If you believe in miracles, start praying. And if you don’t, pray harder. Five years of tight budget restraint – “austerity” in unpopular parlance – has not, as we all had reasonably hoped, brought down the budget deficit and debt. In fact, both are going up.
This matters, because almost everything that Labour and Conservative parties wish to sustain at the level voters demand – from health service funding through welfare provision to local government services – critically depends on having the wherewithal to fund them. And it matters especially now, as the big party conferences crank up voter expectations ahead of the general election next May.
Now, more than ever, we have cause to doubt whether anything we’re told can be believed – whether (from Labour) it’s thousands more nurses for the NHS or (from the Conservatives) steadier finances and a shrinking debt pile.
This week has brought figures for UK government borrowing in August that brought disappointment and confusion in equal measure. You thought that with all those spending cuts and tax rises, borrowing is now tumbling? Look again. Previous forecasts have proved about as reliable as a set of Tesco accounts. The monthly budget deficit – leaving out the borrowing incurred on continuing bank support – is reckoned at £11.6 billion. That’s £600 million higher than the outturn for August 2013. And over the five months of the financial year 2014-15 so far, underlying borrowing is running £2.6bn higher than in the equivalent period last year.
For Chancellor George Osborne this is a dismal outcome. And it doesn’t augur well for any of us. The Office for Budget Responsibility (OBR) forecast back in the March budget that the underlying fiscal deficit would fall by £11.6bn over the whole financial year. Now a deficit overshoot of as much as £10bn looks perfectly plausible.
Worrying though this is, it’s by no means the most troubling figure from the government this week. It’s the latest calculation on outstanding public debt that will particularly depress election policy planners of all parties.
For the figures for total outstanding debt have also been revised upwards. These show total net debt (excluding support for the banks) now stands at £1.43 trillion compared with the figure of £1.29tn for July.
One consolation is that upward revisions to numbers relating to gross domestic product should help keep the UK’s debt-to-GDP ratio broadly unchanged at around 76-77 per cent. So, no need to worry then: it’s not greatly out of line with European debt-to-GDP levels and doesn’t mean that the debt burden as a share of national income has become heavier.
But that’s little comfort to a Conservative or Labour chancellor. They will still have to contend with huge annual debt interest payments. This year debt interest will suck £53bn out of the government’s accounts. That figure is more than one-and-a-half times the entire budget of the Scottish Government. And the figure is set to rise above £70bn over the next three years.
That’s a colossal sum to be flying out of the Treasury every year. It is interest that has to be paid whatever the political pressures for more spending – “dead money” from a chancellor’s point of view. It meets no aspirations and it yields no votes. Indeed, it requires spending cuts across government departments elsewhere to make room for it.
So what’s going wrong? Why, despite an evident improvement in the economy, the marked growth in numbers employed and the cuts in government spending in non-protected areas so far, these debt and deficit numbers are so stubborn and indeed are behaving in precisely the opposite manner to government – and public – expectation?
One notable feature is the poor performance of tax revenues. Central government receipts rose by just 2 per cent over the five-month April-August period – well below the OBR forecast in March.
Income tax and capital gains tax receipts were especially weak, falling by 0.8 per cent over the period. Yet employment – and the economy overall – have been growing markedly faster than the OBR had forecast.
What’s happening is that economic growth is not lifting government revenues in the textbook manner expected. Job growth has largely been in low-pay sectors. And the tax system puts a very low tax burden on those with low pay. Indeed, the tax and benefits system is such that a couple earning 50 per cent of average earnings are still gaining more in benefits than they are contributing in tax.
The system has certainly encouraged more people into the workforce – but the benefit of economic growth to the Treasury in the form of higher tax revenue is far smaller than the OBR expected.
All this suggests that the structural element of the deficit – that is, the hard core that does not melt away with higher economic growth – is worse than previously believed. And this is the core that’s most difficult to shift.
The failure of Ed Miliband to mention plans to reduce the budget deficit in his speech to the Labour conference on Tuesday was put down to a lapse of memory. But who can blame him from giving it a wide berth given the implications of the latest figures?
“The major political parties,” says Citigroup chief UK economist Michael Saunders, “have not yet fully detailed how they intend to implement the major fiscal tightening pencilled in for coming years. And these data suggest that the challenge of getting the UK back to a sustainable fiscal path may well be even greater than the OBR has acknowledged so far.”
That’s a terrible conclusion to reach after five years of spending constraint and all the blood, sweat and tears put in with the aim of achieving debt and deficit reduction – the central purpose of the Tory-Liberal Democrat coalition when it took office in 2010.
It will require an awful lot of explaining by George Osborne. Prospects of Conservative tax cuts ahead of the election have taken a knock. And his party cannot hold out much by way of immediate let-up to the spending squeeze in the following years.
As for Labour, its spending pledges keep going up – with £2.5bn for the already-protected NHS alone to provide 3,000 more midwives, 5,000 more care workers, 8,000 more GPs and 20,000 more nurses. Ah, the nurses! Always good for a hearty cheer at the party conference!
If borrowing is not to rise further, we look set for higher taxes. But the measures that Miliband mooted this week – a mansion tax on properties over £2m, a return to the 50p tax rate, a tax on tobacco companies and those hoary old standbys, efficiency savings and a crackdown on tax evasion – barely begin to cover his wish-list.
For an electorate already wearied of the scrimping and saving of the past five years, there is little that either party can realistically offer other than more of the grinding same.
It’s a truth hardly likely to go down well with so many voters yearning for change. And their patience may run out well before those debt numbers start to decline. Whether you believe in miracles or not, it’s time to start praying for one.