Viewpoint: Public finances

Professor Gary Cook, from the University’s Management School, said: “Figures released on Weds 20 February showed the Government ran a surplus of £11.4bn in January, leading to claims by Treasury Minister Sajid Javid that the Government’s plans to balance the books and tackle the national debt are on track.

“This comes after several months in which the Government has had to respond to borrowing being higher than planned and in some months higher than a year earlier. Can the government really be so confident that its targets for the public finances will be met?

The answer is only a strongly qualified yes. The surplus for January 2013 is £5bn more than last year, however £3.8 of that £5bn has come from a transfer of interest receipts on government debt from the Bank of England to the Treasury.

“This transfer formed no part of the original tax and spending plans to government set out to tackle the budget deficit and the national debt and it is open to serious question whether it is legitimate to include them in the surplus.

“January is traditionally a surplus month, as it coincides with substantial payment made in the run up to the deadline for self-assessment tax, on the 31 January, and is also a month in which some significant corporation tax is paid, for example on profits earned in the North Sea.

“Taken over the 2012/13 tax year as a whole, taxation receipts look set to be £17bn below what the government expected. Only part of this can be accounted for by economic growth being slower than forecast, meaning a smaller national income to tax.

“Even taking slow growth into account, tax receipts have been unusually low. Here lies an important issue. If the weakness of tax receipts is just a temporary blip, then the government is still on course to meet its main target of bringing the annual budget into balance or surplus by 2017/18.

“If the weakness in tax receipts is due to a permanent change, the government will need to apply more austerity, through tax rises and spending cuts, to the tune of about an extra £25bn by 2017/18 to hit this target. Should it? There is a growing sentiment that governments in Europe generally have gone too far too fast in trying to balance the books, causing economic stagnation. Arguably at a time when it is very cheap for the Government to borrow, it makes sense to start up new capital investment projects, which stimulate the economy now and build capacity for the future. This makes further sense as the axe fell particularly heavily on capital investment when the Government laid its plans to curb public expenditure.

“Some fear, as the Chancellor has argued, that loosening the purse strings when plans to curb the deficit are foundering risks the UK losing its AAA international credit rating. Yet there seems to be little hard evidence the markets are unwilling to hold UK debt. What is more obvious is the fragility of the economy and the fact the economy is still smaller than before the financial crisis.

“One thing looks certain, the government will miss its target to see the national debt, the sum of all debt run up over the years, as a proportion of national income fall between the 2014/15 and 2015/16 fiscal years. Does that matter? Maybe, from a political point of view. Not really, from an economic perspective, as the national debt is still far short of danger levels and it is clear the public finances are being brought under control.

“Does this mean that austerity will end soon? No. With a demographic time bomb ticking, due to rising health and welfare costs of an ageing population, the case for strong control of the public finances will remain. On a brighter note, barring a knee-jerk tightening of the fiscal belt economic growth will pick up over the course of 2013 and beyond.”

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