THE UK’S BUDGET DEFICIT IS RISING NOT FALLING

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Re-posted from  Socialist Economic Bulletin  

By Michael Burke

The latest public sector borrowing data shows that the UK budget deficit* is widening once more. Indeed despite a series of accounting adjustments which obscure the true picture, it is clear that the underlying trend is also towards rising, not falling deficits.The Office for National Statistics reports that the June public sector borrowing total was £14.4bn, £500 million higher than in the corresponding month in 2011. However monthly data are erratic and subject to significant revision. Taking the data for the first 6 months of this year as a whole is more meaningful and shows that the deficit over that period is £37.3bn.

But this total is flattered by the strange decision relating to the acquisition of the Royal Mail Pension funds ahead of planned privatisation. In effect the government has decided to include the assets of this fund, but not its much greater pension liabilities in its own accounts. This and another smaller transaction lowered government borrowing by £30.3bn. The underlying deficit, excluding these transactions is therefore £67.6bn in the first 6 months of this year.

This compares to a deficit of £60.5bn in the first 6 months of 2011. The deficit is rising, not falling.

Figure 1

12 07 22 Chart

Factors Affecting Borrowing

This deterioration in the deficit, places British government finances in a growing band of European economies where sharp cuts in government spending are leading to economic contraction, which in turn produces widening deficits.

This should come as no surprise. As the crisis is effectively an investment strike by capital, spending cuts by government will only lead to a further decline in private investment. The reason this logic has taken some time to work through in Britain is due to a number of factors. These are primarily the zig-zag in government policy, which initially saw an very modest increase in government investment under Labour and so produced a reduction in the deficit. This was compounded by the uniquely high level of inflation during the British slump, which eroded the real value of all government spending.

SEB has previously shown that the very moderate increase in government investment from the 2009 Budget under Labour was the catalyst for a modest economic recovery. Because of the increase in government spending (including allowing welfare payments to rise automatically as unemployment and poverty increased) the Treasury forecast that the deficit would rise to £178bn in the following financial year. In the event, the deficit began to decline and was £158bn for the financial year.

In addition, the effects of economic growth are felt on both sides of government accounts. Expenditure is lower than it would have been because more are in work and the benefits’ bill falls. Revenues are higher because incomes, profits and consumption all raise the level of tax revenues.

It is widely known that government policies have led to economic stagnation. Yet it is only now that the deficit has started to rise. The British economy has grown by just 0.5% in the two years since the Coalition came to office. But in nominal terms, before taking account of inflation, the GDP has increased by 6.1%. This surge in inflation during the slump is highly unusual, placing Britain on a par with countries such as Iceland. Britain has an incredible shrinking economy when measured in international currency terms.

Domestically this is reflected in a surge in inflation. While severely denting the purchasing power of all those on fixed or low-growth incomes, the fiscal effect was to increase nominal government revenues by £56bn over the last 2 years. This compares to annualised nominal growth in GDP of £88bn.

The Treasury’s estimate is that every £1 increase in economic activity will lead to a 50p increase in government revenues. In fact the increase over the last two years has been 64p (£56bn of revenues of £88bn increased output). However, government current spending has also risen by £42.3bn over the same period. This is an inevitable consequence of the savings (i.e refusal to invest) by firms.

This points to the essential fallacy of all ‘austerity’ measures, whether from the Coalition’s frontal assault, or the slightly shallower, slower cuts favoured by current Labour policy. Even nominal growth will largely be reflected in increased government revenues. But spending cuts have the effect of weakening economic activity and so drive up government expenditures.

Even in the narrow terms of reducing the deficit, the only effective prescription is growth. The most effective means of promoting growth, as even the cautious 2009 Labour Budget shows, is for the government to increase investment.

First posted on SEB Sunday, 22 July 2012

Related post:

Cut out Cuts – Leave the Eton Mess Behind

* A government budget deficit occurs when a government spends more than it receives in tax revenue.  It becomes a Structural Deficit when the budget deficit has persisted over a period of time.

 

Neil Barofsky: How Washington Saved Wall Street and Abandoned Main Street

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Fascinating (and not in a good way) insight into the priorities of the US treasury.  The mindset according to Neil Barofsky was entirely focused on saving the banks and not at all on the ‘little people’.

The government’s special inspector general in charge of oversight of the Troubled Asset Relief Program (the “TARP” bank bailouts) – Neil M. Barofsky

‘Americans should lose faith in their government. They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable. The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.

Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks.’

http://www.zerohedge.com/contributed/2012-07-23/sigtarp-“americans-should-lose-faith-their-government-only-appropriate-and-ju

Aug 2, 2012 – From the Majority Report, live M-F 12 noon EST and via daily podcast at http://Majority.FM:

Former Tarp Inspector General, Neil Barofsky joined Sam to talk about his new book “Bailout: An Insider Account of How Washington Abandoned Main Street While Rescuing Wall Street.” Neil and Sam discussed the widespread fraud in the TARP program, how the HAMP program was designed to provide a “soft landing” for banks the revolving door between Washington and Wall Street and getting a “Bullet or Bribe” Colombian Drug Cartel Style offer from the former head of TARP, Herb Allison.

In a different video interview, with Business Insider, Barofsky touched on everything from the announcement that Americans holding Fannie and Freddie mortgages would not get a principal write downs, to the general culture in Washington.
Barofsky said the incentive structure in the nation’s capitol is all wrong. There’s a revolving door between bureaucrats in Washington and Wall Street banks, and politicians just want to keep their jobs.
Barofsky said that for regulators it’s something like this:
“You can play ball and good things can happen to you get a big pot of gold at the end of the Wall Street rainbow or you can do your job be aggressive and face personal ruin…We really need to rethink how we govern and how regulate”.

Read more: http://www.businessinsider.com/neil-barofsky-2012-8#ixzz22WjpfyBx

The big question for the British public, is whether the same mindset has operated across UK government – because overwhelmingly, the evidence would suggest that the priority has also been to protect the banks at all costs, regardless of the cost to ordinary people’s lives.