With Ed Miliband and Ed Balls constantly telling us that by cutting the budgetary deficit as hard and as fast as it is doing, the UK government is stifling growth and plunging the country back into a recession, I thought it might be worth looking at the actual numbers involved to see how much wriggle-room any new incoming Chancellor of the Exchequer might have to adjust the strategy. Unfortunately, the answer does is not particularly comforting.
Table 1 presents UK GDP, the annual deficit and the cumulative national debt for the last 25 years, as recorded and tabulated by www.ukpublicspending.co.uk, with a further five years projected forward in accordance with George Osborne’s 2010 budget.
| Year | UK GDP (£billion) | Annual % Growth in GDP | Public Debt (£billion) | Debt as % GDP | Annual Increase in Debt | Annual Increase in %Debt |
| 1985 | 361.76 | | 157.20 | 43.45% | | |
| 1986 | 389.15 | 7.57% | 162.70 | 41.81% | 5.50 | -1.65% |
| 1987 | 428.67 | 10.15% | 167.80 | 39.14% | 5.10 | -2.66% |
| 1988 | 478.51 | 11.63% | 167.40 | 34.98% | -0.40 | -4.16% |
| 1989 | 525.27 | 9.77% | 153.90 | 29.30% | -13.50 | -5.68% |
| 1990 | 570.28 | 8.57% | 152.20 | 26.69% | -1.70 | -2.61% |
| 1991 | 598.66 | 4.98% | 151.30 | 25.27% | -0.90 | -1.42% |
| 1992 | 622.08 | 3.91% | 166.10 | 26.70% | 14.80 | 1.43% |
| 1993 | 654.20 | 5.16% | 202.60 | 30.97% | 36.50 | 4.27% |
| 1994 | 692.99 | 5.93% | 249.80 | 36.05% | 47.20 | 5.08% |
| 1995 | 733.27 | 5.81% | 290.00 | 39.55% | 40.20 | 3.50% |
| 1996 | 781.73 | 6.61% | 322.10 | 41.20% | 32.10 | 1.65% |
| 1997 | 830.09 | 6.19% | 348.00 | 41.92% | 25.90 | 0.72% |
| 1998 | 879.10 | 5.90% | 352.90 | 40.14% | 4.90 | -1.78% |
| 1999 | 928.73 | 5.65% | 351.60 | 37.86% | -1.30 | -2.29% |
| 2000 | 976.53 | 5.15% | 345.40 | 35.37% | -6.20 | -2.49% |
| 2001 | 1,021.83 | 4.64% | 312.40 | 30.57% | -33.00 | -4.80% |
| 2002 | 1,075.56 | 5.26% | 315.50 | 29.33% | 3.10 | -1.24% |
| 2003 | 1,139.75 | 5.97% | 347.10 | 30.45% | 31.60 | 1.12% |
| 2004 | 1,202.96 | 5.55% | 382.80 | 31.82% | 35.70 | 1.37% |
| 2005 | 1,254.06 | 4.25% | 424.00 | 33.81% | 41.20 | 1.99% |
| 2006 | 1,325.80 | 5.72% | 463.00 | 34.92% | 39.00 | 1.11% |
| 2007 | 1,398.88 | 5.51% | 500.00 | 35.74% | 37.00 | 0.82% |
| 2008 | 1,448.39 | 3.54% | 525.00 | 36.25% | 25.00 | 0.50% |
| 2009 | 1,395.87 | -3.63% | 616.90 | 44.19% | 91.90 | 7.95% |
| 2010 | 1,453.62 | 4.14% | 759.50 | 52.25% | 142.60 | 8.05% |
| 2011 | 1,526.50 | 5.01% | 909.20 | 59.56% | 149.70 | 7.31% |
| 2012 | 1,602.80 | 5.00% | 1,046.00 | 65.26% | 136.80 | 5.70% |
| 2013 | 1,693.70 | 5.67% | 1,164.00 | 68.73% | 118.00 | 3.46% |
| 2014 | 1,789.00 | 5.63% | 1,251.00 | 69.93% | 87.00 | 1.20% |
| 2015 | 1,889.10 | 5.60% | 1,314.00 | 69.56% | 63.00 | -0.37% |
The good news is that at £1,314 billion the total national debt – in terms of issued treasury bonds – is only expected to be 69.56% of GDP by the end of 2015, which is nowhere near the 186% which Greece was thought likely to experience some time next year, or even the 120% currently burdening Italy. Government ministers will also probably point out that it is also significantly lower than the slightly worrying 98.91% that would have been the case had Labour won the last election and chosen to implement Alistair Darling’s less draconian deficit reductions plan.
