Sunday, April 29, 2018
A record spending squeeze puts us back in the black
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

A milestone has been reached, somewhat earlier than officially expected, and I feel honour bound to take note of it. After the global financial crisis wreaked havoc on Britain’s public finances, part of the repair process has now been completed.

The current budget, the difference between day-to-day public spending and tax revenues moved back into surplus in the fiscal year just ended, 2017-18. This was the first time this has happened for 16 years. The deficit on this measure peaked at £100.4bn in 2009-10. Now it is surplus, admittedly by a tiny amount, £112m, but in surplus nonetheless.

In the context of the disappointing growth figures, a 0.1% increase in gross domestic product in the first quarter and just 1.2% over the past year, this is surprising.

In eight years, more than £100bn has been taken off the deficit. George Osborne’s original 2010 target, of eliminating the current budget deficit, has been achieved, admittedly a couple of years later than he hoped. He also hoped to still be around as chancellor to celebrate this moment but events intervened.

True, Britain still las an overall budget deficit, £42.6bn in 2017-18. But that was the lowest since 2006-7, has come down to just 2% of gross domestic product, and was £2.5bn lower than the Office for Budget Responsibility predicted only last month. It, by the way, was more than £110bn below its 2009-10 peak.

The OBR’s forecast miss, which may or may not be confirmed as more data become available for last year’s revenue and spending, provides a snapshot of what has been an extraordinary period of spending restraint. The OBR did not get its forecast wrong because tax revenues beat its forecast. They actually came in a little lower than it had expected.

The biggest mistake it made was in overestimating government spending. It came in some billions of pounds lower than it had expected. Spending undershot and local authorities borrowed less than expected.

And that, in a nutshell, is the story of Britain’s public finances and the fiscal repair of recent years. Look at government receipts, mainly tax revenues, relative to GDP and not much has happened. Their current level of between 36% and 37% of GDP is no different to what it was in 2010-11 and 2011-12.

This measure of the tax burden, which has not been above 37% of GDP in the past 30 years, has not broken new ground, despite some well-publicised tax hikes (alongside some notable reductions).

Public spending, however, has undergone a big adjustment, falling from 45.1% of GDP in 2009-10 to less than 39% last year. It done the overwhelming majority of the heavy lifting in reducing the budget deficit.

Surprisingly, indeed astonishingly, I still come across people who say there has been no austerity in Britain. Some of this is the choice of language; some older people still think of austerity as 1940s and early 1950s rationing, the grim winter of 1947 and, to quote Monty Python’s four Yorkshiremen, the days when if you lived in a cardboard box or a hole in the road you were lucky. Nobody is suggesting that the past few years have been as grim, even up north, as earlier episodes.

On the narrow description of austerity, however, public spending control, iut has been very real. Paul Johnson of the Institute for Fiscal Studies calls it “completely unprecedented in the scale of the cuts imposed”.

The normal tendency is for public spending to rise year after year, in cash or real – inflation-adjusted terms. There are good reasons for that. The population is growing and the demand for public services rises over time, as we expect more and better provision. That is particularly true of the National Health Service, where real spending has to rise by at least 2% a year just to stand still, but it is also true of other public services.

At the same time, and even with the helpful effects of low interest rates and quantitative easing, the government has been faced with a higher debt interest bill. There have been other unavoidable spending increases.

Yet government spending in real terms in 2016-17 was lower than in 2009-10, and in 2010-11, and in fact in pretty well every year in between. When adjusted figures are available for 2017-18, a similar picture will emerge.

There has never been anything like it. The OBR has records going back to the mid-1950s and there has never been a period as long as this in which the trend for real public spending has been down. There have been short, sharp cuts, as in the late 1960s and 1976 when Britain turned to the International Monetary Fund. There was a a four-year period of constraint in the late 1980s, and a shorter run in the mid-1990s.

This period, however, has been different. The public spending feast of the 2000s, under Labour, gave way to the famine of the 2010s. You can debate whether it should have happened, though the state of the public finances cried out for this kind of surgery. You can debate whether it should have been more evenly split between spending cuts and tax hikes, though as noted there appears to be a limit on how much beyond 37% of GDP can be raised in tax.

You can debate whether the cuts that have been achieved were done sensibly and fairly, or whether some branches of government, such as local authorities, the police and the prison service, shouldered too much of the burden. What cannot be debated is that it happened.

The question is where we go from here. Current budget surpluses were commonplace in the 1950s, 1960s and early 1970s, then disappeared until the late 1980s. Since then they have been rare, a brief appearance in the late 1980s, and then again in the last 1990s and early 2000s. And again now.

They are rare for a reason. Governments with budget surpluses of any kind still want to be re-elected. The hair shirt can be politically very uncomfortable if voters contrast it with the promises of largesse made by your opponents.

The government is already planning a modest relaxation, which the OBR says will be consistent with continued current budget surpluses. That relaxation will see public spending in 2022-23 some 4% higher in real terms than now.

It may not be enough. There were plenty of times in the 2000s when public spending rose by more than 4% in a single year. Though Philip Hammond is determined to hold the line, the pressures will build as we approach the spending review planned for next year. Looking forward, a report from the Institute for Public Policy Research (IPPR) suggests the NHS will need an additional £50bn a year by 2030.

Budget surpluses, however defined, are rare. We should make the most of this one while we can.