Britain’s long journey back to sanity

 
Allister Heath
HERE is a little test for you, dear reader. How much do you think public spending has been cut over the past year? Five per cent? 10 per cent? Maybe 20 per cent? I’m afraid you will be disappointed. Total spending is up by well over four per cent in cash terms and by more than the public sector’s special inflation measure, according to the latest data for April 2011 released yesterday by the Office for National Statistics.

In fact, current spending was the highest it has ever been last month and up five per cent. Spending on interest shot up 26.6 per cent; but most other kinds of expenditure also rose. In April alone, the UK government borrowed £10bn, the most ever for that particular month, equivalent to £333m every single day. The exchequer was caught by a double whammy: total receipts fell slightly, primarily because £3.5bn was raised a year ago in a special one-off bank tax, while spending went up in all categories except capex, which fell by £200m.

Eventually, debt must be repaid: the bill will fall on us taxpayers as well as on our children – unless the government tries to inflate its liabilities away, which will only work for non-indexed gilts and which will end up costing all of us dear through higher interest rates. Public sector net debt (excluding financial interventions) was £910.1bn (equivalent to 60.1 per cent of GDP) at the end of April 2011. This compares to £765.5bn (53.0 per cent of GDP) as at the end of April 2010. So next time you hear somebody claiming that the coalition is “cutting the UK’s debt”, don’t forget to laugh out loud. It is merely reducing the rate at which more debt is being accumulated.

There was some good news in the figures for George Osborne, the chancellor. Public sector net borrowing (excluding financial interventions) was revised down to £139.4bn in 2010/11, down from £156.5bn last year. The Office for Budget Responsibility’s March Economic and Fiscal Outlook had forecast net borrowing of £145.9bn, so the chancellor has done better than expected. The trend is down, something which the markets are focusing on.

But next time you are told that Osborne is imposing savage, reckless cuts on the UK, remember that the figures tell a different story. So far, spending is still going up. The plan is for total spending to go up in cash terms overall this financial year and to fall by 0.6 per cent in real terms (the measure that really matters). This will hurt, especially given that debt interest payments are soaring, reducing the funds available for public services by a lot more than the 0.6 per cent overall cut. But this should also be put into context. Barack Obama, who was in London yesterday, wants to cut public spending by 3.8 per cent next year, more than the 3.7 per cent pencilled in over four years by Osborne. In other words, Obama’s cuts – which many in the US want to make even larger – are four times larger than the average annual cuts proposed by slowcoach Osborne.

So it is no wonder really that the UK’s credit rating was downgraded yesterday by (wait for it) Chinese rating agency Dagong, which cut the UK by one notch to A+, from AA-, and placed it on a negative outlook. You may snigger – but unless the UK is able to deliver on its fiscal austerity not just this year but for the next four, our creditors will soon start panicking again, with good reason.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath