UK Chancellor George Osborne has set himself a trap.
To hit his own target of a UK budget surplus by 2019/2020, Osborne would have to cut spending and boost taxes by 1.5% of GDP in the year before the 2020 election.
This is unlikely to go down well with a public already frustrated by government cuts and sluggish wage growth.
Unless economic growth suddenly accelerates, and tax receipts with it, Osborne will have to decide between his “fiscal rule” to aim for a surplus and the next General Election.
Nobody expects him to go with the former.
Analysts at Bank of America Merrill Lynch, led by Robert Wood, are sceptical (emphasis ours):
But the degree of austerity now planned for 2019/20 looks implausibly large, especially for a pre-election year. We struggle to see it being delivered.
Indeed, we find it hard to imagine the Chancellor’s fiscal rule surviving beyond the current parliament and possibly not even that long.
There are several problems with the rule, but one of the most obvious is that it is unnecessarily challenging. The UK has rarely run budget surpluses in the past. A surplus means reducing debt quicker, but that has to be balanced against the economic cost of the austerity required to get to a surplus. Moreover, the fixed date for reaching a surplus (2019/20) means the Chancellor could theoretically have to tighten into slowdowns.
And here’s what that level of austerity looks like in graph form:
It’s all down to growth, or rather the lack of it. Economic forecasts have been slashed across the board, making it harder for Osborne to achieve his goals and cut borrowing.
Here’s the chart from Credit Suisse:
So the real question becomes — how will the Chancellor ditch his old rule but still keep his credibility?