#40. Buts and buts


This week’s Autumn Statement represents the government’s last real chance to put down some economic and fiscal markers ahead of the election, and what I’m going to do here is to set out a context. The Prime Minister has already paved the way, “getting his excuses in first” (as some commentators have put it, rather unkindly) by highlighting the “red lights” blinking on the global economic dashboard.

My conclusions are that the recovery in the economy is misleading, in two respects. First, we are continuing to borrow a lot more than £1 for each £1 of growth. Second, growth is based on an expansion in jobs, but these jobs are so poorly paid that no net contribution is being made to the Treasury. Reflecting weak revenues, the deficit is likely to rise from £96bn last year to around £100bn, instead of falling to the £84bn projected officially at the time of the budget.

Frankly, it is a relief to get back to economics after recent political events. The Rochester by-election was encouraging, at least in the sense that it gave each of the established, corporatist parties a poke in the eye, but it was overshadowed by the resignation of a Labour shadow minister over “white van” images.

This incident spelled out the absurd contradictions at the heart of British politics. “Ordinary” people must not be patronised. You must not call them “pleb” or “white van man”. Feel free to load them to the gunwales with debt, to allow employers to pay them less than the bare minimum for survival, to permit “zero hours” contracts, to allow them to die unnecessarily in Stafford, or be abused on an industrial scale in Rotherham, yes.

But please be polite about it.

Even in an age of spin over substance, could anything be more cynically hypocritical?

At least the economic and fiscal situation has some cleanliness about it, even if it is hedged with “buts”. Here are some of them:

– The economy is growing, but growth is exceeded by incremental borrowing.

– Job creation has been strong, but wages are far too low.

– Public spending has been cut, but not by very much, the deficit remains far ahead of targets that have already been revised year after year, and debt is a lot higher than expected.

– The government’s record has been mixed, but things would have been very much worse under Labour.

And so on.

Starting with the economy, growth is likely to be around 3% in the current (2014-15) fiscal year. Add back the GDP deflator and purely nominal economic output, not adjusted for inflation, is likely to have risen by around £80bn. That seems pretty good, until you realise that the government alone is likely to have borrowed about £100bn. Add in borrowings by households and we are still playing the same dangerous shell-game of achieving “growth” by channelling borrowing into consumption.

According to official plans, public spending is supposed to come in at around £732bn this year, up £16bn from 2013-14. If this were achieved, total spending (at constant 2013-14 values) would be £718bn, modestly (£11bn, or 2%) lower than the £729bn spent in Labour’s last year (2009-10).

Though this overall cut seems small, we need to recognise that the cost of servicing the government’s soaring debt pile has risen by £19bn over the same period, so primary (pre-interest) spending has declined by £29bn (4%) under this government. Within this pre-interest total, and despite stalwart efforts by the Treasury, welfare costs have continued to rise, so departmental expenditures at constant values declined by 8%, to £473bn in 2013-14 from £515bn in 2009-10. Since both health and overseas development have been ring-fenced, other departments have experienced double-digit cuts, yet overall spending reductions have been pretty modest.

Revenue, meanwhile, was projected to rise to a nominal £648bn this year (including APF gains of £12bn), a real-terms increase of 2.7% over 2013-14 (though up 5% in nominal terms), and up 13.9% if compared with 2009-10. Expressed at constant 2013-14 values, then, official targets show revenue 14% higher, and spending only 2% lower, than in the last year of the previous government. This in turn means that critics’ accusations (that spending cuts have borne the brunt of fiscal rebalancing) are simply nonsense – this government has raised far more in taxes (£78bn) than it has cut from overall spending (£11bn).

Had everything gone according to plan, the chancellor would have been able to project an underlying current-year deficit of about £84bn, lower than last year (£96bn) and, in real terms, barely half of the shortfall inherited from Labour. On a primary (ex-interest) basis, the coalition would have eliminated almost 80% of the inherited deficit.

