The UK doesn’t need a Budget statement this week. Chancellor George Osborne should cancel his annual set-piece. Britain has barely begun on the path of fiscal consolidation, and there’s an awful long way to go. With political strife brewing, and intra-coalition tensions rising, the danger that Osborne and his team do damage on Wednesday is probably greater than their chances of doing some good.
The pre-budget chatter is that the UK’s public finance are “better than expected”. This has led to suggestions there is “room for a measured giveaway”, if the Chancellor can summon the “political will”. Such analysis might be described as “wishful thinking”. More accurately, it should be labeled “irresponsible nonsense”. That such a notion has even been entertained by our political classes, and gained any kind of currency at all, speaks volumes of the UK’s low level of economic literacy and the lurid nature of what passes for “debate”.
During the first half of the last decade, the UK ordinarily ran budget deficits equal to around £20bn or £30bn, meaning that gilts to that amount were typically sold to plug the gap. Perish the thought we might run a budget surplus and lower our outstanding debts. We haven’t managed that since 2001.
Deficits in the tens of billions used to sound like a lot of money. In recent years, though, our deficit have been catastrophically large – around £150bn in both 2009 and 2010. This year, we will indeed borrow a little less. But we will still add mightily to the overall stock of national debt that current taxpayers, then our children and grandchildren, will need to service.
In November, the Office of Budget Responsibility forecast that Britain would need to borrow £127bn during the fiscal year 2011/12. “Keynesians” are excited because, with two months of the fiscal year to go, it looks like the UK may borrow “only” £120bn this year – hence the “room for manoeuvre”. No matter that this will still amount to a borrowing total equal to 8pc of GDP. No matter that this £120bn figure, if we achieve it, is simply a return to the 2011/12 borrowing requirement forecast by the OBR back in March 2011, at the start of the fiscal year.
There is absolutely no room in this budget for any kind of unfunded giveaway. The Chancellor’s entire focus should be, unashamedly, on asserting, then reasserting, his unwavering commitment to fiscal consolidation.
Last week, the Fitch ratings agency warned that it could downgrade the UK’s AAA status if we don’t manage to contain the expansion of our public debt. Fitch revised the outlook on the UK’s rating to “negative” from “stable”, remarking that the Government has “very limited fiscal space to absorb further adverse economic shocks”.
The “risks and uncertainty” surrounding the coalition government’s debt reduction plans, said Fitch, are “material”. This followed a similar statement last month by Moody’s, which also put the UK’s top-notch rating on notice, implying a one-in-three chance of a downgrade.
Such moves are entirely understandable. For all the Tories’ fiscal chest-beating, and reams of “austerity” rhetoric, the UK’s fiscal squeeze, so far at least, has not been particularly severe. Osborne and Co have laid out a relatively credible deficit-reduction path, yes. But the entire programme, we must never forget, is cast in terms of reducing the deficit, not the debt. That’s by no means a pedantic distinction.
Under the coalition’s consolidation programme, we’re told ad nauseum, we will “pay-down the deficit by 2015/16”. The trouble is, though, that you don’t “pay-down” a deficit. A deficit is simply the annual shortfall in your revenues over and above your spending. So every year you run a deficit, your total debt stock keeps rising. Once you achieve a zero annual deficit, far from being a signal that your debts are under control, and your problems over, that is the moment when your debts have peaked. Unless, of course, you slip back into deficit the following year – and then your outstanding debt stock, all of which must be serviced year-in, year-out, starts climbing once more.
Back in 2008, the UK’s net public sector debt stock was £581bn – or around 43pc of GDP. This year, even after two years of “austerity”, the massive annual deficits we’ve been running means our debt stock has grown far bigger, to £980bn. By 2015/16, even if the coalition implements its fiscal squeeze to the penny, our national debt – after several more years of out-sized deficits – will be £1,500bn, or around 100pc of GDP.
Once the austerity programme is over, UK government spending won’t be low. It will simply have returned, in real terms, to the same level it was at in 2005/06. Except that the years of intervening deficits means that our total national debt will by then be three times higher than during the middle of the last decade. And the interest payments need to service all that extra debt, each and every year, will be on top of those 2005/06 real terms spending levels.
But there’s more, a lot more, in this tale of British fiscal denial. You see, our national debt won’t really be around £980bn this year, as this figure excludes the so-called “fiscal interventions” that bailed-out our world-class banking system. Include those, the bulk of which the Treasury has kept off the books, and we’re looking at UK debts, at the end of 2011/12, of around £2,200bn. That’s in the region of 150pc of GDP, which puts us up there, or down there, with Greece. Oh – and let’s not forget either those massive, unfunded public sector pension liabilities, amounting to another £1,100bn or so, and the hundreds of billions of pounds of PFI debts.
For all the macho “austerity” talk, and the pain being felt by some dependent on state hand-outs, this really is not a historically severe fiscal squeeze. Nigel Lawson, during his 1980s Chancellorship, implemented a consolidation equal to 8.9 percentage points of GDP over 7 years. The coalition is attempting 7.8 percentage points, over 6 – about the same. And, according to the Institute of Fiscal Studies, while around 75pc of the tax rises associated with the coalition’s austerity programme will have been implemented by April 2012, only 12pc of the spending cuts will have been made. No wonder Moody’s and Fitch are twitchy.
Wednesday’s statement will no doubt contain moves to raise personal tax thresholds for the poorest, paid for by partially scrapping the remaining pension tax relief enjoyed by the better off. Osborne may also tinker with the “cliff edge” associated with removing child-benefit from any household with a higher-rate taxpayer, while playing politics with the 50p top rate and the “will he, won’t he” mansion tax.
All well and good. But let us never lose sight of the big picture. For the big picture, as Fitch says, is that the eurozone crisis “isn’t resolved and could once more intensify”, a reality which, over the coming years, could blow the OBR’s relatively rosy UK growth assumptions out of the water. Meanwhile, Britain is suffering from “a still large structural budget deficit and high and rising government debt”.
Our entire fiscal edifice, on top of all that, rests on a gilts market which, over the last two years, has been reliant on debt purchases financed by printed money, the Bank of England sucking up no less than £241bn of the £475bn of gilts sold in 2009-11. Fiscal giveaway anyone? I don’t think so.