Chancellor George Osborne is likely to use his last budget of this parliament to laud the achievements of the current government in heading off one of the worst economic crises in a generation. But the data paint a very different picture to the one he’s likely to present.
Back in 2010, Osborne’s Plan A was for deep spending cuts in order to “eliminate the structural budget deficit over a 5-year rolling horizon”. Government spending was projected to fall from 48% of GDP to 40% by 2015/16 and (equally importantly) the government expected tax revenues to rise from 37% of GDP to 39%.
Here’s the original table from five years ago:
The aim was to reduce public sector net borrowing by an ambitious 8.4 percentage points, from 8.7% of GDP in 2009-10 to 0.3% of GDP in 2015-16.
Clearly, we can now see, they failed. Yet it has not been through lack of trying.
As can be seen from the Institute for Fiscal Studies (IFS) so-called “Green Budget” review for 2015, the government did cut spending by almost as much as it planned in 2010.
Unfortunately, the optimistic assumptions that they made about both growth and tax revenues failed to materialise. The government’s budget watchdog, the Office for Budget Responsibility, put the failure of Plan A down to “weaker potential output of the UK economy” as well as increases in the UK’s tax free allowance reducing the government’s tax take by much more than had been forecast.
Others, including a number of prominent academics, attribute responsibility for disappointing growth to the government cuts themselves, arguing that they reduced demand in the economy and kept unemployment higher than it otherwise would have been. In other words, austerity hurts.
Whatever its cause, years of disappointing growth and tax revenues meant that the deficit targets were inevitably and repeatedly missed. To its credit the government decided against increasing the pace of cuts in order to chase down arbitrary targets, judging (correctly in this journalist’s opinion) that it would needlessly damage the UK economy and risk a spiral of further cuts reducing demand, requiring even deeper cuts.
But to claim that Plan A was a success is, umm, highly questionable. The multiple different lines in the chart below, represent different government budget forecasts, indicate that as the years went by the deficit kept failing to decline the way the government wanted it to.
The lesson that the government could have learned from this is that setting arbitrary deadlines for reducing the deficit that take no account of the economic environment is folly.
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