The structural deficit: 5 things you need to know

George Osborne has spent the last 18 months telling everyone that he will eliminate the structural deficit by the end of this Parliament. As I wrote back in July, that now looks impossible.

The Office for Budget Responsibility will confirm its more gloomy fiscal outlook on 29th Nov, the same day as the Autumn Statement. It is likely to say that the structural deficit will not disappear until 2016/17, due to worse-than-expected growth. Eds Miliband and Balls will pounce on this, as a huge indictment of the Coalition's spending cuts. Osborne will need some good answers.

Just to get you in the mood, here are five things you need to know about the structural deficit:

1. The structural deficit is the bit of the overall deficit that does not go away when the economy recovers. In the OBR jargon, it's the "cyclically-adjusted current budget" (and it doesn't include capital spending on transport, housing, etc.).
2. Since June 2010, the OBR has been forecasting that the structural defict would shrink from around 4.6% of GDP in 2010/11 and disappear by 2014/15, ending up in a surplus of around 0.4% of GDP. That's why the Chancellor has said he would eliminate it by the end of this Parliament.
3. But the economic outlook has worsened over the past six months. We're not going to bounce back to the levels of output we enjoyed before the recession. As a result, a bigger chunk of the deficit is structural rather than cyclical. In OBR-speak, the "output gap" is smaller than earlier thought and there is less "spare capacity" in the economy.
4. The Chancellor's "fiscal mandate" is looser than he has made out. It's "a forward-looking target to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period". So his goal isn't to eliminate the structural deficit by the end of this Parliament (2015), it's to achieve structural budget balance over a rolling 5-year horizon. On 29th Nov, the OBR will publish forecasts across the 5 years from 2012/13 to 2016/17.
5. Whereas we were due to eliminate the structural deficit by 2014/15 (i.e. within this Parliament), the OBR is likely to say we won't eliminate it until 2016/17 (i.e. well into the next Parliament).

So, Osborne will miss his self-imposed target of eliminating the structural deficit by 2014/15. This will be politically embarrassing for him, so he'll need an impressive performance on the 29th. He will need to steady nerves inside the Coalition, and reassure the public that he is still on the right track. Meanwhile, he could come under pressure from the markets to cut spending further than he has already planned.

Looking further ahead, the next government in 2015 will still inherit a structural deficit - which may mean more spending cuts post-election, on top of those already planned up to 2015 under the current Spending Review. No sunny uplands for a while, then - looks like more pain to come.

Labour's response to this is tricky. Politically, the gloomy fiscal outlook will allow them to trash Osborne's Plan A as misguided and self-defeating. But economically, there will be even less room for the additional spending that their Plan B calls for.

The structural deficit might sound geeky, but it's actually going to define the economic debate from now on...