If monthly flat-lining does not end, the official statistics will see year-on-year earnings growth fall to zero by around March or April next year
This week’s figures from the ONS give the latest borrowing statistics for 2015/16. Total borrowing for the current financial year so far (April to November 2015) now stands at almost £67 billion, down from £73 billion over the same period in 2014 but only 6.6 billion shy of the government’s borrowing target for the whole of 2015/16.
Since 2005, the government has on average normally borrowed around three quarters of its eventual annual deficit by November. If this trend were to continue for 2015/16, Osborne’s deficit would eventually come in at just under £89 billion pounds, over £15 billion more than was forecast in the Autumn State just one month ago, and just £0.2 billion less than in 2014/15. Most commentators agree he won’t miss by quite that much, but few think he will actually meet his target.
Why is the government struggling to meet its deficit targets, despite continued (albeit slowing) growth in the economy and very tentative signs that meaningful productivity growth may eventually be returning? Part of the answer may lie in average weekly earnings.
Official earnings statistics are reported as a change on the year, and so far continue to show growth at around the 2 per cent mark. But looking beneath this headline, month-on-month earnings figures have barely risen now for over half a year.
Due to the volatility in monthly earnings data, it is too early to conclude that this is any more than temporary pause in the relatively strong wage growth we saw throughout the period between mid-2014 and mid-2015. But if this apparent monthly flat-lining does not end, the official statistics will eventually see year-on-year earnings growth fall to zero by around March or April next year.
Even the scant recent data was enough to alert last month’s meeting of the Bank of England’s monetary policy committee to the possibility that low inflation expectations may be feeding through into new pay settlements, subduing average salary increases for the longer term.
January and February are normally good months for the tax man because they coincide with income tax receipts from the self-employed. But if the government is to avoid falling considerably short of its own borrowing targets, it will likely need a larger windfall during the first two months of next year than in any of the six years since it came to office.
That’s not impossible, given the steady rise in self-employment since the Conservatives took power. However, the absence of month-to-month earnings growth is not a good indicator of a self-assessment bonanza in the New Year, as it suggests a poor price for labour right now in the economy.
The truth is, however, that the government has consistently missed its borrowing targets ever since it came to office, and the reasons run much deeper than the recent apparent slow down in monthly earnings growth.
Even if you do make tackling the deficit your key economic target (which most economists agree is unwise), it is not enough to simply cut spending and raise taxes. Such decisions are no more important for successful deficit reduction than the health of the underlying economy. And whether it be slow investment or rising household debt, regional imbalance or an international trade deficit, the structural issues in the UK economy remain substantial and unaddressed.
The government’s preoccupation with reduced public borrowing has certainly detracted from efforts to achieve a more balanced economy. But if Osborne misses his deficit targets for the sixth year running, it will have been shown, yet again, that this pre-occupation is a false economy on its own terms too.
Alfie Stirling is a research fellow at IPPR
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