The bad news is that George Osborne’s forecast is based on a projected annual rate of growth of over 5%. If we replace these figures with the Bank of England most recent forecast of only 1% for both this year and next, rising slowly to perhaps 2.5% in 2015, the picture, as shown in Table 2, is nowhere near as rosy.
| Year | UK GDP (£billion) | Annual % Growth in GDP | Public Debt (£billion) | Debt as % GDP | Annual Increase in Debt | Annual Increase in %Debt |
| 2010 | 1,453.62 | 4.14% | 759.50 | 52.25% | 142.60 | 8.05% |
| 2011 | 1,526.50 | 1.00% | 909.20 | 59.56% | 149.70 | 7.31% |
| 2012 | 1,541.77 | 1.00% | 1,046.00 | 67.84% | 136.80 | 8.28% |
| 2013 | 1,564.89 | 1.50% | 1,164.00 | 74.38% | 118.00 | 6.54% |
| 2014 | 1,596.19 | 2.00% | 1,251.00 | 78.37% | 87.00 | 3.99% |
| 2015 | 1,636.09 | 2.50% | 1,314.00 | 80.31% | 63.00 | 1.94% |
Of course, Government ministers will say that a national debt of 80.31% of GDP in 2015 is still considerably less than the figure of 98.91% under the Darling plan. They might also point out that, under the Darling plan, with this new projected rate of growth, the figure would actually reach 114.20%, which would take us into Italian territory. Ed Miliband and Ed Balls, however, would say that by not cutting public expenditure so fast, growth would be higher, and the cumulative national debt as a percentage of GDP would therefore be lower. So who is right?
Part of the problem in answering this question, of course, is that it is impossible to say now what things would be like today if decisions taken in 2010 had been different. All we can therefore look at are the options available to any Chancellor as things currently stand. To do this, however, we need to bring two further factors into the equation: public expenditure and taxation. In particular, we need to see how public expenditure is paid for out of mixture of taxation and borrowing. This is therefore presented in Table 3. Again the last five years are in accordance with George Osborne’s 2010 budget.
| Year | UK GDP (£billion) | UK Public Expenditure (£billion) | Annual % increase in Public Expenditure | UK Public Expenditure as % of GDP | Expenditure paid for by taxation | Expenditure paid for by borrowing | Taxation as % of GDP |
| 1985 | 361.76 | 150.89 | | 41.71% | | | |
| 1986 | 389.15 | 158.62 | 5.12% | 40.76% | 153.12 | 5.50 | 39.35% |
| 1987 | 428.67 | 164.61 | 3.78% | 38.40% | 159.51 | 5.10 | 37.21% |
| 1988 | 478.51 | 173.60 | 5.47% | 36.28% | 174.00 | -0.40 | 36.36% |
| 1989 | 525.27 | 179.91 | 3.63% | 34.25% | 193.41 | -13.50 | 36.82% |
| 1990 | 570.28 | 200.91 | 11.68% | 35.23% | 202.61 | -1.70 | 35.53% |
| 1991 | 598.66 | 218.21 | 8.61% | 36.45% | 219.11 | -0.90 | 36.60% |
| 1992 | 622.08 | 236.20 | 8.24% | 37.97% | 221.40 | 14.80 | 35.59% |
| 1993 | 654.20 | 259.72 | 9.95% | 39.70% | 223.22 | 36.50 | 34.12% |
| 1994 | 692.99 | 266.66 | 2.67% | 38.48% | 219.46 | 47.20 | 31.67% |
| 1995 | 733.27 | 283.99 | 6.50% | 38.73% | 243.79 | 40.20 | 33.25% |
| 1996 | 781.73 | 304.33 | 7.16% | 38.93% | 272.23 | 32.10 | 34.82% |
| 1997 | 830.09 | 312.36 | 2.64% | 37.63% | 286.46 | 25.90 | 34.51% |
| 1998 | 879.10 | 318.41 | 1.94% | 36.22% | 313.51 | 4.90 | 35.66% |
| 1999 | 928.73 | 328.12 | 3.05% | 35.33% | 329.42 | -1.30 | 35.47% |
| 2000 | 976.53 | 338.08 | 3.03% | 34.62% | 344.28 | -6.20 | 35.25% |
| 2001 | 1,021.83 | 362.55 | 7.24% | 35.48% | 395.55 | -33.00 | 38.71% |
| 2002 | 1,075.56 | 384.94 | 6.18% | 35.79% | 381.84 | 3.10 | 35.50% |
| 2003 | 1,139.75 | 415.21 | 7.86% | 36.43% | 383.61 | 31.60 | 33.66% |
| 2004 | 1,202.96 | 451.47 | 8.73% | 37.53% | 415.77 | 35.70 | 34.56% |
| 2005 | 1,254.06 | 488.33 | 8.16% | 38.94% | 447.13 | 41.20 | 35.65% |
| 2006 | 1,325.80 | 502.61 | 2.92% | 37.91% | 463.61 | 39.00 | 34.97% |
| 2007 | 1,398.88 | 544.02 | 8.24% | 38.89% | 507.02 | 37.00 | 36.25% |
| 2008 | 1,448.39 | 575.74 | 5.83% | 39.75% | 550.74 | 25.00 | 38.02% |
| 2009 | 1,395.87 | 621.58 | 7.96% | 44.53% | 529.68 | 91.90 | 37.95% |
| 2010 | 1,453.62 | 660.67 | 6.29% | 45.45% | 518.07 | 142.60 | 35.64% |
| 2011 | 1,526.50 | 683.41 | 3.44% | 44.77% | 533.71 | 149.70 | 34.96% |
| 2012 | 1,602.80 | 703.31 | 2.91% | 43.88% | 566.51 | 136.80 | 35.34% |
