Philip Hammond (Photo by Leon Neal/Getty Images)
4 reasons to dismiss the Chancellor’s claim of ‘good progress’ on deficit reduction
Philip Hammond has been out and about this week looking for praise for deficit reduction. At his Mansion House speech he claimed: “the deficit is down by three-quarters – and below 3% of GDP”. He tweeted the same line in response to Office for National Statistics figures yesterday (my highlighting):
But “good progress” is very far from an accurate assessment. The reality is as follows:
- Nine extra years of austerity
- 80% more borrowing than expected
- £600bn failure on debt
- annual growth reduced by more than a quarter
The basic fact of the matter is that austerity has failed. Cutting spending might repair a household budget, but cutting government spending severely damages economic activity and so does not repair the public budget. The need is not to “Finish the job”, but to finish austerity.
1. Nine extra years of austerity
Originally the government hoped to balance the books in around one parliament, with public sector net borrowing [sometimes called ‘the deficit’ or just ‘borrowing’: basically the difference between government revenues and expenditure] seemingly disappeared by 2016-17. But now, according to the 2017 Conservative Manifesto:
We will continue with the fiscal rules announced by the chancellor in the autumn statement last year, which will guide us to a balanced budget by the middle of the next decade.
So balance from 2016/17 has become balance in 2025. That amounts to nine extra years of austerity.
2. 80 per cent more borrowing than expected
In the coalition government’s original plans, the deficit was basically envisaged cleared up by the end of the parliament (blue line). Instead borrowing has been relentlessly higher every year from 2012-13 and is predicted indefinitely to remain that way (green line).
Public sector net borrowing, £ billion
The Chancellor’s boast that he has got the deficit down by ¾ is based on the deficit as a share of GDP falling from 9.9 per cent in 2009-10 to 2.4 per cent in 2016-17. (I leave aside the point that the lion’s share of the work was done by the inherited economic recovery: here.)
But in cash terms all of the £46.6bn deficit in 2016-17 is additional relative to the original expectation that the deficit would have been cleared up by now. An estimate for the total amount by which the deficit has come in above expectations can be derived as the difference between the green and the blue line (for years from the start of the coalition in 2010-11 up to 2015-16) and then the green line and zero (for years from 2016-17 to 2021-22). The total extra deficit from 2010-11 (i.e. the sum of the grey bars) is equal to £380bn, and this is the difference between the original cumulative deficit of £470bn and the present cumulative deficit of £850bn. The new figure is 80 per cent larger than expected. So the deficit may have been reduced by three quarters to date, but overall the Treasury will have borrowed more than three quarters more than they expected when the end of austerity finally comes.
3. £600bn failure on debt
The failure on the public sector debt is the true measure of the failure of the government’s strategy. [The debt is the total stock of the flow of borrowing measured by the deficit; just like an individual’s total stock of debt is equal to the cumulative sum of all loans minus repayments over time. Policy around the public debt is normally based on the public debt ratio, i.e. debt as a share of GDP.]
The original programmed reduction in the deficit would have been carefully devised so that public sector debt ratio would fall from a certain point in time (2014-15). With deficit reduction greatly lower than expected, debt reduction did not happen.
The coalition inherited plans from Labour that had the debt ratio peaking at an allegedly catastrophic 74% of GDP. Under the coalition’s ‘consolidation’, debt was set to peak sooner (2013-14) and at a lower 70% of GDP. The chart below says it all. The debt ratio is now set to rise to 89% of GDP, it will not be reduced until 2018-19.
Public sector net debt, % GDP
Total debt in cash terms at the current peak year in 2017-18 will be £1830bn. In 2010 peak year debt was expected to be £1235bn in 2014-15. The difference of £600bn reflects the cumulative amount of the higher deficit (discussed above) plus extra items, in particular those arising from public debt issued to finance support to the banks (offset by the fire sales of public assets like post offices).
4. Annual growth reduced by more than a quarter
At Mansion House the Chancellor bemoaned having to make again “The case for growth”. Well he should know. Since the Coalition took office growth has averaged 2 per cent a year. Over every year from 1948 to 2007 growth averaged 2.8 per cent. That’s a 30 per cent reduction in average annual growth.
GDP growth, per cent
A failed model
Plainly the public are right to have had enough of austerity. But they should be doubly angered by the fact that it hasn’t even worked. In economic terms growth has been severely damaged; as a result, revenues and so deficit reduction has fallen far short of expectation and the public debt has got worse not better. Looking into the future the weakness of the position has been exacerbated by the OBR’s projections of the effect of the Brexit referendum, but the majority of the damage has been done in the past.
It is standard practice for the Chancellor to blame productivity failures for the failure of his fiscal strategy. But this is smoke and mirrors. Weak growth has translated to a surge in insecure work and low pay. Like everything else, weak productivity is primarily an effect of the cuts (link).
We have hoped that the government might at some point realise that what is good for the public services and public sector workers is good for the economy. But it seems not.
For the time being everyone throughout the economy – public and private sector – will continue to be hammered by the continued toxic mixture of unsound economics and unsound politics. At some point this has to come to an end.