Business sounds alarm over Osborne's "fiscal straightjacket"

Jessica Morris
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The Chancellor will make his Mansion House speech later today (Source: Getty)

A respected business body has criticised the Tories' plans for strict fiscal rules - expected to be unveiled at the Chancellor's Mansion House speech later today - saying "no government should put itself in a fiscal straitjacket".

Chancellor of the Exchequer George Osborne will use his major speech to the City to introduce a new law requiring all future governments to run an overall budget surplus.

While it's not yet known how the new fiscal mandate will be enforced, further details are due to be included in the summer Budget on 8 July.

Read more: George Osborne says budget surplus will be a legal mandate

Sometimes, governments need "fiscal flexibility"

However John Longworth, director general of the British Chambers of Commerce, questioned its desirability - saying it could hurt governments' ability to respond to future crises, and squeeze infrastructure spending.

While running a budget surplus is a laudable aim, economic history shows that the national interest sometimes requires fiscal flexibility.

It is impossible to predict global economic conditions with any certainty, so no government should put itself into a fiscal straitjacket that limits its scope to respond.

Any move to constrain future spending should explicitly exclude infrastructure, which is an investment rather than just a cost.

Roads, railways, energy grids and broadband drive productivity and job creation - and it is time for government's contributions to national infrastructure to be removed from the debate on the deficit and the national debt.

Osborne thinks it's time to "entrench a new settlement"

During this evening's speech, Osborne is expected to argue that the Conservative's shock electoral win shows that the public rejects arguments for more borrowing and more spending.

Additionally, he'll say that this has created an opportunity to "entrench a new settlement".

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.

We should now aim for a permanent change in our political debate and our approach to fiscal responsibility, just as they have done in recent years in countries like Sweden and Canada.

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