Borrowing is much higher than it should be. Photo: Getty
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Government borrowing: the numbers don’t add up

There is less scope in the years ahead for our current levels of borrowing to be eliminated by further economic growth. 

Friday’s public spending figures brought some small comfort to the Chancellor. In September, borrowing for the year was 10 per cent higher than the previous year; the gap has now narrowed to 6 per cent. But that is very small comfort indeed when borrowing was supposed to fall by around 12 per cent this year.

The initial signs looked good: GDP growth for 2014 is expected to come in at around 3 per cent, higher than the OBR forecast back in March. But poor wage growth has continued to hold tax receipts down. The result is that borrowing is much higher than it should be. 

At the same time, economic forecasters are putting the higher than expected growth down to a faster recovery rather than an improvement in the underlying health of the economy. This means that there is less scope in the years ahead for our current levels of borrowing to be eliminated by further economic growth. 

This has serious consequences for fiscal targets in the next parliament. The Conservatives have said that if they win the next election, they would seek to generate an overall surplus by 2018-19. 

On the plans set out back in March, that looked feasible. With £38bn of cuts to government departments after 2015-16, the OBR forecast that by 2018-19, the next government would have eliminated borrowing and would in fact be running a surplus of just over £1 billion. 

The SMF’s calculations, based on the latest economic forecasts, shows that this is no longer likely to be the case. Instead, even with the £38bn of cuts, borrowing will still be at around £14bn. To hit their targets, the Conservatives would have to bring the total cuts after 2015-16 to £52bn.

Since 2010, the deadline for completing the deficit reduction programme has had to be repeatedly postponed. In large part, thisis because the state of the economy has disappointed. In the next parliament, as with this one, the performance of the economy will make the difference between success and failure in meeting any of the main political parties’ fiscal targets. If, for example, it were possible to repeat the sustainable growth era of the early 2000s, the need for further cuts after 2015-16 would disappear. By contrast, if we see a repeat of poor underlying productivity growth seen in recent years, the size of the cuts required could balloon.

The next government must have an ambitious plan to boost long-term growth, and repairing the UK economy must be seen and treated as an integral part of any public spending strategy. This means that areas of spending that have growth enhancing-benefits must be prioritised.

The spending cuts programme was expected to be over in time for the 2015 general election. Instead, the next incoming government will have an even bigger challenge on its hands than in 2010: making further fierce cuts to spending when the easiest savings have already been made.

Nida Broughton is Chief Economist at the Social Market Foundation 

Nida Broughton is Senior Economist at the Social Market Foundation.

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The NS Podcast #169: Traingate, gaffes and Ghostbusters

The New Statesman podcast.

This week, Helen and Stephen tackle Traingate and Lunaticgate. George Eaton comes down-the-line from the valleys with the latest on the Owen Smith campaign. Anna Leszkiewicz joins to discuss feminism in the new Ghostbusters film. And you-ask-us: what is the role of the John McDonell in the Corbyn ménage? (Helen Lewis, Stephen Bush, George Eaton, Anna Leszkiewicz) 

Links:

Traingate (01.24)
Stephen on Jennifer's Ear

Lunaticgate (05.20)
David Wearing on Smith's slurs and empty promises.

Owen Smith (11.36)
George's interview for this week's magazine

Ghosbusters (18.44)
Ryan Gilbey reviews the film
Listen to the SRSLY take 
Anna on the dark side of the Romcom

John McDonnell (31.17)
Read him in his own words
And watch him in action

You can subscribe to the podcast through iTunes here or with this RSS feed: http://rss.acast.com/newstatesman, or listen using the player below.

And if you're craving yet more NS podcastery, you can watch Helen and Stephen host a live recording at this summer's London Podcast Festival. Tickets available here

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