Golden rule replaced by fiscal mandate as OBR cuts short-term growth forecasts

GORDON BROWN’S golden rule was yesterday scrapped by chancellor George Osborne, who introduced a new forward-looking fiscal mandate and a supplementary debt target.

Osborne announced that the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget. He said that the mandate’s structural nature would give the government flexibility to respond to shocks while the current nature would protect public investment.

The debt target will bind the government to ensure that debt is falling as a share of GDP by 2015-16. The Office for Budget Responsibility (OBR) will judge the government’s success in meeting these measures. Osborne said the OBR currently judges that the coalition will meet them in 2014-15, one year earlier than required.

The OBR updated its macroeconomic forecasts published last week
as a consequence of the Budget. It revised GDP growth down for this year to 1.2 per cent from 1.3 per cent and in 2011 to 2.3 per cent from 2.6 per cent. But it raised growth for 2013 and 2014 by 0.1 percentage points.

However, the Budget noted that the two forecasts could not be directly comparable and that the OBR forecast last week may have been biased upwards. This is because the OBR uses market interest rate expectations in its calculations. These will change as fiscal tightening is priced in.