Public Sector Finance figures for June were released on Thursday, borrowing was actually up compared to June last year, are we heading back to the brink of bankruptcy? The Chancellor of the Exchequer was keen to herald the austerity measures as a move back from the brink of bankruptcy following the Labour profligate years. But are the figures really moving in the right direction?
In the first three months of the year, borrowing was down by just £0.4 billion from £39.5 billion to £39.2billion. Extrapolate this for the year and the borrowing forecast would struggle to drop below £140 billion for the financial year. This would equate to 9% of GDP and well above the OBR forecast for the year.
The problem is that despite the austerity measures, total receipts have increased by 4.6% but spending over the first three months of the year has increased by 3.4%. The interest bill in the first quarter is up by 14% and social security payments are up by nearly 5%. Reducing spending in a low growth economy presents significant difficulty.
Revenues present a mixed picture. Mugging the high street with the VAT rise has yielded spectacular results with receipts up by 17% in the first three months adding £4 billion into the coffers. VAT receipts could contribute an additional £20 billion in a full year if the rate of gain continues. Income and capital gains receipts on the other hand are up by less than 2% at 0.5 billion and taxes on production are up by less than 3% at £1.4 billion,
At first glance the figures are a Keynesian delight. Rebalancing the economy by cutting spending and increasing taxes will result in low growth economy with resilient spending and sluggish revenues. It is difficult to balance the books when breaking the backbone of recovery.
The Office for budget responsibility offers some hope by pointing out that revenues last year included £3.5 billion from the bank payroll tax which was not repeated last year. If this element is excluded revenues are up by 8% and “close to our full year forecast”. Sounds better but the BPT is not a surprise item and hardly a credible apologia.
Next week the GDP estimates for the second quarter will be released. They will make dismal reading with growth year on year likely to be less than 1%. The economy is slowing, the public finances are not recovering as planned, essential imports continue, there is no net export growth, no march of the makers, no rebalancing of the economy, we are a few steps further away from the brink of bankruptcy but the precipice is still in sight.
The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.