Budget 2013: The domino theory of deficit reduction

George Osborne The chancellor is not expected to announce any change of direction in next week's Budget

Talk about lowering expectations. The Treasury really wants you to expect a boring Budget next week, and in one crucial respect, I think it probably will be: the chancellor is not going to stand up and announce that he's decided Ed Balls was right all along.

Borrowing over the next few years is likely to be higher. And the growth forecasts a bit lower. But there will be no big change of direction. Though, behind the scenes at least, I have been struck by a significant change of tone.

When officials and ministers used to make the case against Plan B, they used to talk about the financial markets. Now they talk mostly about the politics of a reversal - and what a change of plan would do to the internal dynamics of the coalition.

Call it the domino theory of deficit reduction: if you let one piece of the programme slip, George Osborne is convinced that the rest of it will start to tumble as well. The moment you reverse one tough decision, every minister will start to think the tough choices in his or her department can be revisited as well. And the public will decide this supposedly tough-minded government has got no spine.

The Treasury has had this mindset since the start of the parliament. It might not have covered itself in glory during the Gordon Brown years, but now the informal motto of its senior officials is "to hold the line against fiscal flakes".

City doubters

What's interesting is that political folk from Number 10 and Number 11 are increasingly talking the same way, rather than focusing on the City, parts of which are starting to sound a bit "flaky" as well.

Budget 2013 graphic

The chancellor will give his fourth Budget speech on 20 March at 12:30 GMT

There will be full coverage of the Budget and how it affects you on the BBC News website

You will also be able to watch the event on a special programme on BBC Two and the BBC News Channel from 11:30 GMT

You are now hearing respected city economists such as Michael Saunders, who supported Mr Osborne in 2010, suggest that a modest increase in capital spending might be a net positive for the economy, even if it did raise borrowing. We have heard similar arguments from inside the IMF.

There are still plenty of city economists who would disagree. They say it would take quite a big increase in capital spending to make a difference to the economy.

You have to think this would have a massive effect on growth to think it would not have a big effect on borrowing and future debt.

That is probably why business groups such as the CBI and the British Chambers of Commerce are still cautious on the subject. But senior folk I have spoken to from at least two of the major ratings agencies do not seem to think a modest increase in borrowing, linked to higher investment, would be a major problem.

Political confidence

So, you might say that the largest obstacle in the way of Mr Osborne announcing an even slower deficit reduction plan next week isn't the financial market, but the chancellor's lack of confidence in his own side.

In effect, he doesn't think MPs will be able to tell the difference between a targeted stimulus and a free-for-all. And who knows, he might be right.

That doesn't really mean he's forgotten about the financial markets.

He's just mindful that, in the current climate, the ratings agencies themselves are starting to focus as much on the politics of the government's strategy as the economics.

Moody's, for example, said doubts about the political sustainability of future cuts were a big factor that might lead them to downgrade the UK's credit rating even further.

Labour, and many Liberal Democrats, think the argument goes the other way. They think it's the lack of growth (and lack of flexibility in the timetable for borrowing) that will make the programme politically unsustainable, not any lack of fortitude on the part of the chancellor.

But Mr Osborne is credited with being a very impressive political strategist. And that is how he sees it. Which is why next week's Budget will indeed be a bit dull.

It will be full of announcements about the supply side of the economy. And peppered with talk of accelerating private infrastructure projects and making it easier for first-time buyers to get a mortgage.

Mr Osborne will also have to announce that he will be borrowing a bit more, between now and the election, than the OBR suggested in December, and at least £65bn more than he expected in June 2010.

But that is as far from Plan A as he seems willing to go.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article

More on This Story


This entry is now closed for comments

Jump to comments pagination
  • rate this

    Comment number 155.

    In their lust to protect bankers bonuses, the Tories seem to have forgot the saying, look after the pennies and the pounds look after themselves.
    They have cut growth to cut the deficit which has increased the debt.
    How much more can we take?

  • rate this

    Comment number 154.


    Like I told you 3 years ago - there is no easy way out of a crisis of capitalism - except to rid ourselves of it.
    So my next car will be a trabant? and the next loaf will be in the shop next month? - obviously they allowed you, as a comedian, back for red nose day.

  • rate this

    Comment number 153.

    The reality is that the economy is like a great big tanker, the UK (and much of developed world) has been living off debt for years. We face a decade of flatlining simply as people and businesses deleverage. The issue of spending more is a valid one but the deficit is eyewatering at 100bn+ and the interest alone is ramping up overall debt. There is no magic wand - any government would be doing it.

  • rate this

    Comment number 152.


    Your wrote 'MAKE PEOPLE SPEND'.

    Your logic is flawed as the psychology of those with money (savers) is to save - no matter what incentive you provide. To get them to spend you must first convince them that their income from savings will grow. Cutting taxes in the ways you propose etc will not do that. The only way is to raise interest rates!

  • rate this

    Comment number 151.

    Osbourne can justify £0.7 Bn RBS bonus payouts and £0.4Bn housing benfit savings. I suggest we stop trusting the rich. And please stop the 'cut the cloth' 'maxed out credit card' rhetorical garbage. We are slaves to housing costs and low wages.


Comments 5 of 155



BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.