So what’s £81.6 billion and still rising? The answer is the UK public-sector budget deficit so far this financial year. Given all the talk over the past week about the state of the Irish public finances it is perhaps timely to review the state of the UK public finances. To do this we take a look at the latest release of public sector finances from the Office for National Statistics. It is worth pointing out that the figures we will refer to take into account the impact of those financial interventions which were designed to ensure the stability of the financial system following the financial crisis. These interventions include the transfer of financial institutions like Northern Rock and HBOS to the public sector, injections of capital into financial institutions and the Asset Protection Scheme whereby institutions insured themselves against losses on assets placed in the scheme. The main impact of these interventions has been on the overall stock of public-sector debt following the incorporation of some financial institutions into the public sector.
We consider three key statistics of the public finances. Firstly, we consider the UK’s level of net borrowing. This is a flow concept measuring the degree to which the public sector’s expenditures exceed its receipts. In October net borrowing was recorded at £10.3 billion and, as we said at the outset, this takes the level of net borrowing so far this financial year (i.e. since April) to £81.6 billion. This compares with £87.5 billion in the same period in 2009. If all these numbers leave you a tad cold then perhaps it may help to note that since the beginning of January 2009 the public sector has been running an average monthly deficit of around £12 billion.
Another widely quoted fiscal indicator is the public-sector current budget. The current budget measures whether the public sector has been able to afford what are known as current expenditures and so net investment by the public sector is excluded from this fiscal indicator. Current expenditures include the wages of public sector staff, such as teachers and nurses, welfare payments and expenditures on a whole range of inputs consumed in the current financial year. Net investment by the public sector adds to our country’s capital stock and includes expenditures on such things as roads and school buildings as well as investment grants to the private sector, for example money to help better insulate our homes.
The public sector’s current budget was in deficit in October to the tune of £7.1 billion. This means that in the current financial year the current budget deficit has reached £64.1 billion which compares with £69.1 billion in the same period last year. Again to put the current budget into perspective we note that since January 2009 the average current budget deficit has been running at just under £8 billion per month.
The third key statistic reported by the ONS is public-sector net debt. This is the value of the sector’s stock of debt less its liquid financial assets (largely foreign exchange reserves and bank deposits). As of the end of October, the stock of net debt (excluding the impact of the financial interventions) stood at £845.8 billion, equivalent to 57.1% of GDP. If we include the impact of the financial interventions then the stock of public sector debt at the end of October was actually £955 billion and so not too far off the £1 trillion-mark. This figure is equivalent to 64.5% of GDP and shows quite clearly the impact of incorporating the balance sheets of those financial institutions now classified as public monetary and financial institutions.
But what about the future prospects for our 3 key indicators of the public finances. The Office for Budget Responsibility central projections at the time of the June Budget predicted that the government’s fiscal consolidation plan will see the current budget in balance across financial year 2015/16. This is expected to come about as the current budget deficit begins falling each year following the current financial year. It is also predicts that if we take into account the negative impact of the economy’s expected negative output gap on the public finances that the structural current budget deficit will have been removed by 2014/15. In other words, any current budget deficit in 2014/15 will be a cyclical deficit resulting from higher expenditure and/or lower receipts because of the economy’s actual output being below its potential output.
Of course, while the OBR is predicting that the actual current budget (i.e. without any adjustment for the cycle) will be in balance by 2015-16, this still means that the public sector will remain a net borrower because there is also net investment expenditure to take into account. Nonetheless, if the forecast is proved correct, this would see net borrowing across the whole of 2015-16 of only £20 billion. As for net debt, the OBR is predicting that it will peak at 70.3% of GDP in 2013-14 before falling to 69.4% by 2014-15.
U.K. had larger-than-expected budget deficit in October amidst modest growth Bloomberg, Svenja O’Donnell (18/11/10)
UK Oct public sector borrowing rise more than expected International Business Times, (18/11/10)
UK government borrowing at £10.3 billion in October BBC News (18/11/10) )
Deficit target still in sight despite new UK borrowing high Telegraph , Emma Rowley (18/11/10)
UK public sector borrowing rises Sky News, Goldie Momen Putrym (18/11/10)
Britain slumps another £10 billion in the red Independent, Holly Williams (18/11/10)
Latest on Public Sector Finances Office for National Statistics (20/11/10)
Public Sector Finances Statistical Bulletin, October 2010 Office for National Statistics (20/11/10)
Public Sector Finances (First Release) Time Series Data Office for National Statistics
Public Sector Finance Statistics HM Treasury
- What do you understand to be the difference between the concepts of deficits and debt? Illustrate your answer with reference to the public sector and a household’s finances.
- What types of public expenditures would be categorised as being current expenditures and what types as capital expenditures?
- What is the difference between the current budget and net borrowing? Why might governments want to measure both these budget balances?
- Explain what you think is meant by a cyclical deficit and a structural deficit? Can you have cyclical surpluses and structural surpluses?
- What is meant by an output gap? What impact would you expect an output gap to have on the public finances?
- In 1988/89 the UK ran a budget surplus equivalent to 6.3% of GDP. After cyclically-adjusting this surplus is estimated to have been a deficit with net borrowing equivalent to 1.3% of GDP. Can you explain how this is possible and what the economy’s output gap is likely to have been?
- Imagine that you have been asked by government to design either a fiscal rule (or rules) or a set of principles for fiscal policy. What sorts of considerations would you take into account and so what rule or principles, if any, would you suggest?