As recent figures have revealed, however, things have not been going according to plan in the first seven months of this fiscal year. Revenues, projected to grow by 5%, are only 1% higher, which means that income has actually shrunk in inflation-adjusted terms. Total spending, which has increased by 2%, is in line with forecasts, and essentially static in real terms. Even so, the deficit in the first seven months was £6bn higher (rather than, as expected, about £6bn lower) than in the year-earlier period. On this basis, government could be stuck with a significant overshoot, with the full-year deficit climbing to perhaps £100bn.

More worryingly, public debt has already risen by close to £110bn thus far in 2014-15, and may stand at £1.48 trillion (86% of GDP) by the end of March, a lot higher than the official projection of £1.35 trillion (77%).

What, then, can we conclude ahead of the Autumn Statement? First, the deficit has fallen very materially, in real terms, under this government, though it has not declined by anything like the amount projected back in 2010.

Second, the brunt of this deficit reduction has been borne by tax increases, not overall spending cuts, over the lifetime of this Parliament.

Third, however, revenue growth has ceased, despite the upturn in GDP, mainly because the reduction in unemployment has been accomplished through the acceptance of poorly-paid jobs. At the same time, the cost of in-work benefits has risen, again because of the low-wage nature of the recovery.

So what we are left with is a workforce which, whilst it has expanded, still needs government subsidies, and earns too little to increase its contribution to the government’s coffers.

It’s a recovery, of a sort, but it is debt-based, and remains incapable of funding the amounts spent by the state.

Under Labour, we learned that government spending could not be afforded in bad times. Now, we are learning that it cannot be afforded in better times either.

The “austerity” that we’ve experienced so far may be dwarfed by the austerity still to come.

11 thoughts on “#40. Buts and buts

  1. Is it true that the miniscule wage increases are having an impact on the amound required to pay pensions now?

    A big problem of the current situation is that parties are not still highlighting the cuts that they are planning to make.
    Would be nice if they acknowledged what they are planning to do and how (cuts/taxes) they want to address this.
    Perhaps it is about time that the main element who have benefitted the last 4-5 years was taxesd.. Thus time to tax the land holders and the BTL…

    • Due to the triple lock, pensions are rising faster than earnings, so in that sense it is certainly increasing the burden. Public sector pension net costs (payments less contributions) are rising very sharply as well – up from £2.6bn in 2007-08 to £9.3bn in 2013-14, a huge rate of increase, which is going to cause a future government huge problems in the not-too-distant future.

      Politics is now dominated by image, so no-one dares tell us what they would really have to do.

      The voters aren’t stupid, of course, so they sense they are being misled, which is why they are abandoning the established parties – as things stand, UKIP is likely to stop either Con or Lab getting a majority, whilst the Greens could even get more votes than Clegg’s Clowns. In terms of voters supporting alternatives to existing parties, the UK is second only to Greece.

      I would tax land banks, to pressure developers to build new houses instead of sitting back and making profits on unused plots. BTL, meanwhile, is a business, so should be taxed accordingly, especially where someone holds 2 or more BTLs.

  2. Tim,

    The figures I have seen suggest that if we distributed our income in the same was as the Germans those on ‘average’ earnings would be about £3000pa better off or if wages took the same percentage of the economy that they did in the 80’s then ‘average’ workers wold be about £100pw better off.

    How might we return to/achieve this sort of distribution?

    As well as higher taxes on excessive pay how about stopping companies being able to offset the costs against tax?

    • John:

      I’m all in favour of redistribution, if we can do it in ways that aren’t motivated by envy; don’t harm the economy; and shift consumption from borrowed to earned.

      But I’d prefer it if our economy was based on earning growth, not borrowing it as now; and making the pot bigger, as well as sharing it out more fairly.

      For that, we need enterprise. Now, big corporates get about £85bn annually out of the state in “corporate welfare”. Yet in my part of England a small/medium-sized shop, restaurant, hotel or pub can expect to pay £1000 per WEEK in business rates. Assume a gross margin of 20% and that small business has to turn over £250k just to pay Whitehall, even before paying wages, electricity and so on. It’s the small businesses that create wealth and jobs, whilst big ones either act monopolistically and/or concentrate on cost-cuttting and consolidation rather than expansion.

