Chancellor faces criticism from all sides over failure to reduce deficit through austerity measures
The public finances paint a bleak picture of the UK economy. Tax receipts are down on this time last year, and the government is on course to borrow more in the current financial year than it did in 2011-12. These will be worrying numbers for a chancellor who has made deficit reduction the judge and jury of his economic management.
Poor old George Osborne is getting stick from both ends of the political spectrum. The left say the £3.4bn deterioration in the deficit between July 2011 and July 2012 is evidence that austerity isn’t working, and supports the argument that the chancellor went at deficit reduction like a bull in a china shop. The right will say that the 5.1% increase in spending over the same period shows that the idea of “cuts” is a myth and that it is time for the government to adopt a more aggressive approach.
The Treasury said on Tuesday that part of the rise in spending was due to planned investment in infrastructure projects, while the sharp fall in corporation tax receipts was in part due to the shutdown of the Elgin gasfield in the North Sea. But while it is certainly true that one-off factors can distort the monthly data, the worry for Osborne is that the July data forms part of a disappointing trend stretching back to the early months of 2012. That has left the underlying deficit in the first four months of the 2012-13 financial year worse off by more than £11bn.
The figures from the Office for National Statistics are distorted by the transfer of the Royal Mail’s pension fund, which helps disguise the true state of the public finances. City analysts say that once this is stripped out, the government could – if the current trend continues – end up borrowing £40bn more than planned this year. This would be a colossal overshoot, yet consistent with an economy that has been flatlining for the past 18 months.
Certainly, the public finances suggest ministers should not get too excited by the rather more upbeat messages coming from the labour market. If employment is indeed going up, the weakness of tax receipts suggests that incomes are not growing and consumption is depressed. Lower-than-expected corporation tax receipts reflect both feeble demand and the cost to businesses of hoarding labour.
Osborne is now in a real hole. He is under mounting pressure to come up with a Plan B to boost growth, but is reluctant to do a U-turn, both because it would be an admission of failure and because he is worried that the financial markets would freak out. Yet, it is becoming harder and harder for supporters of the government to argue that the strategy is working.
The chancellor has already been forced to abandon his original deficit reduction plan, which means that austerity will continue for at least the first two years of the next parliament and, given the recent slippage, beyond that. Even worse, when the independent Office for Budget for Responsibility comes up with its next set of forecasts for growth and borrowing later this year, it could easily conclude that the black hole at the end of this parliament will be bigger than that planned by Alistair Darling. That would leave the chancellor with quite a lot of explaining to do. Assuming he is still in his job, of course.