Britain’s public finances are improving at a more rapid rate than expected, with the budget deficit in the 2010/11 fiscal year undershooting the official forecast by nearly £5 billion. Given what was feared, even relatively recently, this was good news for the government and for those fearing that the Chancellor would be forced to increase taxes further. But there is a long way to go before we are in the clear.
Britain’s public finances are improving at a more rapid rate than expected, with the budget deficit in the 2010/11 fiscal year undershooting the official forecast by nearly £5 billion. Given what was feared, even relatively recently, this was good news for the government and for those fearing that the Chancellor would be forced to increase taxes further. But there is a long way to go before we are in the clear.
When the Office for National Statistics (ONS) recently announced the ‘final’ figures for public borrowing in the 2010/11 fiscal year, there was remarkably little fuss. Few politicians weighed in with comments and the markets barely batted an eyelid. All that, it should be said, was a good thing, as I shall explain.
First let me set out some parameters. I say ‘final’ ONS figures for 2010/11 borrowing with the appropriate health warning attached.
Like most official figures these numbers are prone to revision and, in the case of the public finances, it is not hard to see why. HMRC will still be finding bits of 2010/11 tax year revenues for some time to come.
As for tallying central and local government spending for the year, that is a task worth of Hercules, not something that can be easily totted up a few weeks after the year-end.
Anyway, what we know for now is that public sector net borrowing for 2010/11 was £141.1bn. That, of course, is a huge number by any standards; the second largest budget deficit – as a percentage of GDP – in the post-war era. Borrowing was the equivalent of roughly a tenth of GDP.
Had anybody said three or four years ago that the government would be borrowing more than £140bn, when annual borrowing figures of £30bn or so were the norm, they would have been regarded as ridiculously alarmist.
So why was it a good thing that nobody took much notice of the ONS’s announcement? As far as the public finances are concerned the rules of the reporting game are strictly asymmetrical. Bad news, in other words, gets far more attention than moderately good news.
Bad news in this context would have either been that borrowing came in above the March Budget forecast from the Office for Budget Responsibility (OBR), or that 2010/11’s borrowing was higher than in 2009/10.
The response from Ed Balls, the Shadow Chancellor, would have been that George Osborne’s strategy was in ruins, his austerity programme backfiring badly.
As for the experts, they would have said that the government would require even more spending cuts and tax hikes to meet its fiscal objectives. That, given the extent of the cuts already in train – and the chancellor’s March Budget pledge that no more tax increases would be needed – would have been hugely problematical.
So the lack of such comment, political and expert, was good news. Borrowing for 2010/11, £141.1bn, was nearly £5bn less than the £145.9bn estimate that the OBR, the government’s fiscal watchdog, made at the time of the March Budget.
It was also, perhaps more significantly, more than £15bn below the outturn for 2009/10, £156.5bn. You may say there is nothing remarkable in this, because the budget deficit should come down as the economy recovers.
That is not, however, what happened in the early 1990s, the peak deficit coming in 1993/4, a year after the recovery had begun.
It is also not what many economists were predicting, even relatively recently. They believed that borrowing in 2010/11 would be higher than in 2009/10.
Remember, too, that both totals were significantly lower than feared. In December 2009, in his final pre-budget report, Alistair Darling predicted deficits of £178bn for 2009/10 and £176bn for 2010/11.
Some of that may have been tactical; a Treasury operation to stop Gordon Brown launching another fiscal stimulus, but the fact is that things have turned out much better. Taking the two years together, borrowing has come in more than £56bn below projections made only 18 months ago.
Does this undershoot mean the pressure is off when it comes to Britain’s public finances? At a time when America has just had a warning about her AAA sovereign debt rating, can we be confident that the threat to the UK’s AAA is over? I think so.
The pattern we are seeing is consistent with past behaviour. Economists always get too gloomy about the public finances when the economy appears to be deep in the mire.
Mostly the public finances improve at a faster rate than expected. In the 1990s it took only five years for what was then a record post-war budget deficit to turn into a surplus.
A couple of words of caution are in order. The first concerns the pace of improvement. If the deficit comes down by £15bn a year, as it did between 2009/10 and 2010/11, it will take until 2013/14 before annual borrowing is back below £100bn.
Though the OBR expects a faster pace of improvement than £15bn a year, it does not predict a sub-£100bn deficit until 2013/14. I don’t think we will be able to breathe easily until annual borrowing is comfortably back in double figures.
The second caveat is that the great debate about ‘the cuts’ gets resolved in the government’s favour. Economic recovery has a bigger impact on the deficit than discretionary tax increases or spending cuts.
By the same token, if recovery were to stall or go into reverse, the public finances would stop improving. In theory that should not matter, because the government’s fiscal targets are couched in terms of the cyclically-adjusted deficit. In practice, in terms of the political debate and market sentiment, it would matter a great deal.
So we should quietly celebrate the good news on the public finances. But we should also remember that there is a long way to go before we are in the clear.
David Smith, Economics Editor, The Sunday Times