      So here’s the magic bullet. Take £10bn out of “corporate welfare” and use it to exempt small (and some not-so-small) businesses from business rates. Simple, affordable and effective – so why don’t our leaders (any of them) want to do it?

    • P.S.

      You could limit the amount of interest that can be set against tax, and restore the pre-Brown system where pension funds receive dividends gross and tax-free. That way, you would begin to make equity capital a bit more attractive, and debt capital a bit less so. It’s this unfair treatment of interest (tax deductible) and dividends (not tax-deductible) which has encouraged a debt-based capital structure – i.e.private equity.

  3. Tim,
    I was a bit confused with your figures as they seem to jump from year based to comparisons over the period of the coalition . Then you mixed in inflation in some places and in others not . Plus you stated that revenue had been the main source of the reduction in deficit and yet at the same time saying tax revenue [from employees ] was not growing due to low wages . Then I was unclear as to how/where Government interest payments fitted .
    I fully understand the Government finances and public debt are in queer street and if austerity is the way forward we ain’t seen nothing yet even though the overall Government deficit has dropped by some 70 to 80% as against that inherited from Labour .

    Perhaps I was unfairly looking for more of an idiots guide to the state we are in!!
    I agree totally with your suggestion on reviving small businesses by using 10bn from the corporate welfare pot : alas small businesses are less likely to fund one of the parties.

    best peter

    • Peter

      Fair point – a lot of “mix and match” as I tried to keep it straightforward.

      Generally speaking, I use inflation-adjusted figures. The exception is where I compare growth with debt. If the economy grows by £50bn nominal during the year, but debt increases by £100bn, which is also nominal, then we’ve borrowed £2 to “buy” each £1 of growth.

      To clarify on revenue and spending first:

      1. At constant (2013-14) values, revenue was £559bn in 2009-10, and is forecast officially to be £637bn in 2014-15, an increase of £78bn.

      2. Spending (the total of it) was £729bn in 2009-10, and is forecast at £718bn for 2014-15, a saving of £11bn.

      3. Together, these have reduced the deficit by £89bn (£78bn + £11bn) – but tax increases (£78bn) have been far bigger than cuts in overall spending (£11bn) within this total.

      Within spending, again at constant 2013-14 values:

      1. The total was £729bn in 2009-10, falling to £718bn in 2014-15 (-£11bn)

      2. Interest expense was £33bn in 2009-10, rising to £52bn in 2014-15, a cost increase of £18bn (rounded)

      3. So, spending *other than interest* was £696bn (£729bn minus £33bn) in 2009-10, falling to £667bn (£718bn minus £52bn) in 2014-15, so spending other than interest is down by £29bn.

      4. Within the ex-interest figure, welfare was £181bn in 2009-10, and £194bn (est) in 2014-15, an increase of £13bn.

      5. Other (departmental) spending – total, less interest, less welfare – was:
      2009-10: (£729bn – £33bn – £181bn) = £515bn
      2014-15: (£718bn – £52bn – £194bn) = £472bn, a reduction of £42bn or 8%

      6. So the spending cuts in total are:

      Departments -£42bn
      Welfare +£13bn
      Interest +£18bn

      Overall -£11bn

      As for taxes, low wages are reducing income tax below forecasts – but this is only a pretty small part of total taxation (22% of it last year). Total taxes should be higher in 2014-15 (£637bn) than in 2009-10 (£559bn) by £78bn. But this increase includes higher rates of VAT and increases in a lot of other taxes. The more recent figures also include profits on QE (last year, £12bn).

      I hope that clarifies matters?

  4. Expect more of the same going forward because anything goes when you are fighting the end of days scenario we are in with respect to oil.

    All stock markets are completely dependent on central banks dipping in and buying stocks anytime there is a threat that the markets might crash (which by rights they should)

    There is no stopping now. We run this engine as hard as possible until it gives out.

    Then we collapse. And the die-off begins.

  5. The “austerity” that we’ve experienced so far may be dwarfed by the austerity still to come.

    By God I hope so. The Godless British state needs to be hacked back to almost nothing.

    • If you require to hack back the state “to almost nothing” it begs the question what do you think the state is for?

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