As a check on this, we can think about financial balances. Simple accounting identities tell us that the government can run a surplus if and only if the rest of the economy - that is, the domestic private sector and the overseas sector - runs a deficit.
There are, roughly speaking, two ways in which this might happen - a good way and a bad.
The good way could happen through a combination of two things:
- An export boom. This would mean that foreigners run a financial deficit, or - to put it the same way - the UK has a current account surplus. This would improve the public finances as export-generated jobs pulled in more taxes.
- An investment boom. Historically, government surpluses have come during capital spending booms, such as in the late 80s and 90s. A housing boom would have a similar effect.
In these ways, a budget surplus is endogenous - or, to put in in sillier terms, "cyclical".
The bad way would be if the government actively aimed at a surplus. In cutting spending, it would depress domestic demand and imports - thus moving towards a current account surplus. And in depressing incomes, savings would tend to fall, thus putting the domestic sector into deficit.
In the good case, we have a budget surplus at a high level of income; in the bad case, at a lower level.
Rick claims that the good case is improbable. FWIW - given the futility of economic forecasts - I agree. But that's not my point. Instead, the question is: why did Osborne not distinguish between the two cases?
The irrational possibility is that he's fallen victim of that cognitive bias to which all politicians are prone, the illusion of control; he's exaggerating the influence he has over the public finances.
But there is a less irrational possibility. What Osborne is doing here is acting upon a principle of macroeconomic policy that was widely accepted in the 90s and 00s. This is that "credibility" gives policy-makers more power to stimulate the economy. For example, if a central bank has anti-inflationary credibility, a looser monetary policy would lead to real output growth rather than higher inflation expectations and rising prices. And a government which has the confidence of bond markets can borrow more cheaply and so - if necessary - act in a Keynesian fashion. As someone said in 1997:
Governments which pursue, and are judged by the markets to be pursuing, sound monetary and fiscal policies, can attract inflows of investment capital at higher speed, in greater volume and at a lower cost...they can use discretionary monetary, or indeed fiscal, policy to deal with macroeconomic shocks which need to be accommodated in the short term.
Osborne's unconditional promise to run a surplus can thus be seen as an attempt to shore up credibility and hence give himself more room to pursue discretionary policy if needed.
Now, you might reply that this is unnecessary; low long-term real interest rates show that bond markets aren't worried by government borrowing anyway. But Osborne isn't sure - perhaps for good reasons - that this will remain the case. As the old jibe has it, a conservative believes all markets are efficient except the bond market, whilst a Keynesian believes all markets are inefficient except the bond market.
But who was that guy I quoted? It was Ed Balls. Perhaps the difference between him and Osborne isn't so much one of principle as of empirics.