View all newsletters
Sign up to our newsletters

Support 110 years of independent journalism.

  1. Business
  2. Economics
26 March 2013updated 26 Sep 2015 2:31pm

The public sector deficit through the looking-glass

The government is ignoring the flip side of the its deficit reduction targets: they require us all to spend more.

By Peter Kenway

Reducing the public sector deficit has been the Coalition’s number one economic goal from the start. Inheriting a record deficit in 2009/10 – Labour’s last year – equal to almost 11 per cent of GDP, no new government, even if had wanted to, could have done anything else. 

The underlying reasoning – that a deficit this big is a sign of a something seriously amiss in the economy – was and is completely correct. Since the late 1980s, this deficit had averaged 2.5 per cent. In that period, the biggest it ever got was 7.5 per cent in 1993/4 as the economy began its recovery from the early 1990s recession.

But the approach of trying to reduce that deficit by cutting spending and putting up taxes alone is wrong. The reason why is that the public sector deficit does not exist in isolation. Instead, it is part of a chain of ‘imbalances’ linking the public sector with the household, corporate and overseas sectors. By definition (and measurement errors aside), these four imbalances, some surpluses and some deficits, always add up to zero.

The graph below shows the public sector deficit as a percentage of GDP, year by year from 1993/4 (the previous record deficit year). The figures up to 2011/12 are actual figures. Those for 2012/3 and beyond are the OBR’s latest forecast published last week. The odd-looking 2012/3 figures themselves are due to some one-off financial transfers between the corporate and public sectors. In the big picture they can be ignored.

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.
THANK YOU

Sources: ONS Quarterly National Accounts (to 2011/2) and Office for Budget Responsibility, March 2013 Economy Supplementary Tables, table 1.8, (from 2012/3)

Since there is nothing on the graph labelled ‘public sector deficit’ how can it be a picture of it? On the face of it, the graph shows the other three sector balances, with surpluses above the line and deficits below it. The public sector deficit is the total of these three. In years when all three are themselves surpluses, the public sector deficit is measured by the top of the bar stack: for example, just under 11 per cent in 2009/10. In years when one or more of the other balances is itself a deficit, this has to be subtracted from the top of the stack to get the measure of the public sector: for example, just under 7 per cent in 2008/9. This is a picture of the public sector deficit as Alice might find it, through the looking-glass.

This picture provokes questions. Let’s take three of them here. First, if the public sector deficit has this double life, as both itself and as this mirror image of the other three sectors, can we say which causes which? In simple terms, the answer is no; both sides of the mirror have a life of their own. This answer is enough to undermine the basic idea of ‘austerity’; that if only a government bears down on the public sector hard enough, all, eventually, will be well.

Second, what should we make of the economy in 2017/8, the last year of the OBR’s forecast? With a public sector deficit projected at 2.5 per cent (the long term average) and (though this cannot be seen in the graph) public sector debt at last falling as a percentage of GDP. Osborne would regard this as vindication. But by looking at the reflection of the deficit in the mirror, we see that 2017/8 bears an unfortunate resemblance not to the boom years either side of 1997 but to 2002/3, the year when things started going wrong under Labour as the economy came to be sustained by public and household borrowing. 

Third, if this is where austerity gets us, where do we need to go instead? The answer is that we must concentrate as well on the problematic surpluses, both the chronic corporate sector surplus (into its consecutive 16th year by the end of the OBR forecast) and overseas surplus with the UK – better known as ‘our’ balance of payments deficit. To the extent that there is a debate about alternatives to austerity they are for the most part about how to ‘kick start’ the economy. Without a programme for dealing with the twin surpluses, however, kick-start may turn into stop-start before we get anywhere near a sufficient level of economic activity.

Content from our partners
Development finance reform: the key to climate action
Individually rare, collectively common – how do we transform the lives of people with rare diseases?
Future proofing the NHS

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.
THANK YOU