What has public sector austerity meant in the UK?

21st August 2012

Today I intend to take the opportunity of the publication of the latest (July 2012) set of figures for the UK public finances to examine what public-sector austerity has meant in the UK. We see and hear plenty of media hype but what has happened and what has it entailed? Perhaps the best place to start any analysis of this is to return to the election period of the early summer of 2010 where there was political consensus that the UK fiscal deficit needed to be reduced but differences over the planned speed.

What did the economy look like then?

The brand new Office for Budget Responsibility opened its life with a set of forecasts for the UK economy. After struggling in 2010 with only 1.3% economic growth the UK economy would grow by 2.6% in 2011 and 2.8% in 2012 before growing at a similar rate into the future:

"From 2011 onwards, GDP is expected to grow at an above-trend rate as the economy rebalances away from consumption towards investment and net exports."

Apparently such growth could also be managed without any inflation:

"CPI inflation stays above 3 per cent in the near term, before easing and falling back below target in 2011, after the VAT rate change drops out of the annual comparison. CPI inflation then rises, reaching the 2 per cent target by the end of 2012."

So there you have it the opening forecast from the OBR was completely wrong. Fleetwood Mac fans might call it a Mirage but harsher critics might prefer Earth Wind and Fire's Fantasy

What did this mean for the fiscal deficit plans?

The OBR felt that the UK Public-Sector Borrowing Requirement would fall as follows. In 2010/11 it would be 10.5% of GDP and then would fall in subsequent years to 8.3%,6.6%5% and finally 3.9% in 2014-15. Put like that problem solved! The UK measure of national debt would only rise to 74.4% of GDP at the end of the forecast period (care is needed here as we measure this differently to the numbers used in the Euro area which are converted by adding around 20%). Also the OBR uses numbers excluding what they consider to be the temporary effects of the UK's rather permanent looking intervention in its banks.

And in a diversion to my subject of yesterday here is there view on the UK property market:

"Residential property transactions are forecast to return to their trend level in the medium term."

As they were supposed to rise 22.6% last year and 17% this they have some catching up to do! And this does have implications for deficit numbers when we think of stamp duty revenue from house sales.

This was UK austerity but the new government tightened the noose somewhat (£32 billion of extra public spending cuts and an increase in Value Added Tax to 20%). Now our fiscal deficit was expected to go 10.1% of GDP,7.5%,5.5%,3.5%,2.1%. Put like that it does not seem very much of a change does it? However the impact is more clearly shown by the national debt numbers which only rise to 69.4% of GDP and are then forecast to fall.

So we now have a measure of not only the original plan for UK austerity but how the noose was tightened further by the Coalition government.

Where do we stand right now?

From today's release from the Office of National Statistics:

"Public sector net borrowing was £0.6 billion in July 2012; this is £3.4 billion higher net borrowing than in July 2011, when net borrowing was -£2.8 billion (a repayment)."

This is troubling as the numbers above have falls every year so the plans do not involve month on month rises. However monthly figures can be erratic so let us look at the fiscal year so far (from April 2012):

"The figures excluding the Royal Mail pension transfer show that, for the year to date, public sector net borrowing has risen by 26.2 per cent, which compares to a forecasted 4.1 per cent decline for the full year."

So not very good and this translates in to £44.9 billion versus £35.6 billion. Oh and it was rather convenient taking the Royal Mail pension transfer at the beginning of a financial year was it not? That is before we wonder how a net future liability (of around £10 billion) can improve our national debt by £28 billion!

Okay what is the crucial number?

The number one measure of austerity has to be public sector spending and the bit most under central government control is by far the largest section. How is it going?:

"For the period April to July 2012, central government accrued current expenditure was £212.5 billion, which was £7.3 billion, or 3.5 per cent, higher than in the same period of the previous year."

So we have a problem here as not only is it rising but it is rising faster than inflation where the official measure is 2.6%. This situation is certainly not improved by the numbers for July as you can see below:

"In July 2012, central government accrued current expenditure was £50.2 billion, which was £2.4 billion, or 5.1 per cent, higher than July 2011"

And real growth in spending does not fit with austerity at all, particularly not real growth which appears to be accelerating. Supporters of the austerity plan might well be joining in with Elvis Presley in singing this:

"A little less conversation, a little more action please

All this aggravation ain't satisfactioning me

A little more bite and a little less bark"

The secondary number for austerity

This is an increase in revenue or tax receipts. Here the picture does fit a little more with the plan as we have seen tax increases and they are raising more revenue albeit perhaps not as much as hoped/expected:

"For the period April to July 2012, central government accrued current receipts were £173.9 billion, which was £1.9 billion, or 1.1 per cent, higher than in the same period of the previous year"

So actually as we stand in this fiscal year the secondary austerity method is taking all of the strain.

Continue reading…


More on Mindful Money:

The growth delusion

The Financialist: Could ‘Brand NHS' rescue the UK economy?

Should we welcome or fear falling UK house prices?

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