Bill Jamieson: National debt casts a long shadow

The problem with peaks is that the terrain also comes with deep valleys. Picture: Ian Rutherford
The problem with peaks is that the terrain also comes with deep valleys. Picture: Ian Rutherford
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BACK in 2009 the joke among economists was that they were looking for a new button on their computer keyboards. When hit, it would automatically insert the words “worst since” in front of any and all statistics they were quoting. Today a new keyboard button is needed – to slot in the words “best since” or “record level” or “new peak”.

Over the past week there has been no lack of “new peaks”. The preliminary estimate of second-quarter GDP for the UK showed output rising by 0.8 per cent on the quarter to stand 3.1 per cent higher on the year. The latest numbers mean that output has surpassed its pre-crisis peak in the fourth quarter of 2007, standing 0.2 per cent up on that level, the economy in Scotland having already passed this landmark. The UK economy has now seen five successive quarters of expansion in a 0.7-0.8 per cent quarter-on-quarter range.

Meanwhile, in manufacturing where there have been concerns over a slowdown in the pace of growth, the CBI Quarterly Industrial Trends Survey of 481 firms reports robust growth in orders in the three months to July. Total order book growth edged up on last quarter’s 19-year high, whilst domestic orders rose at their fastest pace since 1988.

Firms are upbeat about the next quarter, with expectations for total new orders’ growth at their highest since 1977. Manufacturers’ plans for investment in product and process innovation are at their strongest since 1989, with robust plans for spending on plant and machinery, and buildings. The number of firms investing to expand capacity reached a record high – or at least the highest since 1979.

Elsewhere, consumer confidence hit its highest level for more than nine years in June, helped by employment, up by 254,000 in the three months to May to, yes, “a new record high level”.

And there is another new peak to celebrate: the fatuous pronouncements of the International Monetary Fund. Only last year it was warning that the UK government was “playing with fire” because of its programme of spending cuts, and calling for a “Plan B “to stimulate growth.

Now it forecasts the UK will grow faster than every other major developed country. It has upgraded its forecast for UK growth to 3.2 per cent for this year and 2.7 per cent in 2015.

From the Masters of the Universe in economic forecasting comes not a word of explanation as to why its previous forecasts were so wrong, still less any hint of apology or contrition.

Re-reading Alistair Darling’s excellent book Back From The Brink last week, I was not surprised to read that in March 2008, when the storm clouds were beginning to gather, an IMF report was optimistic about prospects and concluded that there would be a “global rebound” in 2009.

Even allowing for the evident difficulties in detailed economic forecasting, this was not just off beam but spectacularly wrong. 
With the IMF boffins now forecasting hot and sunny economic climes, we can surely be excused a nervous search for the overcoats and umbrellas.

There are now so many peaks in view that the deep valleys in this terrain have almost been lost from view. But a deep valley there is – or a peak of an altogether malign kind.

We had a reminder earlier last week of this dark mass and the threat that it poses both to the government and the economy. Latest figures on the public finances show progress in reducing the budget deficit is proceeding at a snail’s pace. The underlying Public Sector Net Borrowing Requirement (PSNBR) came in at £11.4 billion in June, down only fractionally from £11.5bn in June last year.

As a result the underlying PSNBR for the first three months of the current financial year totalled £36.1bn – up 7.3 per cent from the £33.7bn tally in the opening quarter of 2013-14. If sustained over the rest of the financial year the total would come to £113bn compared with a government target of £95.5bn.

Now these deficit figures are volatile and much can change in the nine months ahead to narrow the total. And as Global Insight economist Howard Archer points out, the public finances were helped early on in fiscal year 2013-14 by income tax receipts being boosted in April and May 2013 by a substantial amount of bonus payments being delayed from March 2013 due to the top tax rate of tax being cut from 50 per cent to 45 per cent in April 2013.

One-quarter of the way into the tax year it looks like Chancellor George Osborne will struggle to achieve his fiscal targets for 2014-15. And of course, so long as this annual budget persists at this high level, the pile of outstanding public debt climbs ever higher. It is already standing at £1.2 trillion and set to exceed £1.5tn before it starts to decline towards the end of this decade. Or at least, that is the hope.

And meanwhile there is annual debt interest to pay. This has now climbed to £52bn, a gruesome landmark of £1bn a week for the government to find. That is why, despite all these new peaks and records and “best evers”, we face continuing constraints on public spending, whoever wins the 2015 Westminster election.

It also opens up the darkest of thoughts: if this is the best we can do by way of deficit reduction in an economic boom with “new peaks” and calculations of “best since”, what might the borrowing figures be like in the event of any future slowdown?