Most of the debate about the UK deficit reduction programme is about whether the government is doing too much too quickly. There is another side that rarely gets examined – is it doing enough and is the programme going well?
Before critics get to work claiming falsely I want to see cuts in schools and hospitals, let me confirm I do not. There are, however, other areas and budgets, starting with the state owned banks and going through the large EU expenditures, moving on to the pace of sorting out the administrative overhead where there is some scope to cut the deficit more quickly.
Let us today look at the strategy so far. The government in June 2010 said it planned to borrow an extra £451 billion over the five years to 2015. This entailed substantial reductions in the rate of increase in the state debt, from the very high levels reached in 2009-10. The aim is to get rid of the structural deficit by 2015, leaving a relatively small running deficit in that year.
Eight months later, in the March 2011 budget, the government decided it could afford to borrow £485 billion over the five years. It decided to increase spending over the period compared to July 2010 plans, and had to allow for a small revenue loss owing to a downgrade of the growth forecast for 2011. The amount the state plans to borrow in five years is more than the total UK state debt in 2004. The growth forecast was lowered from 2.3% to 1.7% for 2011, and from 2.8% to 2.5% for 2012.
As controlling the debt and deficit is crucial to our economic future, something all commentators and political parties agree, we need to ask how robust is the current plan? Is the March 2011 budget the last when we should expect an overrun or increase in the planned borrowing, or could the same happen in any future budget?
Let us take the growth forecasts first of all. The plan assumes growth will accelerate to a lively 2.9% in 2013, a further 2.9% in 2014 and 2.8% in 2015. This could happen. If the banks by then are mended and capable of lending more money on mortgage and to businesses, that would help. If the world economy is growing well, that will provide a good background. The government’s welfare reforms should be kicking in with their contribution.
If, however, the world economy faltered, or if the banks were still unable to finance a robust recovery, there could be a disappointment. Every 1% of growth less means a revenue loss of around £6 billion each year. If 2013 saw 1.9% growth instead of 2.9% growth, for example, the government would need to borrow an extra £18 billion over the period to reflect the three years of lower revenue from the lost growth. There would also be some consequential increases in public spending, as there would be fewer jobs.
We need also to ask if the public spending figures will be delivered as currently planned. Normally as a government gets closer to an election it wants to increase public spending. Lobbyists intensify their efforts to persuade politicians to give them more money for their causes in a more fevered atmosphere. We have seen the government giving some ground on spending related issues already when it faces criticism. It seems likely that the government will increase spending somewhat compared to plan as we get nearer to 2015. Some of the cuts pencilled in for 2013 may not materialise.
I think it unlikely the final outturn for total government borrowing over the five years will be as low as the forecast £485 billion. Looking at the figures I think other actions need to be taken to allow for some increases in spending on core programmes, and to allow for any disappointment in the global growth rate which could adversely affect UK growth. The government is right to warn that it must cut the deficit to keep the confidence of the markets and keep interest rates low by Greek or Irish standards. That is why delivering the strategy is important, and why we need to ensure something like the forecast numbers is delivered.