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Is the UK planning a surplus ‘straitjacket’?

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Peter Macdiarmid | Getty Images News | Getty Images

The U.K. government is expected to commit to running a budget surplus under normal economic conditions, a move which has already come under attack by economists before it has even been announced.

The surplus commitment hit headlines in the U.K. ahead of its expected announcement by Chancellor of the Exchequer George Osborne at his flagship Mansion House speech Wednesday night, where he will appear alongside Governor of the Bank of England Mark Carney.


Many of the key announcements have already leaked out to the media, a frequent occurrence around this event.

For Osborne, this is his first big chance to make the most of his party's unexpected trouncing of the opposition Labour Party in May's general election. Without previous coalition partners the Liberal Democrats, the Conservative Chancellor can pursue more traditional policies as he aims to restore the U.K.'s budget to surplus by 2017-18. The commitment to surplus in normal economic conditions will be used to reinforce his party's reputation for fiscal competence and its case for further spending cuts.


Surplus savvy?

The plan is a "bad idea," Robin Bew, chief executive of the Economist Intelligence Unit, told CNBC.

"It erodes flexibility, and it's likely that any law that they pass will have a lot of carve-outs. It seems to me more about putting Labour under pressure with their leadership election than macroeconomic policy. I don't think many economists would argue that putting yourself in a straitjacket is a good idea."

The Organisation for Economic Co-operation and Development has already called on Osborne to spread out cuts over a longer time frame, and warned that the race for a surplus could have the unintended effect of harming economic growth.


Labour pains

Osborne's announcement will also make things awkward for the three candidates to lead the Labour Party, which pursued a policy of borrowing to fund growth during the good times while last in power. If they don't support the surplus, they may look fiscally irresponsible, an image which may well have cost them the last election, but to do so would mark a major break with previous policy.

RBS exit?

Osborne is also expected Wednesday to outline his plan to exit the U.K. taxpayer's Royal Bank of Scotland stake, which was bought as the credit crisis threatened to make the bank implode.

Market manipulation

Also set to be unveiled Wednesday are tougher penalties for wrong-doing and market manipulation are likely to be recommended by a report known as the Fair and Effective Markets Review (FEMR), which was announced last year. Free stop-loss orders – where a broker is told to sell a security when it reaches a certain price, thereby putting a limit on losses -- are also expected to become a thing of the past after the report.

- By CNBC's Catherine Boyle