Sunday, April 28, 2019
This may be as good as it gets for the public finances
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

A few days ago we had an object lesson in how official figures can be simultaneously disappointing and very good. Not that many people follow these things closely, but for those who do, last month’s data for public borrowing – the budget deficit – represented a bit of a setback.

March’s borrowing total of £1.7bn was £0.9bn up on a year earlier, breaking a run in which the latest figures have tended to be lower. It was also more than £1bn above City expectations.

Thus, instead of coming in at or below the latest official forecast from the Office for Budget Responsibility (OBR), made just last month, the 2018-19 total for public borrowing, £24.7bn, was nearly £2bn above it.

It is testimony to the fact that Britain’s budget deficit has ceased to be a significant concern for markets that nobody much batted an eyelid at these numbers. The bigger picture, the unalloyed good news, was the huge fall in borrowing that occurred in 2018-19 compared with the previous year.

That £24.7bn total, 1.2% of gross domestic product, was £17.2bn lower than the near £42bn figure for 2017-18. From the giddy and dangerous heights of £153bn and 9.9% of GDP in 2009-10, this has been a formidable fiscal repair job.

Before answering the question of whether the process of deficit reduction can go any further from here, and whether it should, let me provide a bit of perspective.

There is a lot of popular misunderstanding about what was promised on the budget deficit and what has been achieved. When, in 2010, George Osborne embarked on his deficit reduction strategy, the aim was not to have got rid of the entire budget deficit by now.

What he intended to do was eliminate the deficit on current public spending – so only borrow to invest – adjusted for the economic cycle, together with lowering public sector debt as a percentage of GDP.

Both aims have been achieved, though a little later than hoped. The cyclically-adjusted current budget deficit was supposed to have bene eliminated by 2015-16. It all but happened a year later, falling to 0.1% of GDP in 2016-17, and the government has now been in surplus on that measure for two years in a row, by 0.9% of GDP in 2018-19. Public sector net debt did fall as a percentage of GDP in 2015-16 but then rose again. It is now falling. At the latest count it is 83.1% of GDP, though that equates to a hefty £1.8 trillion.

The budget deficit fell a lot in the latest fiscal year, because tax revenues were buoyed by faster growth in pay, strong retail sales boosted VAT receipts and public spending remained under tight control. Low unemployment helped in this regard.

How does the performance of the public finances compare with what was expected around the time of the referendum? The last “clean” forecast from the OBR, in November 2015, before the referendum was announced, anticipated borrowing figures of £49.9bn in 2016-17, £24.8bn in 2017-18 and £4.6bn in 2018-19. The outturns have been a cumulative £32bn higher than that.

The OBR’s first post-Brexit forecast in November 2016 got the economy right, its GDP forecast was the most accurate in its history, but the deficit wrong. Compared with that borrowing is a cumulative £60bn lower, though that gap will narrow if, as seems likely, the deficit figures for the next three years are higher than predicted then. The big picture is that borrowing is higher than expected before the referendum – by now it was expected that we would be moving into a run of overall budget surpluses – but so far lower than predicted immediately afterwards. Growth has been more deficit-friendly than expected.

Where do we go from here? There is a notional target of balancing the budget by the mid-2020s but few, inside or outside government, take it too seriously. It would be easy to conclude at this stage that this, or rather 2018-19, will be as low as it goes for the budget deficit. The deficit has been fixed, and the political incentive to go further is no longer there.

Theresa May has promised the end of austerity and Philip Hammond, perhaps reluctantly, has been obliged to go along with it. This year will see the first of the big increases in NHS spending coming through and, if there is a spending review this year – Brexit may yet thwart it – other departments will expect their share of largesse. Austerity, to judge by a record number of food handouts by Trussell Trust food banks in the latest 12 months, as well as other indicators, is far from over.

There is also the possibility of a Labour government, which the Tory party implosion brings closer by the day. The left-leaning Institute for Public Policy Research (IPPR), which has some influence in the Labour party, suggests the UK should be aiming for the European average for spending of nearly 49% of GDP, compared with what it says is the current level of 40.8%. Official figures suggest something lower than that, 38.5% of GDP but, either way, a very big increase in spending is suggested.

There is a way of squaring the circle. Productivity means an enormous amount for the economy and for the public finances. If we could be confident that productivity growth was to return to something like normal levels , roughly 2% a year from zero now, it would be possible to be very confident about the outlook for the deficit.

Government can do something about it. Hammond has talked in recent days about a spending review that is focused on raising productivity. One way of doing that is to reduce the huge productivity gap between London and the rest of the country, and projects such as the £39bn Norther Powerhouse Rail project, providing better and faster links between Liverpool, Manchester, Leeds and Sheffield, would help in that regard.

Under his chancellorship the balance is shifting towards more public sector investment – in net terms the 2018-19 figure was the biggest since the financial crisis – so there is hope. There is also the danger that the extra spending to be announced this year will just be a sticking plaster to try to get the economy, and the Tories, through their Brexit withdrawal symptoms. In which case, this may as good as it gets for the budget deficit.