Monday 5 January 2015 5:33 am

Have the Conservatives really halved the deficit?

There has been a lot of fuss around the Conservatives’ new campaign poster, in which the party claims to have, among other things, halved the deficit.

Fraser Nelson, the editor of The Spectator, was quick to point out that the claim only holds if a specific measure is used – deficit as a percentage of GDP – rather than the raw figure. The Conservatives, Nelson says, didn’t specify which measure they were using, which is disingenuous.

The budget deficit is basically the amount the government has to borrow to meet spending requirements, or receipts minus expenditure. 

This graph shows the debate quite clearly. The red line shows debt and GDP as real, full-blooded numbers. A fall from £153bn in 2009/10 to £91.3bn in the Office for Budget Responsibility’s (OBR) forecasts for 2014 is not a halving.

However, it isn’t that simple: it makes more sense to view debt as a percentage of GDP. After all, if you owe £1,000 and you’re earning £25,000 you’re going to feel the pinch far more than if you owe £2,000 but earn £100,000. The blue line shows that by this measure the deficit has been cut from 10.2 per cent to five per cent. 

It should be pointed out that the Conservatives pledged to eliminate the structural deficit, a long term imbalance between income and expenditure, by the end of the parliament.

The horizontal lines show the "budget halved" thresholds. When solid lines turn dotted, they are forecasts. The dotted grey lines show predictions for the next parliament. 

Of course if income isn't rising fast enough, that's another problem.  

Despite stronger GDP growth recently, the deficit isn't falling as much as the government would have liked. It is expected to drop to £91.3bn this year, about half what the OBR initially predicted. As the chart below shows, the deficit soared under Labour as the government sought to stimulate the economy.

Years are financial year ending, so 2009/10 is a Labour year.

The main reason the deficit isn’t falling is a lack of tax receipts, as the OBR said:

Wage and productivity growth have once again disappointed [in 2014], while national income and spending have outperformed most in those areas that yield least tax revenue.

For these and other reasons, [there was] a sharp fall in the amount of tax raised for every pound of measured economic activity [in 2014]. As a result, despite strong economic growth, the budget deficit is expected to fall by… around half the decline we expected in March.