The Coalition came together to eliminate the structural deficit over the lifetime of this Parliament. The government tells us they have cut the deficit by one quarter so far, and intend to go further.
Mr Clegg now says he does not think it was right to cut capital spending so much at the beginning. This is a criticism of Labour as much as of the Coalition, as all the Coalition did was inherit Labour’s plans for large cuts in capital spending, reducing the cuts just a little. They reduced them further in subsequent budgets. I think Labour were right about this. In a previous blog I have described how cutting out “growth” spending on new capital facilities is one of the best and easiest ways of stopping public spending growth overall, as new capital items often lead to continued extra current spending in future years.
There is no particular magic about capital spending as opposed to current spending. It is all spending, and needs borrowing to pay for it. Capital spending does not have unique properties which bring the deficit down or create more economic growth whilst current spending increases the deficit and cuts growth. The only exception is capital spending on better technology and automation which replaces state employees and makes it cheaper to deliver a given service.
A few billion more capital spending in 2010-11 or 2011-12 would not have transformed the growth rate of the Uk economy. The Coalition did raise current public spending by 5.3% in its first year in cash terms, and overall spending by 3.7%. The Coalition has increased public spending in real terms since coming to office. The poor performance on growth compared to forecasts comes from declines in private sector output, especially in financial services, construction and banking , and in oil and gas. It does not come from reductions in the public sector.
This week’s figures do not make good reading. Between April and December 2012 the state borrowed an extra £106.5 billion, £7.2 billion more than the same period in 2011. There were two main reasons for the high borrowings. The first is a shortfall in tax receipts from Income and wealth taxes and company tax. The second is the large increase in public spending.
Taxes on income and wealth were £194 billion for the whole of 2012 compared to £199.7 billion for 2011. As I have reported before, income tax on high earners has fallen sharply this decade with the higher 50% tax rate in place. Corporation Tax has also been weak.
Spending in December 2012 was 5.4% higher than spending in December 2011. According to CEBR, the economics consultancy, real public spending rose by 2.8% in 2012 compared to 2011.
I have long argued that the government’s strategy for cutting the deficit relied entirely on higher tax revenues, with real increases in public spending in the first three years. The latest figures reinforces this view of the government’s strategy. Their problem is the high rates of tax allied to the poor rate of private sector growth are not delivering the extra tax revenues they forecast, so the borrowing is continuing at higher levels than planned. They need to get a stronger grip on the increases in spending, especially at a time of good progress in the private sector generating many more jobs.
I have also been asked to comment on Mr Cameron’s debt remarks. I assume he just made a mistake. I can assure my readers that he does know the difference between debt and deficit, and does know the debt is still rising.