Osborne seeks to bind successors to budget surplus goal

LONDON (Reuters) - British finance minister George Osborne, fresh from his party’s election victory last month, will seek to bind future governments to his vision of permanent budget surpluses, something only rarely achieved in modern Britain.

Britain's Chancellor of the Exchequer, George Osborne, delivers a keynote address at a dinner held by the CBI (Confederation of British Industry) in central London May 20, 2015. REUTERS/Toby Melville

Osborne will draft legislation to compel future governments to spend less than they raise in taxes during normal economic times, according to extracts of a speech that he will give to London’s finance industry.

Osborne is also expected to give details on how the government will sell its 80 percent stake in Royal Bank of Scotland.

Bank of England Governor Mark Carney, who will speak at the annual Mansion House dinner, is expected to announce tougher regulation for financial markets, which have been rocked by a string of scandals.

“In the budget, we will bring forward this strong new fiscal framework to entrench this permanent commitment to that surplus, and the budget responsibility it represents,” Osborne is due to say in the speech.

Late last year, Osborne came under fire from the Labour Party opposition over what they called an ideological obsession with running a budget surplus at the expense of public services, but that failed to cut any ice at last month’s election.

The Office for Budget Responsibility, which Osborne created in 2010 to make independent growth and borrowing forecasts, will play a key role in judging if the economy is no longer in normal times and needs support from government spending.

Britain’s budget deficit exceeded 10 percent of gross domestic product when the Conservatives came to power in 2010 after the financial crisis, and lasting public mistrust of the previous Labour government’s economic management was a major reason why it failed to regain power in 2015.

Britain’s budget deficit was just under 5 percent of GDP last year -- larger than that of most other advanced economies -- and Osborne said in December he wanted to achieve a surplus by the 2018/19 financial year, something economists say looks tough.

Osborne said Canada and Sweden had adopted similar policies in the past, which left them better prepared for the financial crisis, and Germany has written a balanced budget requirement into its constitution.

But some economists doubt that a legal requirement to run a budget surplus almost every year is a good thing.

“This is a step away from the sensible economics practised by most well-run finance ministries and central banks across the world,” said Jonathan Portes, director of the National Institute for Economic and Social Research, an academic think tank.

Philip Shaw, an economist at Investec, said British governments had come up with long-term fiscal rules in the past, but that these had rarely lasted. In practice, a future government could easily repeal any law passed by Osborne.

Staff at the International Monetary Fund said this month that Britain’s economy might be better off if the government reduced its debt levels relatively slowly.

Sweden said in March that it would scrap its surplus rule to allow government borrowing to fund investment.

Portes said it was a good idea to have independent oversight of government budget policy, but that it was not necessary to run an outright surplus, as economic growth should ensure outstanding debt fell as a share of GDP.

Targeting a surplus would make it hard for the government to invest - even where projects promised returns greater than the cost of borrowing - and would encourage politicians to focus on gimmicks to achieve a surplus each year, rather than on longer-term economic challenges.

Editing by William Schomberg and Larry King