George Osborne is planning to drive home a simple message in the runup to his autumn statement at the end of this month. Britain, he will claim, is a safe haven in a dangerous world because of the tough action he took in his first budget last year to tackle the record fiscal deficit.
As Ed Balls condemns the chancellor for cutting too far and too fast, jeopardising the economic recovery, there has been speculation about whether Osborne will unveil a plan B this month.
The Treasury has rejected this, though sources point out, sotto voce, that there is great flexibility built into the "fiscal mandate" outlined by the chancellor in his emergency budget last year. This flexibility is likely to become apparent in his autumn statement on 29 November as he prepares for the possibility of admitting that he will struggle to meet his ambition of eliminating Britain's structural deficit within the lifetime of this parliament.
In his budget last year, Osborne said he hoped to meet his target just before the election, by 2014-15, a year earlier than his formal target date of 2015-16. But Whitehall sources are bracing themselves for such a downbeat growth forecast by the Office for Budget Responsibility (OBR), to be published in conjunction with the autumn statement, that the chancellor will have to wait until the formal end of the "fiscal mandate" – 2015-16 – to meet his targets.
This will not mark a breach because the chancellor's fiscal mandate has two elements:
• The "structural current deficit" should be in balance by 2015-16. This is usually translated as eliminating the structural deficit – the part of the deficit that is immune to economic growth and can only be tackled through spending cuts and tax increases. This is a "rolling" five-year judgment, which means that no definitive judgment will be made because it is assessed on a forward-looking basis. The use of the word current is important. It means that capital spending – building schools, hospitals – is excluded from the calculations.
• Debt as a share of GDP is falling by 2015-16. This is a "fixed" target, which means that the level of debt must at least fall between 2014-15 and 2015-16.
In his budget in June 2010, the chancellor said that, on the basis of forecasts from the OBR, he expected to meet his targets a year early. The chancellor told MPs: "I can confirm that, on the basis of the measures to be announced in this budget, the judgment of the OBR published today is that we are on track to meet these goals.
"Indeed, I can tell the house that because we have taken a cautious approach, we are set to meet them one year earlier – in 2014-15 … we are on track to have debt falling and a balanced structural current budget by the end of this parliament."
The independent OBR, which was created by the chancellor to give credibility to growth forecasts after the Gordon Brown years, may raise questions about this final forecast by the chancellor – that he will meet his targets in the lifetime of this parliament. In its growth forecast this month the OBR will assess whether the slow growth Britain has experienced since the recent recession is "structural" – that the economy has suffered a permanent dent and the gap between spending and tax receipts is bigger than expected.
If that is the case, then the structural deficit could increase by about £12bn, according to a recent forecast by the FT. That would mean that Osborne would still meet his fiscal mandate but he would do so by 2015-16, a year later than he suggested last year.
A Whitehall source said: "The OBR will make a growth forecast. But it will also make an assessment about whether the slow growth we have at the moment is structural. In other words, is a recovery from a financial crisis unlike any other and you suffer slow growth for some time? At the moment the automatic fiscal stabilisers kick in and borrowing goes up on a cyclical basis. But if the OBR decides this slow growth is structural then the structural deficit grows. That is how Chris Giles [economics editor of the FT] came up with his £12bn. But it only delays us to 2015-16."