What will a balanced budget mean for business?

Chancellor George Osborne's plans for perpetual budget surpluses could increase confidence.

by Adam Gale
Last Updated: 08 Jul 2015

Political leaders, much like chief executives, don’t just work for a pay cheque. They usually want to make some kind of difference, to do achieve something they can be remembered for. Chancellor George Osborne certainly appear busy lining up his legacy, in the form of entrenched fiscal responsibility.

He will give a speech tonight at Mansion House in London, outlining a plan to commit future governments to balancing their budgets in years when the economy is in growth. The rule, which will go to a Commons vote later this year and which will be enforced by the Office for Budget Responsibility, goes much further than anything he’s previously mooted.

When Osborne suggested binding future chancellors to surpluses earlier this year, he was talking about current surpluses, i.e. excluding capital investments like new school buildings, new roads or medical devices. This plan covers all spending in any given year outside of recession.

‘With our national debt unsustainably high, and with the uncertainly about what the world economy will throw at us in the coming years, we must now fix the roof while the sun is shining’, Osborne will say, pointing to Canada and Sweden as glimmering examples of the new austerity via his favourite metaphor. 

It’s certainly not a rule that businesses would feel comfortable with applying themselves. Debt is the natural partner of investment, a necessary step to higher profits. Osborne’s rule is more applicable to households than firms, though of course a national government is a very different creature altogether. No one’s ever going to repossess your parliament building if you’re a nation state, for one (even if it is in Athens).

How will business respond to Osborne’s plan then? Broadly, it’s likely to be welcomed. Highly indebted states are restricted in their ability to react to economic crises, having less capacity to absorb the costs of fiscal stimulus packages, and find it harder to cool down overheating economies by raising interest rates (as doing so would raise their own debt).

What business wants above all else is certainty, and therefore a state able to manage the inevitable crises that befall the global economy. It can then invest, particularly in longer term projects, with less risk. ‘Without sound public finances there can be no lasting economic security,’ as Osborne will no doubt enjoy saying, ‘and without economic security there can be no lasting economic prosperity.’

There are problems, of course. A government handcuffed by these rules may find it harder to jolt the economy out of low growth (Japan, anyone?), which while technically not recession is still far from ideal.

More importantly, of course, Parliament cannot bind its successors. A law ‘binding’ future governments is only as robust as the paper it’s written on. It might be politically awkward for another government to repeal legislation enshrining fiscal responsibility, but it’s by no means impossible.

Besides, most economists agree (which is remarkable in itself) that slavishly balancing budgets does more harm than good. The concensus is that maintaining a healthy debt to GDP ratio in the long run is more important, and modest budget deficits can help fuel growth, which of course the corporate world wants too.

Business may want to see stability but its faith in the state’s ability to provide that is unlikely to extend further than the lifetime of the current government, regardless of what it tries to do to its successors. Indeed, given the way economic conditions prevented the Coalition government from cutting the deficit  in the last parliament, even that faith may be pretty flimsy.

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