While the coalition is pointing to not needing to borrow in July, the City now expects the coalition to borrow £10 billion more than the OBR prediction.
While the coalition is pointing to not needing to borrow in July, the City now expects the coalition to borrow £10 billion more than the OBR prediction, blasting through Alistair Darling’s budget for 2011/12 by at least £5bn.
History suggests governments that fail to hold to their budget-cutting in the first year abandon it totally within a short time. With early signs that borrowing is slipping, one has to wonder when that will happen in the UK.
It would be a tragedy if the coalition government’s policies undermined our country’s long-term global economic credibility.
To repeat the numbers, the OBR prediction for Darling’s budget plans was for Total Managed Expenditure in 2011/12 to be £708.9bn and receipts of £581.5bn, generating a borrowing figure of £127.8bn.
The latest OBR prediction for the March Budget was TME £710.4bn and receipts of £588.6bn, a borrowing figure of £121.8bn that was already a rise from the June emergency budget of £116bn due to a downgrading of growth.
On Left Foot Forward last month, I highlighted the risks on the budget deficit of low growth. It now looks like the poor growth we have had for the past nine months has fed into City expectations. These new expectations should raise concerns about the government’s strategy.
The coalition strategy of reducing borrowing by “crowding in private investment” relies on two things – solid business expectations and swift-falling government borrowing – both of which are now at risk. Nine months of zero growth have undermined expectations, but even worse for George Osborne and the government, the City now expects borrowing of at least £15bn more than they announced in the June 2010 emergency budget.
This is crowding out, not crowding in – equivalent to 6% of economy-wide investment. Already we can see, evidenced by the Q1 2011 figures, business investment is already falling by 3.2%. The City’s higher predictions for borrowing have been prompted by the problem signs in the OBR’s report (pdf) on July borrowing. July being in the black is not the light at the end of the tunnel.
The OBR said in its report on the July borrowing figures:
“…borrowing this July was lower than in 2009 and 2010, but in each of the preceding twelve years the public sector repaid debt in July rather than borrowing.”
As taxes have gone up, and spending cut, you would hope that one of the best months for the Treasury would look better. But the OBR sounds a much more cautious note than the Treasury on the 2011/12 outcome.
The speed of decline in borrowing is:
“… a smaller proportionate decline than the £20.9 billion fall in PSNB over the year as a whole that we forecast in the March EFO.”
The important number is the growth in receipts of the ex-bank payroll tax /ex-bank levy:
“Bank levy receipts have only started to score in the National Accounts from this month. If the bank payroll tax and bank levy were excluded, receipts growth for the first four months of 2010-11 would be 6.1 per cent.”
That is versus a prediction of receipts growing at 7.2%. There are timing effects on both the spending and receipt side which will iron themselves out – expenditure was lower (1.9% growth versus 3.6% expected) – and they hope that self assessments were paid late, and will accrue in August.
But at 6.1% growth in receipts, we have a borrowing of £127bn, the same level of Darling’s borrowing this year. Labour is right to be asking “all this pain for what gain?”. The deeper question is what happens over the course of the parliament. At this early stage, the OBR is reluctant to attribute long term risks to the current “weak corporation tax and income tax receipts”.
For the moment, PAYE receipts have held up – unemployment has not grown much – and the OBR is hoping the self assessment payments are late.
The larger problem is in corporation tax:
“Corporation tax receipts in July were up just 1 per cent on a year ago, compared with our March Economic and fiscal outlook (EFO) forecast of a 14.5 per cent increase for the year as a whole.”
“Receipts from financial sector firms were down on a year earlier.
“This is consistent with the recent results announcements for the first half of 2011, in which profits were hit by weaker investment banking activity, write-downs on euro area sovereign debt and provisions for the mis-selling of payment protection insurance.”
Some of those look like longer term problems than they suggest:
“Some of the sector specific weakness (such as the payment protection insurance provisions and some of the fall in oil and gas production) could be one-off or temporary factors affecting 2011 profits only.”
That’s fine, but if we’re relying on a strong banking sector, then we need a strong asset base, which means we need a strong economy. The problem is that for the remainder of the parliament, the OBR predicts government cuts and tax rises will be a larger drag on growth than in 2011: -0.2% for 2011; -0.5% for 2012 through 2014.
It’s hard to see how receipts will hold up when the government is neither crowding in investment nor supporting growth itself. But it is this long-term picture that should really worry. A slippage of £15bn this year, together with the associated crowding out of investment, could begin to undermine the international opinion of UK plc.
In August, Standard & Poor’s said the maintenance of the UK’s top ratings required a “fiscal stabilisation programme”; Moody’s, however has been more worried about growth, and said in June that in “a situation of lower growth combined with weaker than expected fiscal consolidation we would reconsider our stance”.
The current direction of borrowing and growth suggest we should be worried.
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