Each political party's borrowing requirement would see the books balanced in the next Parliament, but there remains a set of substantive choices, with significant implications for local government budgets, writes John Healey
The chancellor's Autumn Statement this month brought a flurry of bad economic tidings, rather than festive cheer.
In June 2010, a fresher-faced George Osborne announced a binding fiscal commitment as the centrepiece of his first ‘emergency' Budget, saying: ‘The formal mandate we set is that the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget'. Four-and-a-half years on, that budget centrepiece lies in tatters.
Budgets and Autumn Statements are undone by the detail, and the small print in this statement showed that the deficit for 2015-16 will not be in balance. Instead borrowing next year to cover the overall deficit will be £75.9bn, or £42bn on the Government's favoured 2010 measure.
Indeed, borrowing over this Parliament will be £219bn higher than the Government promised in 2010, which is around four times what government spends each year on education.
And, because wages aren't rising and too many people are stuck in low-paid jobs, the fiscal position looking even less rosy than it did six months ago with the chancellor having to admit borrowing an extra £12.5bn this year and next beyond what he forecast in the 2014 Budget.
Hidden in the Office for Budget Responsibility (OBR) analysis are the potential consequences of this position for spending in the next Parliament, based on present policies: public funding and public services reduced to 35% of national income, lower than at any time since the founding of the welfare state; GDP growth built on year-on-year increases in household debt; and real wages set to be still below the pre-crash peak a decade after the downturn.
The take-away point from this Autumn Statement doesn't need to be party-political.
But it must be a recognition of the truth that there are choices about the public finances in the next Parliament.
Just as Margaret Thatcher was wrong to say about her economic policy that there was ‘no alternative' so George Osborne was mistaken to say that in 2010 that Britain was ‘on the road to ruin' if we adopted the then Labour Government's plan to halve the deficit over this Parliament.
As it happens, he hasn't even managed that.
As Oxford economist Professor Tony Atkinson wrote recently about what economics can teach politicians and the public: ‘The first lesson is that there are choices to be made'.
The choices are contained in the primary fiscal rules that each of the parties have set out, and these differ on three main axes.
First, the Conservatives have said they will seek a budget surplus in 2018-19, the Lib Dems in 2017-18, and Labour as soon as possible in the next Parliament, depending upon economic conditions.
Second, whether the deficit measure used will cover capital or just current spending – the Conservatives have the most austere definition comprising all government spending, the Lib Dems' measure excludes some capital spending, and Labour's concentrates on current spending and excludes investment.
Finally, whether or not the deficit measure tracks only the ‘structural' deficit which measures borrowing as a proportion of potential GDP.
This is something which the Lib Dems favour, while Labour and the Conservatives don't.
These seemingly small technical differences could translate into substantial policy choices.
One recent estimate from the respected Resolution Foundation think-tank estimated that the potential variation in the amount of fiscal tightening – spending cuts or tax rises – offered by the two main parties could be at least £33bn in the four year spending round starting in 2016-17.
While the Conservatives' plans were estimated to require £37bn of tightening, Labour could require just £4bn.
Each party's borrowing requirement would see the books balanced in the next Parliament.
On that there is consensus but, within that declaration, there remains a set of substantive choices, with significant implications.
Local government knows the toll that spending cuts are already taking and will recognise the consequences of these differing approaches.
If the choice is further accelerated cuts, then even if local government has a more committed figurehead in Whitehall, who doesn't offer council budgets up as a sacrificial lamb, the prospects for the next Parliament looks bleak.
OBR forecasts on current policies show that central government spending on local government would then decline in each and every year of the next Parliament.
By 2019-20, central government would be providing councils with little more than half the share of national income they had in 2009-10.
But this end point is not fixed. There is still all to fight for.
As Otto von Bismarck said, ‘politics is the art of the possible'.
The inconvenient truth for the chancellor after this Autumn Statement is that the realm of the possible – and so the domain of political debate and policy choices – is wider than he would have the country believe.
This is exactly the debate that we can and must have ahead of the next General Election.
