France’s economy: Austerity stakes
Despite a good month, George Osborne is far from balancing the budget
January is always a bumper month for the public purse. Government receipts spike as workers scramble to meet self-assessment tax deadlines, pushing public income far above spending. The month provides a fleeting glimpse of a budget surplus, but it also, by contrast, is a striking reminder of how distant that goal remains.
The latest data, released by the Office for National Statistics (ONS) on 21st February, showed a January surplus of ￡15 billion ($23 billion). That allowed ￡11 billion of borrowing to be repaid, nudging public-sector debt down to ￡1.16 trillion or 74% of GDP. But over the course of recent years the reverse has been true: spending has been higher than receipts, meaning more borrowing and a growing pile of debt.
The coalition’s austerity plan proposes to close this gap by raising income and cutting spending. Much of the early push focused on taxes: the first budget set out by George Osborne, the chancellor of the exchequer, in June 2010, included a VAT increase and higher capital gains tax. Because the tax changes were front-loaded, they are almost complete: the Institute for Fiscal Studies (IFS), a think-tank, reckons four-fifths have been made. In part, this pace was possible because the aims are modest: to raise receipts from 37% to 38% of GDP and hold them there.
But even this humble target now looks tough. Income tax has brought in less than expected, as has VAT: consumer spending is held back by flatlining wages. On top of this the sale of 4G spectrum, supposed to raise ￡3.5 billion, netted just ￡2.3 billion.
This bad news means that a new income stream, appearing for the first time in January, is very welcome. Since March 2009 the Bank of England has been buying government debt, attempting to stimulate the economy through quantitative easing. Because its holdings are so large the interest it receives is chunky, too (by July 2012, the bank had earned ￡24 billion on its bond-holdings, which currently stand at ￡375 billion). This cash will be returned to the government, with a first payment of ￡3.8 billion, further boosting January’s income. Future payments will help put revenue plans back on track.
But the biggest test of austerity is spending cuts. Here plans are more ambitious: the savings account for 85% of planned deficit reduction, according to the IFS. And they have only just started: only a third of cuts to benefits and a fifth of those to departmental spending will be in place by the end of the financial year. Over the next five years, reductions in benefits, investment and government consumption will deepen year on year, cumulatively cutting expenditure from 42% to 37% of GDP.
It is early days, but the signs are not good. In December, the Office for Budget Responsibility (OBR), a fiscal watchdog, forecast that government departments would make extra cuts allowing a ￡4.5 billion underspend this year. But this week’s data confirm that spending on public services is actually likely to rise this year, so that forecast now looks optimistic. Overall,Britainlooks set to borrow slightly more this year than it did last year. The long road to a balanced budget is getting longer.