I’ve been reading Stephen’s Westminster View column in the Cornish Guardian over the last couple of weeks about the budget, and then about what the deficit is. I can’t help feeling that I’m being talked to like a small child that doesn’t understand. But Stephen I do understand. Do you? And if so why are you continuing on this course?
What Stephen says about the mechanics of borrowing for government spending and that adding to the interest we owe is basically right, but there are some key omissions in what he is saying. You see spending is only one half of the equation. To get the deficit down, you need to narrow the gap between money out (spending) and money in (tax). More tax comes with more growth in the economy – basically more businessess, earning more and paying more tax; and more employees also paying more tax. This is where Stephen and I part company.
There are essentially two views on what current government policy will do to the economy. The first (and the one Stephen, as a member of the ConDems is at least officially signed up to) is that you fix the deficit by cutting spending, taking ‘waste’ out. You encourage competition, especially from the private sector, which will generate new business opportunities and bring with it new growth, that will take up the slack created through the public sector cost cutting.
The alternative view is that by cutting public sector jobs, you put a whole load of people who would otherwise be spending out of work. As well as those directly employed, the impact hits lots of private sector organisations who basically rely on public sector contracts – another lot out of work and not spending (those directly employed in the public sector plus those whose businesses rely on the public sector together make up about half the workforce of the country). This creates greater competition in the job market driving wages down. So that’s less money to spend. All these people spending less means the retail businesses and others that they would have been purchasing from also start to go to the wall – more people out of work, less spending. Of course all these people who lose their jobs or take lower paid ones now pay less tax, and all those businesses going to the wall or making less profit also pay less tax. On top of that, we’re then going to have to fork out more in benefits to keep them. So how are we doing now on money in (tax) and money out (government spending)? Hmmm.
Now let’s see what is actually happening. Well even Stephen’s article admits that spending on debt is going to continue to rise throughout this parliament. He doesn’t actually say the words, but that means the deficit is going to keep going up.
I’ve been having a look at the Office for Budget Responsibility website (I’ve given up on the wading through the treacle that is the treasury for now). The OBR were set up in 2010 to provide ‘independent and authoritative analysis of the UK public finances’. They say some interesting things. In March 2011 they produced their latest economic and fiscal outlook. Their outlook basically presents a worse picture than their last outlook did in Nov 2010. The reasons for this are given as:
An unexpected fall in GDP – unexpected by who, I ask myself
A rise in world oil prices – well I expected that too, and what’s more I’m expecting a lot more of it, along with rises in all sorts of other basic essentials including food – don’t be fooled by any temporay supermarket battles, food has to compete with fuel crops these days, there’s only one way prices are heading.
Higher than expected inflation – that’ll be all that expensive food and oil along with the benefit payments that go along with the ‘unexpected fall in GDP’.
How are we doing with some key stats? (I’m glad to say now that I’m using the OBR instead of trying to get any sense from the treasury this is getting a lot easier).
First let’s have a look at Public Sector Net Borrowing (PSNB) as a percentage of GDP. The Tories have a made big thing of this, about how high the percentage is, how reckless Labour were etc. The first thing I notice is again that big jump that came after the stock market crash. Doesn’t look like the recklessness reached anything like the same proportions before then.
The government uses the cyclically-adjusted current balance (sometimes referred to as cyclically-adjusted surplus on current budget) to show the effectiveness of their fiscal policy. The cyclically-adjusted bit is what they mean by the structural deficit. This is forecast to move from a deficit of 5.3% of GDP in 2009 10 to a surplus of 0.8 in 2015-16. This is apparently the same as was forecast in June 2010 (after better than expected economic performance reported shortly after Labour left office) and worse than was forecast in November 2010 (after worse than expected economic performance since the Tories took over).
The government’s other target is Public Sector Net Debt. This is forecast to peak in 2013-14 at 70.9% of GDP. This is again worse than was forecast in December.
The two targets the government has set itself are to:
- Balance the cyclically-adjusted current budget by the end of a five year rolling period; and
- See Public Sector Net Debt falling in 2015-16
How’s this for a lovely quote from the OBR’s report ‘our central forecast suggests that the Government has a greater than 50 per cent probability of meeting both these targets under current policy’. So they think it stands a chance is basically about as good as they are prepared to say. Hope we’re stocked up on salt, it’ll take more than a pinch.
The table below has some of the headlines. I’ve shown the difference between the March and November forecasts to show just how much salt is necessary. I’ve used just the most commonly referred to version of the deficit, Public Sector Net Debt as a % of Gross National Product. The next couple of measures I’ve put in because they are the stated government targets. Under these there is some cash.
It’s still not easy to find money in amongst the percentages in all this financial stuff, but eventually I did find some forecasts in real pounds. When you look at some of what they have to say it’s not hard to understand why they are so shy about them. Just in case you were under any misapprehensions that cutting the deficit meant not owing as much, then take a look at the bottom measure (which really is the bottom line). This is Public Sector Net Debt – what we currently owe and are expecting to owe in the future. Even accepting this forecast (which I don’t – it includes things like stabilising oil prices – ha ha ha ha ha ha) it still expects that we will owe three quarters as much again in 2015 16 than we do now. That’s almost £600 bn more. Now are you beginning to see just how unsustainable this nonsense is? Oh and we’ve added £36bn in revised forecasts in the last four months. Lunatics? Asylum?
|Per cent of GDP|
|2008 09||2009 10||2010 11||2011 12||2012 13||2013 14||2014 15||2015 16|
|PSNB as % of GDP (Mar 11 forecast)||6.7||11.1||9.9||7.9||6.2||4.1||2.5||1.5|
|PSNB as % of GDP (Nov 10 forecast)||11.1||10||7.6||5.6||3.5||1.9||1|
|Fiscal mandate and supplementary target|
|Clyclically-adjusted surplus on current balance||-3.1||-5.3||-4.6||-3.2||-2||-0.6||0.4||0.8|
|PSND (Mar 11 forecast)||43.3||52.7||60.3||66.1||69.7||70.9||70.5||69.1|
|PSND (Nov 10 forecast)||53.5||60.8||66.3||69.1||69.7||68.8||67.2|
|PSNB £bn (Mar 11 forecast)||156.4||145.9||122||101||70||46||29|
|PSNB £bn (Nov 10 forecast)||156||148.5||117||91||60||35||18|
|Nominal GDP £bn||1405||1473||1544||1625||1717||1814||1915|
|PSND £bn (Mar 11 forecast)||759.5||909.2||1046||1164||1251||1314||1359|
|PSND £bn (Nov 10 forecast)||772||923||1052||1157||1232||1284||1320|