Is our current economic weakness merely cyclical or structural? The OBR is, to say the least, not clear: see pars 1.16 to 1.18 here (pdf). It says (par 1.3) that most of its downward revisions to GDP forecasts are "assumed to be cyclical" [emphasis added].
This assumption is very convenient for Mr Osborne. If weak GDP is cyclical, then it follows that much of the deficit is cyclical, which relieves the Chancellor of the percived need to tighten fiscal policy further to reduce the "structural deficit".
Because no-one can tell how much of our economic underperformance is structural and how much is cyclical, George Osborne can’t possibly have any idea how big the structural deficit is.
This raises the question. Even if we do have a "structural deficit" - and it's impossible to tell for sure - would it then follow that fiscal policy should be tightened? I think not, for three reasons:
1. A world in which the deficit is "structural" is one in which productivity growth is low and trend output growth is low. But in such a world, investors' would have little demand for risky assets and a high demand for safe ones. It would, then, be easy to finance big borrowing, even if it were structural. To put it less strongly, the question of whether the deficit can be financed at low bond yields is separate from the question of whether the deficit is cyclical or structural.
2. Measure to tighten fiscal policy could aggravate the problem of low productivity. Many of you might think this would be true of tax rises. But it might also be true of any fiscal tightening that amplifies a downturn if - as for example in learning-by-doing models - cyclical downturns (pdf) can reduce long-term growth.
3. A good reason to believe the government's deficit might be structural is that the private sector has a structural(ish) financial surplus. This could be because the dearth of investment opportunities means companies' aren't recycling their profits into capital spending - something which the OBR expects to continue*. And/or it could be because this is a balance sheet recession and the private sector wants to pay off debt.In such a world, it might be better for the government to loosen policy, to give the private sector the room to repair its balance sheets. Fiscal tightening risks crashing the economy as the paradox of thrift takes hold.
These considerations, I think, mean that the idea of a structural deficit is not just imprecise, but irrelevant. Even if its existence could be proved, it would not be sufficient justification to tighten fiscal policy. That justification lies elsewhere.
In this context, perhaps Osborne deserves a little credit. In deciding against tightening yesterday, he's shown that he's not obsessing about whether the deficit is "structural" or not. Quite right too.
* Table 1.8 of its supplementary economics tables.