Return to growth may provide a temporary fix for UK public finances, but if
that growth proves as unsustainable as the pre-crisis variety, it’s no
solution at all
Even assuming the improvement in tax revenues
continues, the outturn for this year will still be no better than the
OBR was expecting a year ago before the impaired forecasts of the March
Budget were made.
By
Jeremy Warner: Rejoice. Like the economy, the UK public finances are at last moving in the
right direction. October is an important month for corporation tax inflows,
and most of the anecdotal evidence is that with an improving economy, they
are picking up nicely.
Add in expected increases in taxes from the housing market – and with rising
consumption, some improvement in VAT receipts – and by the end of this
financial year, public sector net borrowing could be as much as £10bn lower
than the Office for Budget Responsibility (OBR) was forecasting as recently
as the last Budget in March. Another feather in the Chancellor’s cap then?
Time for a reality check. Even assuming the improvement in tax revenues
continues, the outturn for this year will still be no better than the OBR
was expecting a year ago before the impaired forecasts of the March Budget
were made. We are merely back to where we were at the time of last
December’s Autumn Statement, and we are still years away from where the
Chancellor expected to be when he unveiled his emergency Budget in June 2010.
What’s more, it doesn’t look so good on the other side of the ledger, where
public spending is continuing to overshoot the OBR’s March forecast. More
than five years after the crisis began, Britain still has one of the worst
deficits in the industrialised world. Only Japan and Ireland exceed us.
It is true that the gap has been closed somewhat; receipts are quite a bit
higher in nominal terms than they were, and spending has been contained, at
least in real terms. However, the breakdown of pluses and minuses does not
give much reason for cheer. Admittedly, there has been a big increase in VAT
receipts, as you would expect after the decision to raise the rate. But
other sources of taxation have barely grown over the past four years.
The rest of the improvement in revenues comes from “other” income, including
the interest on gilts bought by the Bank of England under its quantitative
easing – or money printing – program.
Similarly on spending, where to the extent that outgoings have fallen at all, it is substantially down to netting off the assets acquired when the Government assumed liability for the Royal Mail pension fund.
Enron this is not, since it is all perfectly transparent and in any case conforms to international standards on public accounting. But it also demonstrates that what little headway has been made in getting on top of Britain’s debts is substantially down to sleight of hand.
This is not to deny that some quite significant cuts to spending are indeed being implemented, but without growth these tend to get lost in the wash of rising social and debt servicing costs.
No democratically accountable government will, when push comes to shove, deliver the full-frontal assault on demand that true austerity would require. I leave the troubled economies of the eurozone out of this, because in their case, government has become more the charge of Berlin, Frankfurt and Brussels than their own capital cities. In any case, with the UK Coalition the reality of the austerity agenda has always fallen short of the rhetoric.
Still, now we have growth, so real progress at last becomes possible, yes? Only up to a point. Improved growth ought to enable the OBR to bring forward its forecast of return to balanced budgets by at least a year when the latest Autumn Statement is unveiled early next month.
Unfortunately, this may be no more than a short-term reprieve. Almost regardless of what actions are taken to correct the immediate problem, high entitlement spending associated with an ageing population will eventually put the public finances back on an unsustainable trajectory, absent of further action.
The public finances face a pincer movement of higher spending on health and pensions and a shrinking working-age population, which will damage output and tax revenues. Either the pensions and healthcare promise has to be further eroded in the years ahead, or the tax wedge in GDP has to be substantially increased.
The OBR’s long-term projections on all this already make depressing enough reading, but they may somewhat understate the true nature of the challenge, for they assume considerable scope for productivity improvement in public healthcare provision. If this does not happen, then the numbers look more terrifying still.
Still, it is the immediate problem that Western governments first have to deal with, and this is proving quite tough enough. Growth is back, but there remain real concerns about its sustainability. Governments proved quite good at arresting the financial crisis; events that on most measures were far worse than anything that happened in the crash of 1929/30 have ended up in a way that bear no comparison to the Great Depression.
What they have not been good at is restoring economies to their full potential. In a characteristically insightful presentation to the IMF’s annual research conference last week, Larry Summers, a former US Treasurer Secretary, warned that we may have entered a period of “secular stagnation”, the origins of which he dates to well before the financial crisis.
Suppose, he said, that the rate of interest consistent with full employment in advanced economies had fallen to a negative 2pc or 3pc some time before the crisis began?
It would then be no surprise that even with the artificial stimulus coming from imprudent credit expansion, there would be no visible boom or excess in demand. Inflation and growth were both relatively subdued in the run up to the crisis.
It follows, Professor Summers implies, that with the financial crisis addressed, but demand still down in the dumps and interest rates at the “zero bound” , more needs to be done both in terms of fiscal and monetary policy to get things going again and return economies to full potential.
