From the TUC

Q. How did George Osborne end up borrowing FOUR TIMES more than he said he would?

13 Oct 2016, by in Economics

A. His spending cuts crushed economic growth, meaning that in 2015-16 tax revenue fell short of expectations by £85bn.

New analysis from the Office for Budgetary Responsibility (OBR) carefully details exactly how Osborne managed to end up with this colossal failure to stick to his original plans:

obr_fer_16

The logic is a little peculiar to see quickly; so to guide you through:

1

We start on the left with the June 2010 forecast for public sector net borrowing of £17.6bn for financial year 2015-16.

Note that in the OBR presentation ‘borrowing’ is shown with a positive sign and so we start above the zero line. Things that add to borrowing are in RED and things that reduce borrowing are in GREEN.

2

We then subtract £22.6bn, for a windfall gain on the government’s debt interest payments.

These follow because of lower than expected global interest rates (lo and behold, financial markets were not so spooked by public debt as we were told) and also because the government (sensibly) insisted that the Bank of England return to the Treasury interest payments on debt held through the quantitative easing programme.

17.6 – 22.6 = -5

3

We subtract £6bn for welfare spend coming in lower than planned.

The OBR single out in particular the government moving uprating of this type of spending to CPI, which as we all know is significantly lower than the RPI.

-5 – 6.0 = -11

4

We then make small negative adjustments for RDEL and CDEL, which are peculiar acronyms for departmental spending.

-11 – (0.6 x 2) = -12.2

5

These have all been in green because they are positive benefits to the government budget (though plainly not society at large). Then come the bits that have cost the government more (in RED)

The first is +£3.9bn on ‘Other spending’.

The OBR say this is mainly “higher borrowing financed capital spending by local authorities”. In a sane world this would be greatly larger; the government should allow local authorities to lead on capital spending to strengthen the economy.

-12.2 + 3.9 = -8.3

6

And then, finally, ‘Receipts’, LOWER THAN EXPECTED BY £84.8 BILLION.

-8.3 + 84.8 = 76.5

We therefore arrive at the OBR figure for total borrowing in 2015/16 of £76.5bn, from the starting point of £17.6bn. The outcome is £58.9bn (or 4.3 times) more than expected in 2010.

This red column on the chart constitutes the case against the government. The case that austerity policies are self-defeating.

And this is the pattern every year. Rounding to the nearest £10bn (the OBR don’t give these details in cash figures, so I am going broad brush), targets were missed by £30bn in 2012-13, £40bn in 2013-14, £50 billion in 2014-15, all ahead of the £60bn in 2015-16. Cumulatively: ‘180’.

The cumulative position feeds through to public debt; as a share of GDP, public debt has risen relentlessly, when the whole purpose of policy was to have it fall. (And this is in spite of a fire sale extending to more and more public assets.)

As we have repeatedly argued, government spending cuts have hit the economy much harder than was expected.

Growth has come in lower than expected, especially in the cash terms that are relevant to the government’s coffers. While jobs have held up better than expected, low paid work and unprecedentedly weak growth in earnings has mean this vast shortfall in tax and National Insurance revenues.

OBR stick dutifully to their lines that the failure is a result of the eurozone crisis and weak productivity. But (both) these interpretations follows mechanically from the ludicrously low multipliers that underpin their calculations of the impact of government spending on the domestic economy. The word multiplier appears only once in their report; the OBR have not taken the opportunity to review the wider evidence of the experience of spending cuts across the OECD. ( I have laboured this elsewhere, e.g. here.)

Nearly all countries have been crushed to varying degrees by austerity. Likewise public sector finances have not been repaired. The reality is that the original deterioration in the public sector finances was a symptom of the failure of the global economy in the wake of the 2007-08 financial crisis.

The only way to repair the public sector finances is to repair the economy. As part of any such strategy, spending must increase. It is unclear whether Philip Hammond has grasped this.

One Response to Q. How did George Osborne end up borrowing FOUR TIMES more than he said he would?

  1. Cynthia Johnson
    Oct 16th 2016, 10:32 am

    You need to ask how and why he got the job in the first place.