| 2013 | 1,693.70 | 722.19 | 2.69% | 42.64% | 604.19 | 118.00 | 35.67% |
| 2014 | 1,789.00 | 740.29 | 2.51% | 41.38% | 653.29 | 87.00 | 36.52% |
| 2015 | 1,889.10 | 760.55 | 2.74% | 40.26% | 697.55 | 63.00 | 36.93% |
The first thing one ought to notice from the above figures is that far from being cut, public expenditure is actually set to rise throughout the period of this government, albeit by a smaller percentage than in recent years. This is something on which I commented in a previous blog, The Decline of the BBC and the Deception of Modern Poilitics, where I pointed out that the current government’s cuts in public expenditure, are cuts to the previous government’s planned expenditure rather than to expenditure itself.
That is not to say, of course, that the cuts being implemented are not real. The number of policemen on the street is clearly being reduced; local authorities are receiving small grants; and some government departments are certainly having their budgets pared down. Other departments, however, are still growing, principally the Departments of Health and Work and Pensions. Nor, in the case of the latter, is this purely down to the expected rise in unemployment, which the opposition will claim is a self-inflicted wound brought about by the government’s rush to cut the deficit. The biggest increase, in fact, is due to pensions. In 2011, the first of the post war baby-boomers turned 65, and with more and more of us retiring over the next two decades, and all of us living longer, the cost of pensions is set to rise quite steeply.
This is particularly alarming with respect to public sector pensions. After the war, the public sector grew faster than any other part of the economy, particularly in the area of health, with the founding of the National Health Service. There are now 6.27 million people working in the public sector, 21.5% of the working population, and our collective liability with respect to their pensions currently stands at £1.13 trillion, for which no provision has been made, and which will therefore have to come out of general taxation. Indeed, it could be said that this is actually a far bigger problem for the country than the official national debt, measured purely in terms of treasury bonds. What it also means is that, even having made all the high profile cuts to public services it thought it could get away with – without causing the kind of riots we have seen in Greece and are soon, I believe, to see in Italy – the government still hasn’t solved the underlying structural problem. Indeed, it has hardly scratched the surface, and with lower than expected growth, it is now going to have real problems achieving its deficit reductions targets. In fact, Labour are currently saying that due to the lower rate of growth, the government is going to have borrow an extra £100 billion parliament. If my calculations are correct, however, this estimate may even be optimistic. For if we assume that public expenditure and taxation remain the same, the borrowing requirement could actually be as high as shown in Table 4.
| Year | UK GDP (£billion) | UK Public Expenditure (£billion) | Annual % increase in Public Expenditure | UK Public Expenditure as % of GDP | Expenditure paid for by taxation | Expenditure paid for by borrowing | Taxation as % of GDP |
| 2010 | 1,453.62 | 660.67 | 6.29% | 45.45% | 518.07 | 142.60 | 35.64% |
| 2011 | 1,526.50 | 683.41 | 3.44% | 44.77% | 533.71 | 149.70 | 34.96% |
| 2012 | 1,541.77 | 703.31 | 2.91% | 45.62% | 544.94 | 158.37 | 35.34% |
| 2013 | 1,564.89 | 722.19 | 2.69% | 46.15% | 558.24 | 163.95 | 35.67% |
| 2014 | 1,596.19 | 740.29 | 2.51% | 46.38% | 582.88 | 157.41 | 36.52% |
| 2015 | 1,636.09 | 760.55 | 2.74% | 46.49% | 604.13 | 156.42 | 36.93% |
Over five years this would amount to a total increase in borrowing of £231 billion, with the result that the deficit would remain virtually constant.
Not, of course, that this could actually happen. For if the government failed to meet its deficit reduction targets, the bond markets would almost certainly respond by increasing the cost of the £12 billion we currently have to borrow each month. Indeed, yields would very quickly reach Italian levels and the whole house of cards would then come crashing down.
