UK public finances still in sorry state

Allister Heath
SLOWLY but surely, the government is regaining control over public spending. Yet there is still a long way to go: the deficit, believe it or not, has actually been higher so far this financial year than it was during the same two-month period of 2010.

This deeply depressing fact shows just how detached from reality much of the political and media debate has become, where it is widely assumed that massive cuts have already taken place. But while it is true that spending increases are gradually becoming less pronounced, austerity still remains more of a goal than the actual reality in Britain today.

Central government current spending in April-May, the first two months of the new financial year, was 4.1 per cent higher in cash terms than during the same months of 2010. The official inflation rate used for the public sector is just 2.9 per cent (it is lower than the usual consumer or retail price indices) so spending still grew in real terms by over one per cent. So much for the “massive, reckless cuts” that are supposed to have taken place.

But there were also signs that spending is finally being tightened in other areas: public sector net investment during April and May 2011 was five per cent lower in cash terms than in the same two months of 2010. Current spending grew by just 2.3 per cent in May, though monthly figures are even less meaningful that the two-monthly ones. So progress is being made at trying to ensure that Britain starts living within its means once again, albeit too slowly.

Depressingly, public sector net borrowing (excluding financial interventions) was £27.4bn so far during 2011-12, up substantially from £25.9bn in the same period last year. Two months don’t make much of trend, of course, and borrowing in May alone was down £1.1bn on the previous year. It would be interesting, however, to know what Ed Balls, the shadow chancellor, would be doing differently – would he be increasing the national debt that we will be bequeathing our children and grand-children at an even faster rate?

The reason why the deficit increased was that spending rose faster than tax revenues. Receipts in April and May were just three per cent higher in cash terms than in the same months of 2010. If this were a fair reflection of the situation, Britain would truly be in crisis. Fortunately for George Osborne, April 2010 figures were flattered by £3.5bn worth of receipts from the temporary Bank Payroll Tax. Excluding these suggests that underlying receipts grew by 7.8 per cent in April and May 2011 compared to the same two months a year ago, a much healthier trend.

Yet the overall picture remains grim. Even on the official measure, which excludes off-balance sheet items, public sector net debt was £920.9bn (60.6 per cent of GDP) at the end of May 2011. This compares to £778.9bn (53.8 per cent of GDP) as at the end of May 2010. Again, this demolishes the sloppy claim that is still so often heard that the coalition is “paying down the national debt”. It isn’t.

So far this year, spending is still rising, the deficit is increasing and the national debt is soaring. The good news is that this miserable situation will probably start to improve over the next few months. But until we actually see better numbers, it will remain too early to declare Britain back on the path to fiscal sanity.
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