From the TUC

Living standards crisis derails deficit reduction

16 Oct 2014, by in Economics

The Office for Budgetary Responsibility (OBR) today reminded us of the extent of the Coalition’s failure to reduce the deficit in recent years. Public sector net borrowing in 2013-14 was originally expected to be £60 billion; the outturn for borrowing was £108 billion (on a comparable basis). This amounts to a shortfall of nearly £50 billion, with borrowing approaching double the original predictions made when the government’s austerity policies were announced in 2010.

Much of this shortfall is accounted for by the earnings crisis. Earlier in the week newspapers reported (the Chairman of the OBR) Robert Chote’s statement that:

… weak wage growth, combined with large numbers of people in low-paid jobs or self-employment, was affecting income tax revenues.

Today the OBR quantified the extent of the impact in their Forecast Evaluation Report. As the table below shows, receipts fell short of expectations by £53 billion. The OBR argue:

More than half of the overall shortfall of £52.5 billion against our June 2010 forecast – over £30 billion – can be explained by weaker income tax and national insurance contributions (NICs) receipts, with the continued weakness of earnings growth a key drag.

 Public finances for 2013-14, £ billion

fer

These annual totals for public finances in 2013-14 have been in the public domain for some time, but the new OBR work puts borrowing onto a comparable basis when the original forecast was made (for example the present ONS figures are flattered by the inclusion of the interest payments the Bank of England returns to the Government).

It is worth remembering too that these figures are for 2013-14: the position looks even bleaker for 2014-15. So far the borrowing outturn in the year to date is £45.4 billion, an increase of £2.6 billion over the comparable period in 2013-14. In June 2010 the Coalition expected public borrowing in 2014-15 to fall to £37 billion (from £60 billion in 2013-14, as above). A even more massive shortfall against the original plans is likely, not least given ongoing reductions in earnings.

The OBR report includes some discussion of the impact of austerity policies on the economy and government finances. They seem to be sticking to their guns that austerity policies were not the primary reason for the failure of the economy relative to original expectations, and therefore by association the failure of earnings, the failure of taxes and the failure of deficit reduction. But maybe expecting our fiscal watchdog to isolate the effects of a single of the many exceptional forces acting on a single economy over only a few years of the most unprecedented crisis since the great depression along with massive data uncertainties is asking too much.

But the IMF operate on a broader canvas, drawing on the experience of many countries, and they (and others) are backtracking significantly on austerity. In the meantime, markets convulse once more, now in the wake of fears of global deflation.

4 Responses to Living standards crisis derails deficit reduction

  1. postkey
    Oct 17th 2014, 9:15 am

    “The OBR report includes some discussion of the impact of austerity policies on the economy and government finances. ” ?

    “Even Britain has now abandoned austerity
    And while Osborne will never publicly admit this, the big surprise of his budget is its implicit acceptance of this Keynesian view.
    Instead of trying to reduce borrowing any further or aiming for a balanced budget, as it originally promised, the British government has now accepted that deficits will keep rising in absolute terms and will still be worth 6% of GDP by the next election in 2015. That would leave Britain with by far the highest deficit ratio among the major economies after five years of unprecedented austerity. ”

    http://blogs.reuters.com/anatole-kaletsky/2013/03/21/even-britain-has-now-abandoned-austerity/

  2. Paying the living wage: good for workers, good for the economy | ToUChstone blog: A public policy blog from the TUC
    Nov 3rd 2014, 3:31 pm

    […] our society and our economy. According to the Office for Budget Responsibility the UK is facing an income tax shortfall despite rising employment levels. The OBR say this is due to the numbers of people going into […]

  3. As good as it gets? | ToUChstone blog: A public policy blog from the TUC
    Nov 13th 2014, 8:17 am

    […] that the failure of earnings has been harming the public finances in a big way. To reiterate: the OBR showed public borrowing in 2013/14 at £108 billion, nearly double the £60 billion deficit that […]

  4. Austerity evermore. Voters’ bill per Parliament: £100 billion and rising | ToUChstone blog: A public policy blog from the TUC
    Nov 19th 2014, 11:53 am

    […] Recent OBR analysis is indicative of the way these huge shortfalls have come about. They explained how for 2013-14 the deficit was expected to be £60 billion, but on a comparable basis turned out to be £109 billion. A huge £50 billion more / nearly twice as much as expected. On the current course the deficit for 2014-15 may well be up on last year’s figure. I cannot quickly put a full time-series onto a comparable basis, so the following chart is again only indicative, showing the original profile for public sector net borrowing, against the latest outturn figures from the ONS, with a projection for the current financial year at the same amount as last year. The figures speak for themselves: apart from coming off the peak, rather than declining steadily towards zero, the figures remain stuck between £100 – £120 billion a year. The cumulative difference across the figures shown is £109 billion, which is remarkably the same as the figure above for austerity to go. I doubt whether too much should be read into this, but it hopefully suggests that, ballpark, the figures are reasonably consistent and not too misleading. […]