There was, however, something missing in Summers’ analysis. No economy, not even the US, is any longer a closed world beholden only to itself. All are part of a malfunctioning global economy that has required consumer nations such as the US and the UK to keep artificially stimulating internal demand – whether it be through credit expansion, negative real interest rates or government spending – in order to support employment within their own borders and among the big exporting nations of Germany, Asia and the Middle East, with their relatively low levels of consumer demand.
Deficit countries cannot indefinitely keep clocking up debt to support what the financial crisis demonstrated beyond all doubt is a completely unsustainable state of affairs.
Yet Summers suggests we should, that it is somehow our duty as advanced economies, both to ourselves and everyone else, to remain consumers of last resort to the rest of the world. This is nonsense and will only lead to new crises.
Return to growth may provide a temporary fix for the public finances, but if that growth proves as unsustainable as the pre-crisis variety, it’s no solution at all.
Similarly on spending, where to the extent that outgoings have fallen at all, it is substantially down to netting off the assets acquired when the Government assumed liability for the Royal Mail pension fund.
Enron this is not, since it is all perfectly transparent and in any case conforms to international standards on public accounting. But it also demonstrates that what little headway has been made in getting on top of Britain’s debts is substantially down to sleight of hand.
This is not to deny that some quite significant cuts to spending are indeed being implemented, but without growth these tend to get lost in the wash of rising social and debt servicing costs.
No democratically accountable government will, when push comes to shove, deliver the full-frontal assault on demand that true austerity would require. I leave the troubled economies of the eurozone out of this, because in their case, government has become more the charge of Berlin, Frankfurt and Brussels than their own capital cities. In any case, with the UK Coalition the reality of the austerity agenda has always fallen short of the rhetoric.
Still, now we have growth, so real progress at last becomes possible, yes? Only up to a point. Improved growth ought to enable the OBR to bring forward its forecast of return to balanced budgets by at least a year when the latest Autumn Statement is unveiled early next month.
Unfortunately, this may be no more than a short-term reprieve. Almost regardless of what actions are taken to correct the immediate problem, high entitlement spending associated with an ageing population will eventually put the public finances back on an unsustainable trajectory, absent of further action.
The public finances face a pincer movement of higher spending on health and pensions and a shrinking working-age population, which will damage output and tax revenues. Either the pensions and healthcare promise has to be further eroded in the years ahead, or the tax wedge in GDP has to be substantially increased.
The OBR’s long-term projections on all this already make depressing enough reading, but they may somewhat understate the true nature of the challenge, for they assume considerable scope for productivity improvement in public healthcare provision. If this does not happen, then the numbers look more terrifying still.
Still, it is the immediate problem that Western governments first have to deal with, and this is proving quite tough enough. Growth is back, but there remain real concerns about its sustainability. Governments proved quite good at arresting the financial crisis; events that on most measures were far worse than anything that happened in the crash of 1929/30 have ended up in a way that bear no comparison to the Great Depression.
What they have not been good at is restoring economies to their full potential. In a characteristically insightful presentation to the IMF’s annual research conference last week, Larry Summers, a former US Treasurer Secretary, warned that we may have entered a period of “secular stagnation”, the origins of which he dates to well before the financial crisis.
Suppose, he said, that the rate of interest consistent with full employment in advanced economies had fallen to a negative 2pc or 3pc some time before the crisis began?
It would then be no surprise that even with the artificial stimulus coming from imprudent credit expansion, there would be no visible boom or excess in demand. Inflation and growth were both relatively subdued in the run up to the crisis.
It follows, Professor Summers implies, that with the financial crisis addressed, but demand still down in the dumps and interest rates at the “zero bound” , more needs to be done both in terms of fiscal and monetary policy to get things going again and return economies to full potential.
There was, however, something missing in Summers’ analysis. No economy, not even the US, is any longer a closed world beholden only to itself. All are part of a malfunctioning global economy that has required consumer nations such as the US and the UK to keep artificially stimulating internal demand – whether it be through credit expansion, negative real interest rates or government spending – in order to support employment within their own borders and among the big exporting nations of Germany, Asia and the Middle East, with their relatively low levels of consumer demand.
Deficit countries cannot indefinitely keep clocking up debt to support what the financial crisis demonstrated beyond all doubt is a completely unsustainable state of affairs.
Yet Summers suggests we should, that it is somehow our duty as advanced economies, both to ourselves and everyone else, to remain consumers of last resort to the rest of the world. This is nonsense and will only lead to new crises.
Return to growth may provide a temporary fix for the public finances, but if that growth proves as unsustainable as the pre-crisis variety, it’s no solution at all.
X art by WB7
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