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The Chancellor should use next week’s Budget to revise his plans for cutting the structural fiscal deficit, according to a ‘Plan B’ published by ippr. ippr’s Plan B proposes a new ‘deficit reduction averaging’ approach.

The ‘deficit reduction averaging’ approach would require the Chancellor to set a target to eliminate the deficit (cyclically-adjusted public sector net borrowing) by a fixed year and then to plan to achieve this target in equal measures during each year of the deficit-reduction programme. ippr’s ‘Plan B’ would give the Chancellor a formula for flexibility and would still eliminate the deficit by 2017/18.

ippr argues that if the Chancellor’s goal for each year was an average of the remaining reduction required, rather than the current pre-determined targets, he could change the pace of deficit reduction in response to fluctuations in the economy and the short-term outlook for growth as determined by the Office for Budget Responsibility (OBR). This would make his plan more sensitive to the economy as well as to market sentiment.

ippr’s ‘deficit reduction averaging’ plan would reduce the deficit more slowly than the Chancellor’s plan but with more flexibility than the Alistair Darling plan that is supported by the Labour front bench.

Tony Dolphin, ippr Senior Economist, said:

'There is an alternative to the Osborne and Darling deficit reduction plans. Our Plan B is based on economic pragmatism and not politically imposed deadlines. It would give the Chancellor a formula for flexibility.

'Rather than setting out detailed year-by-year plans to eliminate the entire structural deficit, or to halve the actual deficit, in this Parliament, our Plan B proposes annually reviewing progress and the economic outlook, so that deficit reduction is sensitive to swings in economic growth.

'This would reduce the risk of a negative spiral of weak economic growth leading to greater efforts to reduce the deficit, which in turn add to pressure on the economy. '

Notes to editors

Download Deficit Reduction Averaging: A Plan B for fiscal tightening

ippr believes the deficit should be reduced more slowly than in the Chancellor’s plan – so that cyclically-adjusted net borrowing is eliminated by 2017/18. ippr wants a threshold for investment spending so that it does not fall below 2 per cent of GDP.

ippr’s deficit reduction averaging plan, has five key implications for economic management:

1. The cyclically-adjusted PSNB will be zero in 2017/18 – on current projections, this will require a 7.6 per cent cut in the cyclically-adjusted PSNB over seven years from its 2010/11 level.
2. From 2010/11, the cyclically-adjusted PSNB will be reduced by 1.1 per cent of GDP each year on average to achieve the overall 7.6 per cent cut.
3. In any year, this 1.1 per cent target will be reduced if, in the judgment of the OBR, the fulfilment of such a target would lead to an annual growth rate below 1.5 per cent. Conversely, it will be increased if growth is expected to be above 3 per cent.
4. In each year, subject to a satisfactory outlook for growth, the annual average target reduction will be reappraised based on the latest actual data, so that the plan stays on course to hit the 2017/18 cyclically-adjusted PSNB target of zero.
5. If the 2017/18 cyclically-adjusted PSNB target of zero cannot be met without reducing annual GDP growth below 1.5 per cent, then the total length of the deficit reduction programme may be extended.

By allowing a slower pace of deficit reduction in the next few years, the averaging approach would raise the prospects for growth in later years and so reduce the likelihood of the target of a zero PSNB in 2017/18 being missed than would otherwise be the case. 

Contacts

Tim Finch, Director of Communications: 0207 470 6110 / 07595 920 899 / t.finch@ippr.org