Speaking in a lecture at the Royal Economic Society, Osborne said that any future government should “aim to run an overall budget surplus each and every year” unless facing abnormal circumstances. Abnormal circumstances would be defined by the Office for Budget Responsibility, with a threshold set around the rate of economic growth or the size of the output gap.
The chancellor said a surplus was crucial to economic security of the UK:
The only way to keep our economy secure is with a credible plan to reduce our debts.
The UK, he said, could become the wealthiest nation in the G7, measured by GDP per capita. By this measure, the UK is yet to regain its pre-crisis peak, as wages have failed to grow as quickly as hoped. Nevertheless Osborne was bullish. There is no reason, he said, “why Britain cannot be the richest major economy in the world.”
Labour, Osborne said, were wrong when they said that a recovery could be largely brought about by growth, as high debts are damaging and in a low inflation environment only a surplus can reduce debt levels.
The argument for a surplus has two parts: first, high levels of national debt are risky and damaging for an economy like the UK; and second, the only reliable way to reduce debt levels when inflation is low is to run an absolute surplus. High debt leaves you vulnerable to shocks – and if recent years have taught us anything it is that there will be other shocks. Imagine if we had entered this crisis with debt at 80 per cent of GDP; by now it would be approaching 125 per cent; similar to Italy.