2008-2009 and 2009-2010 UK budgets at a Glance - courtesy of Daily Mail. Budget Day has been announced for 24th March, only weeks before a general election, scarcely time enough to pass The Finance Bill, thus government finance will be at the heart of the white heat of electoral debate - about whether spending cuts are required now or later and whether frontline services will need to be cut or not. Labour says cut later when the economy can afford it. Conservatives say cut sooner but not frontline services, and not the NHS, and won't confirm if tax rate rises are in their plan - though the chosen head of the Conservative proposed Office for Budget Responsibility (OBR - inspired by the US Congressional Budget Office), Sir Alan Budd and other HMT ex-mandarins interviewed by the BBC say frontline services will inevitably have to be cut, and some tax rates will rise - to rebalance the budget i.e. reduce the borrowing requirement.
Labour has a planned schedule for reducing government borrowing and already has in train £15bn in efficiency gain cuts and more than same again in expected annual asset sales i.e. somewhere in public sector there are always some cuts happening and 'other' income sources operating. Should election politics seek to make a big issue out of government budget deficits and public spending cuts?If government spending and borrowing are not responsible for the global credit crunch crisis and recession, and not solely to be blamed for the budget deficit rising should they bear substantial cuts, or should we rely on the economy's recovery to restore balance to the government's budget?
Government services are part of the total economy, part of the real economy; not outside it. Will it help the total economy's recovery if the public sector part, currently a substantial economic buffer in the crisis, that it should now be cut back too? Public spending is akin to an automatic stabiliser. Rising unemployment caused a 12% rise (£23bn) in social security and other related spending. With a 15% rise (£5bn) in defense spending, these two necessary items are half of the total government spending increase this year. Fall in employment and slightly larger rise in registered unemployment explain much of the loss of employment tax income and the higher social security spending. Total government public spending rose 9% this year, but that explains only 40% of the rise in government borrowing; the rest, £75bn is caused by inevitably falling tax revenues: £56bn less tax from business and employment and £20bn less from VAT. Tax from business fell 32% (£17bn) and from employment fell 10% (326bn). This is no more than expected in a recession when the economy lost over 9% of output (unadjusted for inflation). Public spending has been very stable in the economy; an important source of stability. It should not be a business enterprise budget that can be expanded or cut in line with the general economy. Its role is to be a counterweight to economic cycles.see also: http://www.wheredoesmymoneygo.org/prototype/
Year to date government borrowing may be roughly 11% ratio to GDP and slightly higher is expected in 2010-11, but that is the amount required to provide for recovery, and proportionate to how governments of either party responded to past recessions relative to depth of recession.Adjusting budget setting for the direction of the economy is to some extent like a sat nav operation. It is the economy that dictates the deficit far more than government choosing it. Chancellor Alistair Darling in his December 2008 Pre-Budget Report forecast the UK economy would shrink 3.5% in 2009, before expanding by 1.25% in 2010 and by 3.5% in 2011. Commentators and analysts at the time described the figures as overly optimistic. In April 2009, Darling said the UK was facing the deepest recession since WW2. He was again rounded on for his forecasting. But, the 2009 forecast has since proved to be quite accurate. When positive growth returned in the fourth quarter of 2009, output was 3.3% down on a year earlier, up 1% in cash terms and GDP for the year is 3.58% down at current prices. But 5-7% real growth was lost over the recession and 8-10% in cash-flow terms. The UK had experienced a long period of 15 years of positive growth and high private sector borrowing and asset bubbles therefore it was not surprising that recession was particularly deep. If the economy grows positively in 2010-2011, there could be a £100bn recovery in government revenues without tax rate rises. One quarter to one third of that recovery will be from tax exerted on the government's own additional borrowing and spending plus £30bn from business taxes and asset sales. The remainder could come from the indirect effects of the £200bn quantitative easing.
What risks this amount of budget balancing is continuing negative net lending by the banks to business as well as mortgages and consumer loans. 90% of all foreign trade requires trade finance and a similarly large % (uncalculated) in domestic trade. banks are not currently helping economic recovery - leavingthe matter entirely to the government sector. Only when bank lending rises can we envisage cutting back in the government budget deficit. Banks claim in there defence that they are not dictating lending levels - that these are subject to borrower demand. This is not entirely true - not least if it was true bankers should not get bonuses for gowing their loan books. Banks have tightened credit conditions. UK banks have also not filled the gap in lending to UK borrowers by foreign banks. Since the above graphic, bank lending to businesses has become negative - no umbrellas in the rain, at least not generally. Deposits have grown but banks are still striving to close their funding gaps before resuming lending growth. Hence, UK businesses are deprived of liquidity and this is reflected in sluggish trade and business investment.
The pattern of world trade is changing and UK needs to reduce its external trade deficit, for which it is hoped the lower trade-weighted exchange rate helps. But, the effects of that have not yet fed through.
As with much else in the UK economy, the same story may be told of the problems of securing recovery in the USA economy.A high budget deficit is necessary to cope with lower tax revenues, kick-starting the economy, and doing so in the face of falling lending to US businesses, plus need to narrow current account, reduce the trade deficit. Without trade deficit reductions, then the economy's growth path returns to another credit-boom model and that is only sustainable by banks yet again financing the deficit through selling large tranches of securitised loanbooks!If more is not done to secure business and exports through higher bank lending to business and less proportionately to property and mortgages, then the high private sector debt levels that fuelled credit-boom growth will be returned to and prove to be longerlasting as a general burden than government debt. And, in the case of the USA, the sensible reduction in government borrowing is contradicted by the Congressional Budget office for the years after 2011, for reasons implicit in the design of CBO model projections that I judge to be political-ideological. I wonder if the UK Conservatives idea of an Office for Budget Responsibility will be similarly minded. George Osborne told the BBC that the OBR will depoliticise budget setting decisions i.e. as Chancellor he will rely on OBR predictions over his own - and presumably over that of HM Treasury? OBR echoes of course Labour's George Brown and his Ministry of Economics in the 1960s that eventually The Treasury snuffed out. Would a Conservative Chancellor think to ask the Bank of England for macroeconomic reasons to strongly advise the banks to restructure their lending portfolios? It was the bias towards mortgages that denuded lending to non-finance non-property businesses, especially manufacturing.