The question one has to ask, however, is whether Ed Miliband’s plan is any more credible. For with the bond markets forcing ever more severe austerity measures on Italy and Greece, do we really believe that under similar circumstances they would allow the UK to borrow additional money in order to provide a fiscal stimulus? Dream on!
So what is the alternative. One option, of course, would be to increase taxation. The result of this, however, is shown in Table 5.
| Year | UK GDP (£billion) | UK Public Expenditure (£billion) | Annual % increase in Public Expenditure | UK Public Expenditure as % of GDP | Expenditure paid for by taxation | Expenditure paid for by borrowing | Taxation as % of GDP |
| 2010 | 1,453.62 | 660.67 | 6.29% | 45.45% | 518.07 | 142.60 | 35.64% |
| 2011 | 1,526.50 | 683.41 | 3.44% | 44.77% | 533.71 | 149.70 | 34.96% |
| 2012 | 1,541.77 | 703.31 | 2.91% | 45.62% | 566.51 | 136.80 | 36.74% |
| 2013 | 1,564.89 | 722.19 | 2.69% | 46.15% | 604.19 | 118.00 | 38.61% |
| 2014 | 1,596.19 | 740.29 | 2.51% | 46.38% | 653.29 | 87.00 | 40.93% |
| 2015 | 1,636.09 | 760.55 | 2.74% | 46.49% | 697.55 | 63.00 | 42.64% |
At first glance, this may not seem an unworkable solution. But if one looks more closely, one will see that to make up the entire additional deficit through taxation would require an overall rise of more than 20% in tax rates. This would mean an extra 5p on the basic rate of income tax, another 4% on VAT, and equivalent rises to all other taxes. Not only would this have even more depressing effect on the economy, however, it is also likely to be counter-productive in terms of tax revenues. For as is well known, the relationship between tax rates and tax revenues is a bell curve. As the rate goes up, revenues also initially rise until a certain tipping point is reached. Then they start to decline. If one examines Table 3, one will see that the normal range of overall taxation in the UK is between 34% and 37%. One of the reason for this is that anything significantly above this has such a depressing effect upon the economy that less revenues are produced. To raise overall taxation to 42%, therefore, would be economic suicide.
If we cannot plug the additional deficit either with additional borrowing or additional taxation, this means, therefore, that if George Osborne cannot find alternative, non-fiscal ways to stimulate growth, such as his much trailed ‘credit easing’, he will have no choice but to cut public expenditure even further, as shown in Table 6.
| Year | UK GDP (£billion) | UK Public Expenditure (£billion) | Annual % increase in Public Expenditure | UK Public Expenditure as % of GDP | Expenditure paid for by taxation | Expenditure paid for by borrowing | Taxation as % of GDP |
| 2010 | 1,453.62 | 660.67 | 6.29% | 45.45% | 518.07 | 142.60 | 35.64% |
| 2011 | 1,526.50 | 683.41 | 3.44% | 44.77% | 533.71 | 149.70 | 34.96% |
| 2012 | 1,541.77 | 681.74 | -0.25% | 44.22% | 544.94 | 136.80 | 35.34% |
| 2013 | 1,564.89 | 676.24 | -0.81% | 43.21% | 558.24 | 118.00 | 35.67% |
| 2014 | 1,596.19 | 669.88 | -0.94% | 41.97% | 582.88 | 87.00 | 36.52% |
| 2015 | 1,636.09 | 667.13 | -0.41% | 40.78% | 604.13 | 63.00 | 36.93% |
Of course, this will be enormously unpopular; and the opposition is bound to make a lot of political capital out of it. They will say that this is all the fault of the government, for rashly attempting to cut the deficit so fast. The fact that it was they who, when in government, arguably got us into this situation in the first place, will of course be conveniently over looked, as will the even more important fact that any government in this position would have to do exactly the same thing. For if we kept on spending money at the same rate, while unable borrow more or raise more in taxation, the unavoidable truth is that one day the treasury would simply run out of money, the country would be bankrupt, and all hell would break loose.
Not that it would ever actually come to that of course. Before then, the government would naturally ask the IMF for a help. As a condition of any loan, however, the IMF would impose a strict austerity programme. One way or the other, therefore, public expenditure would be cut. The only real question is whether we would be forced into, like Italy and Greece, or would do it of our own accord.
Of course, George Osborne’s non-fiscal stimulus, which he is going to announce on 29th November, may yet work. Moreover, the government will almost certainly take other steps to close the gap such as selling off assets, like Northern Rock. At £0.75 billion, however, it will take a lot of Northern Rocks to make up the addition £50 billion per year the government is likely to need. This is not to say, that one way or the other, it still might not be able to muddle through. After all, we are nowhere near as close to the brink as Greece. The one thing that is certain, however, is that for the present 2012 is going to a difficult year.
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