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Osborne inherited a falling deficit – and proceeded to increase it

The Osborne computer - in need of an upgradeThe 1981 Osborne computer – in need of an upgrade.

The latest official data for public borrowing show a sharp monthly rise to £9.9bn – a record for April. They also show that the government’s cuts policy has failed to work even for its stated objective: reducing the deficit.

Public borrowing totals are affected by the time of year because of the timing of tax payments such as corporate taxes and VAT. On the expenditure side there is also a tendency for spending to increase towards the end of the financial year in March. The best of way of looking past these seasonal fluctuations is to take the 12-month data as a whole.

The latest 12-month data to April show a public sector borrowing total of £142.1bn, up from £139.4bn in March. This March total was an improvement on the previous month of £141.2bn and the deficit has been falling on a trend basis since March of last year, when it peaked at £156.5bn.

For a government and an economic debate which is apparently intensely focused on deficit reduction this trend decline in borrowing has gone largely unremarked. You would think that anyone with a genuine interest in reducing the deficit would closely study what has been happening and try to reinforce and build on it.

But the trend towards lower deficits has largely been ignored because they have nothing to do with government ‘austerity’ measures. The improvement in the deficit began in April 2010. The election didn’t take place until a month later and the Comprehensive Spending Review didn’t take place until October.  During that time government spending was largely untouched.

The reason the deficit fell throughout that period was growth. The year-long business recovery – which came to a juddering halt in the latest six months – saw a rise in taxation receipts as the economy expanded moderately. In the financial year just ended, tax receipts were £35bn higher than in the previous year. The increased tax on bank bonuses contributed £3.5bn – but the main reason was growth.

Taking a snapshot of these awful April data, central government borrowing is £2.6bn higher than last April’s total of £10.5bn. Cheerleaders for austerity like Spectator editor Fraser Nelson argue that this is because Osborne hasn’t made any cuts. In fact the opposite conclusion is true: what we are seeing now is just the effect of initial cuts, plus falling confidence. Things are about to get worse and those arguing for even deeper cuts would make them worse still.

£1bn of the rise in spending is on interest payments. The spending on the services that matter to people has risen by £1.6bn compared to April 2010 – a rise of just 3.1% compared to an inflation rate of 5%. That is, even before the major cuts begin this year spending on services is already falling in real terms. The government and its supporters seem unaware that economic growth impacts government finances. So, if the pay of public sector workers is cut don’t be surprised when the number of people eligible for in-work benefits increases – and pushes up total welfare spending even while entitlements are being cut.

Government finances should still be benefitting from the recovery earlier last year, with incomes and corporate tax revenues increasing. Yet as well as driving down growth, the government took the fateful decision not to renew the bank payroll tax of the previous government, which netted £3.5bn in the previous year.

So, having inherited a falling deficit the government’s measures have actually started to throw it into reverse – and the sole beneficiaries are bankers. So much for deficit reduction.

Michael Burke is an economist and blogs at Socialist Economic Bulletin.

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