SLOWLY but surely, George Osborne’s budget deficit is going down. It is still far too large for comfort, and the rate at which it is improving remains disappointing, but at least the numbers are moving emphatically in the right direction.
The best measure of the shortfall between money in and money out – excluding financial interventions and various other factors – suggests that the deficit has fallen by £5.8bn from a year ago, and the 12-month rolling total calculated by Citigroup is down to £109.2bn. For the whole of the fiscal year, the OBR expected a deficit of £120bn, a number which now looks around £11bn too pessimistic.
There will be more undershoots next year and the year after, with the deficit now likely to be around £24bn lower than previously thought by 2015-16. But before you start jumping up and down with joy, remember this: the national debt is still growing by a shockingly large amount, albeit at a slower rate than previously thought. The state is still leveraging itself. Public debt is going up, not down.
At the end of October 2013, the public sector net debt excluding the temporary effects of financial interventions was £1.207 trillion (75.4 per cent of GDP), up from £1.142 trillion (72.6 per cent of GDP) a year ago. It’s getting worse but not as quickly, which is not that uplifting a thought.
Tax receipts have grown 3.2 per cent over the past year, in part thanks to home buyers shelling out on stamp duty – some of this overall rise in the tax take is artificial and due to high-income workers shifting bonuses from 2012-13 (when the 50p tax rate was in force) to 2013-14 (when it fell to 45p). However, not all of the effects of the recovery have so far been visible in the tax take, which suggests that more revenue growth will kick in with a lag.
The real problem on the revenue side for Osborne is wage growth: at the moment, total pay is creeping up by just 0.7 per cent a year. When and if this eventually returns to more normal levels, the impact on the national finances would be hugely positive.
On the spending side, so far this financial year (from April to October) central government accrued current expenditure has increased by 2.1 per cent, compared with the same period in the previous financial year. Regrettably, austerity is slowing to a crawl: while real spending is still probably falling (depending on the GDP deflator, the measure of inflation for these matters) the reduction appears to have become vanishingly small.
Yet if he has any chance of trying to win the next election, the chancellor needs to unleash a programme of tax cuts targeted at the poor and the middle class. Given the political constraints, a plausible set of pledges could include a further increase to the tax-free personal allowance; a cut to the basic rate of income tax; a reduction and reform of stamp duty; an axe to green taxes to cut the price of energy; and a relaunch of his original vote-winning inheritance tax cut pledge that saw off Gordon Brown.
This is not my ideal set of policies, merely a list that might possibly be acceptable to the current coalition (for those that could happen in 2014 or 2015) or that David Cameron might be willing to sign up to (for the next Tory election manifesto). Given that these tax cuts wouldn’t have much of an impact on incentives, the supply-side effect is likely to be limited. The chancellor would therefore need to cut spending by another one per cent of GDP (on top of current plans) over the next two years.
Osborne’s budget deficit is going down but progress remains slow. Yet a hard-pressed public is in desperate need of tax relief. That means that Osborne needs to cut spending more quickly, and share the proceeds between deficit reduction and tax relief. Whether or not he has the courage to do so will be a key factor determining whether or not the Tories win the next election.