A budget surplus is nothing to celebrate

There is nothing sacrosanct about having a budget surplus if it means slower growth in the economy. This holds true as long as markets are prepared to lend to you at reasonable rates, and in the case of the UK they are.

Interest rates at which we borrow have hardly moved. Indeed the cost to the Exchequer of servicing the debt is similar to what it was in 2008 despite the debt trebling over that period.

Why is this relevant? Because according to the latest ONS data for government finances, George Osborne’s target of a budget surplus on current spending was achieved in 2017/8, albeit two years later than originally planned. The small £112m surplus is the first in 16 years. The data also show better tax receipts and more people in employment than earlier predictions had suggested. Stealth taxes and overpaying in many areas such as inheritance tax seem to have all helped. But the overall deficit was still some 2 per cent of GDP.

George Osborne as Chancellor was defined by the austerity he presided over after the financial crisis. But in the process much was done to unbalance the economy which has been left in a permanent weaker state. Spending cuts in real terms across most sectors took their toll on service provision. Business investment has been slow to recover since the initial drop from the crisis. And although the sharp reduction in public sector jobs has been more than made up by higher private sector employment, many of the new jobs over the period have been low paid, part time, self-employed and relatively low productivity, with the result that real wages have taken a decade to get back to where they were before the crisis.

The Brexit uncertainty has added to this. The economy in 2017 grew by a modest 1.7 per cent. While the latest April IMF forecast upgraded eurozone growth to 2.4 per cent, UK growth was put at only 1.6 per cent, near the bottom of the G7. The first estimate for Q1 2018 confirms the problem, suggesting a sharp slowdown to just 0.1 per cent. And the OBR forecast that accompanied the Chancellor’s spring statement assumed growth in the years from 2019 to 2022 not exceeding 1.5 per cent in any year.

The longer term problem appears to be the sharp slowdown in productivity growth since the crisis which has become embedded in the economy. To sustain the pace of improvement in government finances at a time of weak growth and rising demands from an ageing population would require tax increases and/or more cuts elsewhere.

But the obvious deterioration in public services including from cash strapped councils is now becoming politically explosive. And the latest shocking figures on growth in the first quarter make a rethink even more urgent—especially if the Brexit malaise lingers on.

The Chancellor Philip Hammond sensibly dumped his predecessor's fiscal rules, delaying the date for an overall budget balance across both current and capital spending to 2025. No one should shed a tear if that deadline is shifted further to the right.