:
The government's five-year departmental budgets (the so-called DEL limits) are set in stone. They won't change (in cash terms) until April [20]15, after which no figures have been set.
• A supplement to the formal mandate – that debt is falling as a share of GDP by 2015-16.
This is Osborne's mini Plan B – the area where he is planning to be flexible. In his budget statement in June last year Osborne said that, in line with his "formal mandate" on eliminating the structural deficit, he would meet his "fixed target for debt" by 2014-15.
Osborne is prepared to revise this and delay meeting his debt target by a year until 2015-16. The chancellor will insist this is very much in line with Plan A which set 2015-16 as the formal target date. But by indicating that he is prepared to change his original, informal, 2014-15 goal on debt Osborne is showing that his plans may need tweaking as the economy grows at a painfully slow rate.
The chancellor is prepared to lengthen the timetable on his debt target because it does not just apply to the structural deficit – the part that is impervious to economic growth and which can only be reduced through spending cuts and tax increases. It also applies to the cyclical element of the deficit which rises and falls according to the growth of the economy.
Osborne indicated this would be the case in his Today programme interview when he said that the automatic fiscal stabilisers would be allowed to do their work if growth is weak. This is the extra spending that automatically kicks in when tax receipts fall and welfare spending rises.
Fraser Nelson clocked this when he wrote:
Money to pay for increasing debt has to come from somewhere. So total state spending will rise in cash terms because the departmental budgets are fixed. This threatens to slow pace of deficit reduction.
So a mini Plan B is being drawn up. But what of the other threat to the economy – inflation? Osborne is said not to be unduly worried by this on the grounds that the two key factors which have driven up inflation in recent months – world commodity prices and the VAT rise – are unlikely to apply next year. The chancellor believes world commodity prices are stabilising and he has no plans to increase VAT again.
10.00pm UPDATE
The Treasury is keen to point out that there is no Plan B and that the chancellor is sticking to Plan A in all aspects of his deficit reduction plans. This includes his debt target.
A Treasury source has just told me:
The debt target was always set for 2015-16 from the first budget. But the chancellor built in a margin of caution of one year such that if, for any reason, borrowing was higher than forecast he would not automatically have to adjust his plans to meet the target.