August’s borrowing figures were a little better than expected, but the seriousness of the UK’s public finances remains plain to see. Stripping out one-off factors shows that, so far in 2012-13, the deficit is running at £2.6bn per month higher than last year, leaving George Osborne struggling to achieve his aim of bringing down debt as a percentage of GDP by 2015-16. These trends are not a failure of the government to carry out cuts in spending, but because the sluggishness of the economy has impacted on tax receipts. Both income and corporation tax inflows are running at levels below a year ago. At times like this, fiscal policy treads a fine line. It is imperative that government borrowing does come down. But, in times of stagnation, additional austerity can be counterproductive, squeezing demand further and forcing the deficit higher.
Philip Shaw is at chief economist at Investec.
If you are deep in debt, the first thing a debt counsellor will make you do is cut up your credit cards. If you keep adding to your debt, there comes a time when your creditors demand immediate repayment and nobody will give you any credit to tide you over. It is no different with governments. Right now, people are willing to lend to the UK government because they have nowhere else to put their money that looks even remotely secure. If the UK starts to look shaky, that money will simply fly elsewhere, and we will be really stuck. The government must balance its books. It should not do this by raising taxes, which are cripplingly high already, but by cutting its expenditure, which has hardly changed since the crisis. To survive, government has to live within its means – like the rest of us. The coalition must show its committment to eliminating the deficit and then getting Britain out of debt.
Eamonn Butler is director of the Adam Smith Institute.