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The Chancellor Shouldn’t Turn on the Spending Taps Just Yet

March 6, 2018 in Economics

By Ryan Bourne

Ryan Bourne

Better late than never, as they say.

New data shows that the Conservative government has finally hit
its original target to eliminate the £100bn day-to-day budget
deficit they inherited in 2010.

Sure, they got there three years later than planned. Former
chancellor George Osborne committed to eliminating this borrowing
(which excludes investment spending) by 2015. But as US politicians
start borrowing for fun once more, the UK’s achievement of
sustained deficit reduction over eight years should not be taken
for granted.

Job done? Some of the backslapping from Osborne’s acolytes
on Twitter has suggested so. Many prominent Brexiteers are also
keen to use EU exit to abandon “austerity
economics”.

But the chancellor Philip Hammond should resist calls from
colleagues to use better-than-expected receipts to turn on the
spending taps. The UK’s long-term public finance projections
are still awful. A prudent approach would instead prioritise
getting the debt-to-GDP ratio firmly on a downward path given its
current high level, known economic risks, and the headwinds of an
aging population.

Through hard choices and
political commitment, the UK has done most of the work in repairing
the recession-induced damage to the public finances.

Overall, government borrowing (including investment spending) is
now around two per cent of GDP.

This would be a perfectly manageable level in a normal world of
sustained growth and modest accumulated debt. The problem is the
financial crisis and its aftermath saw public debt balloon from
35.4 per cent of GDP in 2008 to 86.5 per cent today — far
higher than the 35 per cent average since 1975.

Such high debt levels make the UK finances vulnerable to
unforeseen events and slower-than-expected growth. They also create
a worrying baseline given future spending pressures. The Office for
Budget Responsibility projects that public debt will shoot up to
178 per cent of GDP in the next 40 years on unchanged policies, as
demands on the state pension, social care, and healthcare rise.

That our current financial position may be a little better than
we expected must be put in that context. Extra revenues allowing a
slightly faster debt-to-GDP ratio fall would be a small down
payment on this challenge.

Indeed, the Treasury’s own analysis suggests that overall
surpluses, including investment spending, are necessary to get debt
levels back to historic norms given likely shocks to the economy.
If we balance the books a few years earlier than forecast last
November (still much later than predicted in 2010), then all the
better.

Of course, we should not get carried away here. Even two months
ago, the Treasury did not expect this improvement in outlook. The
underlying public finances are constantly being assessed and
reassessed.

With Brexit on …read more

Source: OP-EDS

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