Bill Jamieson: The economy is not out of debtors' prison yet

At last we have some economic good news, but the UK still has a total debt of £1.8 trillion, writes Bill Jamieson.

The UKs yearly debt repayments are still considerably more than the entire annual defence budget (Picture: Three Lions/Getty Images)

Good news has been a rare commodity in our public finances. For the past ten years, we have been engulfed by some of the worst budget figures since the Second World War. Exploding budget deficits, a soaring government debt total and annual debt interest payments now one of the biggest items of public spending: deficit has come to be our permanent station – and austerity our natural lot.

But raise our heads and look up if we dare: government borrowing is in rare retreat, both at UK level and in Scotland.

We won’t have to wait long for the departmental queues to form for a spending boost. In fact, they are already stretching from the Treasury door, and head of the queue is the Prime Minister Theresa May – she has already pledged an extra £20 billion for the NHS. Even so, there is growing expectation of further relaxation by way of a ‘giveaway’ budget later this year – a chink of light in what is shaping up to be the stormiest political autumn for decades.

Here in Scotland, the latest Government Expenditure and Revenue Scotland report – the ferocious annual battleground of Scottish politics – shows that while the budget deficit (the amount by which spending exceeds revenue) still totalled £13.4 billion in the last financial year, it has fallen from 8.3 per cent of Gross Domestic Product to 7.9 per cent.

The £1 billion improvement is due entirely to an increase in North Sea oil tax revenues as the world oil price has rallied from the depths of $28 a barrel in 2016 to $74 today. And as a percentage of GDP, Scotland’s deficit is still four times that of the UK.

However, despite the relentless charge of austerity, public spending in Scotland is £5.6 billion – or more than eight per cent – higher than four years ago. And total spending per person is 13 per cent higher than the UK level at £13,530.

The improvement at the UK level has been particularly dramatic. Here the Government’s finances were in surplus by £2 billion last month, the biggest surplus for July in 18 years, and up from a surplus of £1 billion a year ago. At the same time, borrowing in the April-to-July period fell to its lowest level since 2002.

Borrowing for the financial year so far stands at £12.8 billion, some £8.5 billion less than in the same period in 2017. The spending deficit has dropped by £6.4 billion to £39.4 billion in 2017/18, the lowest figure since 2007, and represents just 1.9 per cent of UK GDP.

Over the financial year to March 2019, the Office for Budget Responsibility (OBR), which produces the official government forecasts, expects the public sector to borrow £37.1 billion – around one-quarter of what it borrowed in 2009-10, at the peak of the financial crisis. Now there is talk that the out-turn could even be as low as £23.7 billion.

However, public sector net debt, the total amount of debt outstanding (excluding public sector banks) still totals £1.8 trillion, equivalent to 84.3 per cent of GDP. That is £17.5 billion higher than a year earlier, though lower as a percentage of GDP than in 2017, when it was 86 per cent.

We have waited long to see such improvement in our public finances. For the UK in particular, the upturn has been often promised but more often delayed. And after so many years of spending restraint and increases in taxation, the figures are still lamentable. We are surely due a break.

But there is also cause for caveats a-plenty before we come to regard the dour chancellor Philip Hammond as the coming Mr Bountiful. July is traditionally a good month for the UK public finances with the deadline for self-employed people to make the second of two self-assessed tax payments in July.

The figures have also been flattered by one-off items such as the proceeds of a sale of shares in RBS and lower payments to the European Union, due to the timing of the bills rather than any change in annual costs.

Meanwhile there is still massive work to do to reduce the total debt of £1.8 trillion to the pre-financial crisis level of 60 per cent of GDP.

Lest we dismiss this debt figure as a statistical abstraction, this should concentrate minds: the annual debt interest charge this financial year will be £39.8 billion, dwarfing the amount spent on defence (£28.2 billion) and the Home Office (£10.7 billion). Nor should we count on any early respite – annual debt interest payments are forecast to rise to £44 billion in 2022-2023.

Further progress on debt and deficit reduction is also contingent on economic growth. While the latest pointers suggest a gradual improvement, slowing world trade and a Brexit-induced investment slowdown could bring a serious reversal. Similar concerns surround Scotland’s fiscal improvement if the oil price tanks again.

Meanwhile, average pay rises are still lagging inflation, and as consumer spending is a major driver of the UK economy, the Treasury cannot count on much of an uplift from this area. There is also concern that, after a record run of rising values, stock markets world-wide are due a major correction.

It was only a few weeks ago that Bank of England Governor Mark Carney raised interest rates, with the expectation that the economy would gain momentum and that further increases would move monetary policy back to something approaching ‘normality’. But what is ‘normal’ in the post-banking-crisis world with a return to pre-2007 levels of economic growth looking as distant as ever? Indeed, far from another interest rate rise returning us to something akin to orthodoxy, the recent cut could well be reversed.

So we are far from any early release from the debtors’ prison, or a splurge in public spending largesse. Indeed, the best course of action, both for the Chancellor and Scotland’s Finance Secretary, would be to keep their powder dry and not allow borrowing discipline to slip. Looking at what lies in store, we will need resilience – and strong reserves to match.