Further bad news for the public finances came through today with official figures showing that public sector net borrowing was £4.3 billion in January.
With the Treasury predicting total public sector net borrowing for the 2009-10 financial year at £178 billion, £4.3 billion in January may not seem like much. But January is the month when the Treasury’s coffers are boosted by corporation tax and self-assessment payments. So even in a downturn, the public sector should be running a surplus in January. Indeed, this is the first time the Government has borrowed money in January since records began in 1993.
From April 2009 through January 2010, Office for National Statistics figures show that:
- Net borrowing totalled £122 billion, compared with £58 billion during the same period in the 2008-09 financial year.
- Tax receipts in January 2010 were down £7.1 billion, or 11.8 per cent, from January 2009.
- Net borrowing in January 2010 was £4.3 billion, compared with a £5.3 billion surplus in January 2009.
The general consensus is now for net borrowing to come in at around £180 billion for the whole 2009-10 financial year, slightly above the Government’s estimate.
This is a horrendous state of affairs to be in. The UK government is now borrowing more than £1 for every £4 that it spends, while the deficit as a share of GDP is at a comparable level to Greece. Clearly this cannot be sustained for very long.
The 20 economists who wrote to the Sunday Times, and senior business figures like Sir Richard Branson, are right that current plans to reduce the deficit are insufficient, not adequately specific and are lacking in urgency. Business needs to see a convincing plan which sets out specific cuts to lesser priority areas of public expenditure – the IoD, together with the TaxPayers’ Alliance, made 34 suggestions for items of public spending to cut, which would save a total of £50 billion per annum. Given the sheer size of the deficit, it is likely that still more will be needed.
The problem is that the private sector economy is so weak. Unemployment is still at very high levels, bank lending is still weak (a recent Policy Voice survey of IoD members found that, of the quarter who had tried to access finance from the institutions that they banked with in 2009-10, 57 per cent said that their application for finance had been rejected by their bank), and growth is still anaemic. There is a serious risk of a double-dip recession, or even of a triple-tumble.
Hence why there are calls to delay any deficit reduction until the private sector economy is growing strongly again. It’s not an easy decision, but the IoD’s view is that the “wait-and-see” approach is too risky. If bond markets take fright and gilt yields spike, the UK would enter even more turbulent waters with a vicious cycle of higher debt and higher debt servicing costs. As Greece is discovering, the ultimate public spending cuts and tax rises would have to be much harsher.
By contrast, early action will keep gilt yields low, allow interest rates to stay lower for longer, and provide investors with confidence in the UK economy. These factors will be likely to mitigate the effects of a sharp cut in public expenditure.
Ultimately, if the financial crisis has taught us anything, it is that we cannot have something for nothing and that we must live within our means. This lesson holds true for governments as well.