Sunday, April 26, 2015
The budget black hole still matters in this election
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.

It was a big week for the public finances, both where we have been and where we might be going. We can now make a judgment on the past five years and say something meaningful about the next five, though through the murk that passes for serious political debate on debt and the deficit.

Let me start with the record of the past five years. Though the numbers for the public finances are prone to revision – usually downwards in the case of the budget deficit – the Office for National Statistics’ latest figures, released on Thursday, tell the story reasonably well of the past five years.

Public sector net borrowing in 2014-15 was £87.3bn, £3bn less than was expected in last month’s budget. In five years the deficit has come down from £153.5bn, the 2009-10 figure the coalition inherited. That is a drop of 43%, though relative to gross domestic product it has fallen from 10.2% to 4.8%, a fall of more than half.

What about the debt? Public sector net debt at the end of March – the end of the 2014-15 fiscal year – was £1,484bn, 80.4% of GDP, compared with £956bn at the end of 2009-10.

It has thus increased significantly under the coalition, as it was bound to do; you cannot eliminate a £150bn-plus deficit overnight. Nigel Farage keeps saying that debt has doubled under this government, which is wrong; the rise is 55%, though it did more than double in the previous five years under Labour, rising from £448bn in 2004-5 to £956bn in 2009-10, an increase of 113%.

This measure of debt, incidentally, excludes the public sector banks, mainly Lloyds and RBS. Include them and the debt is larger, £1,796bn, but has fallen by £449bn under the coalition.

How much more has George Osborne borrowed than he planned? The official Office for Budget Responsibility (OBR) forecast in June 2010 was for borrowing of £37bn in 2014-15, so the outturn was £50bn higher than intended.

Interestingly, that June 2010 forecast envisaged that debt would rise by more than £500bn over this parliament, and it has done so. Definitional and other changes suggest, however, it is fair to say that Osborne has borrowed around £100bn more than planned.

Why has this happened? If you want a rare example of an astonishingly accurate five-year forecast, look at what the OBR was saying about spending back in 2010. It predicted £737bn of overall government spending in 2014-15 and its latest estimates suggest spending was precisely that. There was no relaxation on the spending side: the government stuck to its plans.

Where the extra borrowing has occurred has been because of the weakness of revenues, some £50bn in the latest year below what was expected five years ago. Some of that was deliberate, reflecting the aggressive raising of the personal income tax allowance to £10,000 and now £10,600. Most of it was accidental, reflecting weak earnings growth; now starting to unwind.

When you hear opposition politicians claiming that they would not have presided over such weakness in pay, treat it with the contempt it deserves. We are many decades from the era of the “going rate” and the idea that politicians can determine what employers choose to pay. What we have had over the past five years – very strong growth in employment alongside subdued pay rises – has been infinitely preferable to the alternative.

What does the recent history of the public finances tell us about the outlook for the next five years? The differences between the parties on deficit reduction are fairly clear, even if some are doing their best to obscure them. Labour, for example, wants to have its cake and eat it; selling itself to voters as the party of significantly less austerity than the Tories but not wanting voters to realise that its definition of “balancing the books” will mean borrowing £25-30bn a year in normal times, as the Institute for Fiscal Studies pointed out in a typically useful analysis last week.

Though some economists, who I would call the Martini set, strangely dismiss the need for austerity any time, any place, anywhere, there is a sensible debate to be had over whether governments should continue to borrow to invest – eliminating only the so-called current budget deficit – or whether they should go the whole hog and aim for an overall budget surplus.

The coalition, after all, had the aim of getting rid of the current deficit, not the whole lot. Gordon Brown’s golden rule was borrowing only to invest over the economic cycle. The lower the interest rates on government debt, the stronger the argument for borrowing to invest in infrastructure and other projects.

There are, however, problems with it. Politicians tend to miss their deficit targets, as we have seen. Brown’s golden rule creaking well before the financial crisis hit, and was destroyed by it. We know now that a supposedly fiscally responsible government was running a structural, or underlying, overall budget deficit of roughly 5% of gross domestic product in 2007.

The coalition followed suit. It probably never would have been credible to eliminate an overall budget deficit of more than 10% of GDP in a single parliament – and that was never the government’s aim – but even getting rid of the current deficit has proved too challenging.

Another difficulty, although I would not overstate it, is that “borrowing to invest” could cover a multitude of sins, allowing governments to boost what they define as investment without limit, although there official checks and balances on this.

The other is the opposite one: some things that should properly be defined as investment these days, such as spending on training and skills, are generally not.

The problem I have with this goes deeper, however. The IFS did its best with the thin gruel the parties provided, but was obliged to take at face value their broad promises. On their stated plans Labour will cut less than the Tories but borrow £90bn more over the next parliament.

The difficulty I have is imagining Labour cutting at all, particularly if it is reliant on Scottish National Party (SNP) support. Labour’s record on cuts is, frankly, almost non-existent. It did so after the International Monetary Fund bailout in 1976, though only under extreme duress. When Labour took office in 1997 it stuck to Tory plans for two years, temporarily earning Brown the sobriquet “iron chancellor”.

In the run-up to the 2010 election, aides and cabinet colleagues found it almost impossible to get Brown the words “cuts” at all. That was why there never was a Labour plan to deal with the deficit, merely a sketch, an artist’s impression.

Not much has changed. When pressed on the cuts Labour would make Ed Miliband mentions a couple of small-scale privileges for better-off pensioners, which would save peanuts, and then moves swiftly on. You could say the Tories and to a lesser extent the Liberal Democrats are not much better but at least they have a track record.

Labour does not. If a minority Labour government did indeed require the support of the SNP, which is committed to ending austerity even if its policies do not imply that, it is hard to see tough decisions on spending getting through the House of Commons. The deficit, which is still closer to £100bn than zero, could easily get becalmed.

After two successive five-year periods in which Britain has added more than £500bn to government debt, a sizeable black hole remains which has to be dealt with. Whether or not that matters to most voters, it should. And it matters to me.