One of the key economic issues in 2010 has been the state of countries’ public finances. We take one final look this year at the latest state of the UK public finances in light of the latest release of Public Sector Finances from the Office for National Statistics. In doing so we will be updating our blog of 20th November – What’s £81.6 billion and still rising?.
Well, a good place to start is to up-date you on the amount of net borrowing. This is the amount by which public sector expenditure exceeds current receipts, almost entirely taxation revenues. After adjusting for the impact of temporary ‘financial interventions’ or policies to provide stability for the financial system, the amount of net borrowing in November was a record high £23.3 billion. Therefore, the amount of net borrowing since April and so the start of the financial year rose from over £81 billion in October – and the reason for the title of the earlier blog – to £104.4 billion in November. This is roughly the same as in the first eight months of financial year 2009/10 when we had amassed net borrowing of £105.1 billion.
In the first eight months of the last two financial years monthly net borrowing has averaged close on £13 billion. The government’s independent economic forecaster the Office for Budget Responsibility (OBR) released its Economic and Fiscal Outlook at the end of November. The OBR is forecasting that over the entire financial year the amount of net borrowing will be £148.5 billion or the equivalent of 10% of GDP.
The public-sector current budget balance measures whether the public sector is able to afford its current expenditures. This balance was an important indicator under the previous Labour government of whether it was meeting its Golden Rule whereby over the economic cycle it should be able to its afford current expenditures and any borrowing would be for net investment, i.e. capital expenditures giving rise to a stream of benefits over time. Therefore, the current budget balance compares revenues with current expenditures, including the wages of public sector staff, welfare payments and expenditures on inputs consumed in the current financial year. The public sector’s current budget (excluding financial interventions) was in deficit in November by £20.0 billion.
In the financial year to date, the current budget deficit has reached £83.2 billion almost identical to the total in the previous financial year. This means that the average monthly current budget deficit over the first eight months of the last two financial years has been £10.4 billion. The OBR is forecasting that there will be a deficit on the current budget in 2010-11 of £106.2 billion, the equivalent of 7.2% of GDP
Finally, we update the public-sector net debt total. The public sector’s net debt is its stock of debt less its liquid financial assets (largely foreign exchange reserves and bank deposits). As of the end of November, the stock of net debt (excluding the impact of the financial interventions) stood at £863 billion, equivalent to 58% of GDP. The stock of debt at the end of the last financial year stood at £772 billion, equivalent to 54% of GDP. The OBR expects it to increase to £922.9 or 60.8% by the end of this financial year.
The extent of the increase in the stock of public sector net debt is very clearly illustrated illustrated if we compare the latest numbers with those at the end of 2006/7 and so before the financial crisis really took hold. Back then, the stock of debt stood at £498 billion or 36% of GDP and so the last government was meeting it sustainable investment rule by keeping net debt below 40% of GDP. Both the sustainable investment rule and the golden rule were to be abandoned during 2008 as the financial crisis took grip.
If we add back the impact of the financial interventions, most notably the balance sheet effects of public sector banks, including Northern Rock, then the stock of public sector net debt at the end of November was £971 billion or 65.1% of GDP. This means that the actual stock has almost doubled since March 2007. It is perhaps little surprise that the government is introducing the Bank Levy in 2011 which, in large part, is being designed to acknowledge the external costs that the banking system can cause to the wider economy and, of course, to the public finances.
Articles
Public borrowing soars to £23.3bn record high Independent, Nick Clark (22/12/10)
UK borrowing hits new record high as government spending jumps Telegraph, Emma Rowley (21/12/10)
Government borrowing hits record high Herald, Douglas Hamilton (22/12/10) )
Public borrowing: What the economists are saying Guardian (22/12/10)
Shock as govt borrowing hits record high Sky News, James Sillars (21/11/10)
Record UK borrowing raises concerns Financial Times, Daniel Pimlott (21/12/10)
UK government borrowing hits record high BBC News (21/12/10)
City shocked as government borrowing hits record high Scotsman, Natalie Thomas (22/12/10)
Data on UK Public Finances
Latest on Public Sector Finances Office for National Statistics (21/12/10)
Public Sector Finances Statistical Bulletin, November 2010 Office for National Statistics (21/12/10)
Public Sector Finances (First Release) Time Series Data Office for National Statistics
Statistics on Public Finance and Spending HM Treasury
Questions
- Give examples of variables which are stock concepts and those which are flow concepts. Is public sector net borrowing a stock or flow concept? What about public sector net debt?
- Give examples of public expenditures which are examples of current expenditures and examples of those which are capital expenditures?
- What arguments could you put forward for and against the previous Labour government’s golden rule? What about its sustainable investment rule?
- Explain the difference between the current budget balance and net borrowing. Why might governments want to measure both these budget balances?
- What arguments would you make for and against a rapid reduction of the level of net borrowing by the UK public sector?