When the central pillar of a government’s economic policy starts to unravel, coherence and credibility soon follow. Prime ministers Callaghan (in 1976) and Major (in 1992) never recovered from the economic crises of these years. Is Cameron (2012) about to repeat the pattern? And what cards has he possibly left to play?
It is hard to describe the latest figures on government borrowing as other than shocking. What makes them doubly so is that debt and deficit reduction formed the basis of the Conservative/Liberal Democrat coalition in 2010 and was then – and remains now – the cornerstone of coalition policy. Around this everything else revolves. George Osborne has continually repeated that deficit reduction is the principal goal and mission of his chancellorship and by this goal and mission he should be judged.
The latest figures show that, far from falling as is normal in July (this being a strong month for corporation tax receipts) government borrowing shot up by £600 million. This compared with a £2.8 billion surplus in July last year and reinforces a troubling trend of borrowing increases in recent months – the reverse of the government’s central purpose.
In addition, figures for the April-June period have been revised up by £1.4bn so that borrowing so far this financial year, excluding one-off factors, is £44.9bn or £9.3bn higher than a year ago.
Were this trend to continue, the government would be on course to borrow £30bn more this financial year compared with the forecast from the Office for Budget Responsibility of £120bn.
As for the national debt, this now stands at £1.03 trillion or 65.7 per cent of GDP, and July was the fifth month it stood above the £1tr mark.
While these figures are crushing for the Chancellor, they bring no comfort for Labour and shadow chancellor Ed Balls in particular. For the past two years he has constantly berated George Osborne for his deficit obsession, urging him to ease up on spending cuts and let the deficit run for now.
But that is exactly what George Osborne has been doing, albeit by default rather than by design. The public finances are showing that “austerity Britain” is a sham – public spending has been £7.3bn (3.5 per cent) higher in the first four months of the current fiscal year than it was in the same period last year. And as spending has risen, so too have our national borrowing and debt.
If Ed Balls’ prescription is even more of this than we are currently seeing, one shudders to think what the spending and borrowing totals might be.
Nor do the figures bring much comfort to the SNP. The reason why corporation tax receipts last month were down by 20 per cent was largely due to lower oil production in the North Sea. One of the reasons for this was a leak in the Elgin Field lasting 52 days. Such setbacks happen.
They are not the fault of fiscal policy. But if the UK public finances can be badly dented in this way, how much more of a dent would they cause for an independent Scotland, whose finances would be even more sensitive to fluctuations in North Sea oil production flows and revenue?
Truly, when you look at these dreadful figures on the public finances, never has the slogan been more apt: “we’re all in this together”.
Tim Morgan, commentator with the money broker Tullett Prebon, warned on the back of these figures that Britain “is edging ever closer to a vortex in which government borrowing escalates whilst economic output spirals downwards. The fact is that no-one – government or opposition – has anything remotely approximating to a workable plan, probably because no-one dares tell the voters the truth.”
For the moment the pressure is on the government. And calls are now growing for a Cabinet reshuffle. However, as Allan Massie eloquently set out on these pages yesterday, such changing of names and titles rarely achieves the effects hoped for. And the latest figures make a change in the chancellorship all the more problematic politically. A change of finance minister in the wake of these numbers would be universally seen as a crushing verdict on Osborne and an admission of defeat at the heart. But opinion poll evidence points to a gaping credibility problem. The government cannot carry on with the same old mantra.
This autumn the coalition will be compelled to switch emphasis from deficit reduction to economic recovery. Here are three broad fronts on which it can advance.
First, it can push through a far more ambitious agenda of supply-side reforms to encourage business formation and investment than it has attempted hitherto. Here the government has come under fire from business lobbies for not doing nearly enough on tax system reform and red tape.
A survey this week from the Institute of Directors showed that 69 per cent believe the government has been ineffective in reducing tax complexity and a similar percentage reflecting disappointment in steps to cut through business regulation.
Second, it can provide guarantees on initial funding support to help incentivise and encourage pension funds to invest in infrastructure projects.
Billions of pounds of long term savings are piling up on the sidelines as investment managers are obliged by regulation to scale back exposure to equities, while the yield on government bonds has fallen to lows not seen for more than a hundred years.
And third, there is a strong argument for a temporary tax cut, either in the form of a reduced rate of VAT on home refurbishment and improvements or a rise in the threshold for income tax or allowances that would have a proportionately bigger effect for lower income households. Tax relief here would be more likely to be spent than hoarded, thus giving a fillip to domestic demand.
None of these will fully counter the continuing downward drag on confidence exercised by the eurozone and the debilitating uncertainty as to whether the single currency will survive in its present form. For the moment, financial markets have placed great store by the assurance of European Central Bank governor Mario Draghi that the bank will do whatever it takes to save the euro. And both Britain and the US look poised for further bursts of quantitative easing.
This will further impoverish pensioners and those dependent on fixed incomes. And longer term it is to take a huge gamble with inflation. But as public patience is wearing out, even with the ersatz austerity of recent years, and the Chancellor is on the rocks, it is the one black ace an economy trapped in recession has left to play.