What today’s borrowing figures don’t tell us
The public sector finance statistics are out and the headline figure is a very small (£300mn) fall in the deficit in the financial year 2012/13 over 2011/12. That said, Left Foot Forward is reporting that Sky’s Ed Conway has noticed that if you exclude various special factors the deficit may actually be up by a small amount.
To an extent these minor details don’t really matter – the broad picture is that the deficit is roughly the same as it was last year and is expected to stay at that level this year.
We reduced the deficit by a third in our first two years in government, mostly by massive cuts to public investment, which we now understand were a big mistake and have damaged the economy. We’ve also now realised that trying to reduce the deficit further while the economy isn’t growing is self-defeating, so we’re not even going to try to get back on track until it does grow. We won’t miss our fiscal targets, since we no longer really have any. If the IMF understood that we’re not really going anywhere, perhaps they would stop telling us to change course.
Today’s figures don’t really tell us anything new. In fact, I would argue that the most interesting data in today’s release is the information that is not contained. Because whilst the overall deficit numbers have become an issue of political controversy, the Government’s actual fiscal target is to eliminate the structural deficit over five years. So – what do today’s figures say about the structural deficit?
Nothing. It’s not even mentioned in the ONS release.
Because, as I’ve argued before, the structural deficit cannot be measured, it can only be estimated.
Measuring the structural deficit depend son measuring the output gap – another concept which is subject to particular uncertainty. To work out last year’s structural deficit we have to estimate last year’s output gap and, as the following graph from the OBR makes clear, that is not easy.
As the OBR has made clear they currently estimate that the output gap is around 2.7% and that the gap will close by 2021/22. Taken together with the Government’s current policies imply a structural surplus of 0.8% of GDP in 2017/18 – i.e. the rolling five year target is on course to be met.
But this assumption relies on the output gap estimate being correct and time period in which the gap closes being correct. Take the estimates of the IMF or NIESR and we have far more fiscal tightening that we ‘need’ to meet the self-imposed target.
As I argued last week, I don’t think the structural deficit is a sensible target on which to base fiscal policy. And even it where a sensible target, I don’t see why a five year timetable makes any sense.
In many ways this is the worst of all worlds, the short period of the target forces the government into making cuts too quickly which damage growth but the fact that the policy is so-flexible means the tomorrow never actually comes and so the period of cuts are continually extended. This is a recipe for continual austerity.
The sooner we can move to debating what a sensible fiscal framework looks like the better.