Osborne’s budget ‘surplus lock’ is a scam to encourage more borrowing from the City

by Joel Benjamin

9 July 2015

Yesterday Chancellor George Osborne delivered his sixth successive austerity budget, undeterred by the IMF’s recent back-pedalling on the need for further austerity in Greece amidst growing calls for debt restructuring or cancellation.

In his latest attempt at debt fetishism, Osborne has been planning to implement a budget ‘surplus lock’ – legally binding future governments to running surpluses when the country is not in recession – through which he will attempt to hold the government to reducing its debt burden by tightly controlling spending and restricting public sector borrowing.

The increasingly irrelevant Labour party, supposed to be in opposition, has signed up to Osborne’s plans, with Shadow Treasurer Chris Leslie stating the public budget should not be in deficit “if the economic circumstances allow.” He added:

“It stands to reason that any government should want more income coming in than expenditure. The banking crisis has led to this massive stock of national debt which we can’t ignore.”

Those who remember Labour’s Alan Milburn, will have heard such rhetoric before:


Milburn and New Labour also used the tightening of public spending rules to engineer a massive expansion of the Conservatives’ private finance initiative (PFI) policy in the late 1990s and early 2000s.

The result has been £310bn of PFI infrastructure spending, described by some commentators as a ‘buy one hospital, pay for three’ policy, and by Manchester academic Jean Shaoul as “very corrupt… no rational government, looking at the interests of the citizenry as a whole, would do this.”

Public finance commentators are suggesting Osborne’s surplus lock could result in a return to PFI financing and the government “taking greater risks with taxpayer money.”

Even though bank finance used to fund PFI is vastly more expensive (twice the interest rates according to the national audit office) than central government borrowing – resulting in more debt overall – UK accounting rules mean PFI does not count against official government debt figures, because the money is borrowed from the banks.

PFI is effectively an off-balance-sheet ‘buy now, pay later’ credit card, allowing politicians to buy votes with no official debt hangover. A wheeze few politicians can resist, while future generations will still be paying for this folly in 35 years time.

Whilst restricting public debt levels is central to the austerity narrative, it ignores bigger problems beyond the grasp of most neoclassical economists.

As Ann Pettifor and Steve Keen have been repeating, restricting public borrowing and spending ignores the real problem in advanced economies, which is ballooning personal consumer and household debt.

Whilst EU economies are hard-wired to restrict public spending, there are few measures or restrictions of private debt levels – private debt growing alarmingly since 2008 – with growth occurring as house price inflation is leveraged into consumer spending.

The Eurozone features strict controls on member state public debt. The Maastricht treaty limits government deficits to not more than 3% of GDP, with government debt not to exceed 60% of GDP.

As demonstrated by Greece, Maastricht treaty rules have done little to prevent ballooning national debt in many Eurozone countries tied to the single currency.

It was Maastricht treaty debt convergence rules which provided both the Greek government and Goldman Sachs with the perverse incentive to cook up the ‘devil’s derivatives’ deal to mask Greek debt upon entering the EU in the early 2000s – a deal which cost Greek taxpayers billions and entrenched the Greek government’s unsustainable debt position.

By promoting adherence to Maastricht treaty-style debt limits in the UK, Osborne will effectively restrain welfare spending provision, formalising austerity budgets and restricting public sector access to cheap central government borrowing via the Treasury Public Works Loan Board (PWLB) for public infrastructure.

Osborne, however, has little political control over independent public sector bodies borrowing from private banks. So in effect restricting access to central government borrowing merely forces public authorities to go shopping for more expensive forms of off-balance-sheet bank finance, such as PFI deals and private bank loans from Osborne’s donors in the City of London.


Osborne has form. Back in 2010 when elected and appointed as Chancellor, one of his first moves was to increase the cost of lending for councils seeking to borrow from the PWLB, raising the Treasury profit margin on loans by a further 1%.

The result was a dramatic 90% reduction in local government borrowing from the PWLB between November 2010 and January 2011 amid warnings from the Local Government Association that council finance costs would increase by 25%.


Unreported by the mainstream media, during this period local authorities needing to access finance for regeneration projects and social housing renewal were not prevented from borrowing, but simply forced to look elsewhere – to private banks in the City of London.

On 6 July, Channel 4 Dispatches: ‘How Councils Blow Your Millions’ presented the results of an 18 month long research project by Debt Resistance UK to expose the true cost of these bank loans to local authorities known as Lender Option, Borrower Option (LOBO) loans.

Many of the worst value LOBO loans sold to local authorities by RBS just happen to have been sold over this period, when access to the PWLB was restricted and the cost of borrowing was artificially inflated by Osborne.

LOBO loans from banks including Barclays and RBS have cost city councils at least £1.5bn in unnecessary interest payments, with interest rates as high as 7.6% when councils could otherwise be borrowing from the PWLB at 3.5%.


Osborne’s PWLB rate rise resulted in councils being incentivised to go shopping for bank credit, at a time when bank lending remained both depressed and expensive, meaning state-owned RBS [see graph above] was one of the few lenders still active in the market and able to scalp councils as EU-based banks hit trouble and needed to be bailed out.

Osborne’s plans to limit public spending and borrowing will simply exacerbate debt problems in other areas of the economy, namely consumer and household debt, whilst tax income declines, as more public sector jobs are destroyed.

Far from being a measure of fiscal prudence as presented by a compliant mainstream media, Osborne’s surplus lock ties the UK economy into self-defeating austerity, expensive borrowing from the City of London, and ballooning personal debt as the burden of cuts is transferred onto the shoulders of the working poor least able to bear them.

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