There is a big danger in today’s government borrowing figures for September being a little less bad than was expected by many observers. It will lead to claims that the Chancellor has enjoyed a ‘windfall’ prior to next week’s Budget, therefore lessening the need for spending cuts.
No, there is no windfall. Until recent years, the idea that the government would have to borrow £16.6 billion in a single month would have been received with horror. True, September is not generally a great month for government finances, and the level of borrowing in the year to September – at £79.6 billion – is only around half the size of the deficit Gordon Brown bequeathed the country with when he left office in 2010. But on that occasion Britain had just been through a very deep recession, when borrowing was bound to spike. What we have now is vast routine deficits even when the economy is growing.
Until recent years, the idea that the government would have to borrow £16.6 billion in a single month would have been received with horror
Moreover, Gordon Brown’s deficit was considered to be a crisis at the time, with David Cameron and George Osborne making the restoration of the public finances one of their main election offerings. There seems a lot less impetus now to get the public finances back into balance. Rachel Reeves’s ambition now is not to balance spending and revenue over the course of the economic cycle – as Brown promised – but simply to reduce debt as a proportion of GDP by the end of this parliament. Like Brown went on to do, she is already resorting to the trick of trying to change the rules about what is and what is not counted as debt, to give herself more room for borrowing.
While she has already made one public spending cut by withdrawing winter fuel payment for most pensioners, the sharp pay rises given to public sector workers – without any requirement to improve productivity – have made reducing the deficit a far harder task. Not only do those pay rises impact on current spending, they also increase the long-term burden of public sector pensions – given that many of these schemes are linked to salaries, either final salaries or a lifetime average. Borrowing in September may have come in a little lower than was expected, but it was still £1.2 billion higher than last September.
When governments have been running 22 years of continuous deficits it really begins to show. How useful the government would have found an extra £5.6 billion of spending money in September – which was the sum it had to shell out in interest to service accumulated debt. While interest rates were at a 300 year low it was possible to argue that public debt didn’t matter very much, that what was far more important was to stimulate the economy in order to promote growth. Yet what have 22 years of deficits done for the economy? Growth has slowed down to a snail’s pace since then. In terms of GDP per capita – which is what matters – the economy has yet to recover to the level it was in 2019.
To promote growth we will need to shunt resources from the part of the economy where productivity is static or falling – the public sector – to the part where it has been growing (albeit not as fast as in the past), the private sector. But Reeves’s Budget, like so many in recent years, promises to do the opposite. There will be multiple tax raids on businesses and individuals. Promised public spending cuts, if they appear at all, will be no match for the extra money which is being thrown at public sector workers. Whatever cuts Reeves might like to impose, the Labour party has made it politically impossible for her by constantly attacking the Conservatives for ‘austerity’ every time they cut so much as a halfpenny from a budget over the past 14 years.
There will come a time when the need for government austerity will become impossible to deny. But that isn’t going to be next week.
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