If this is austerity, why is debt rising? - The Share Centre Blog

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Michael Baxter

If this is austerity, why is debt rising?

Written by: Michael Baxter on February 7th 2013

Category: Thought for the day

Austerity is a myth. It must be. According to the Institute of Fiscal Studies (IFS), the chancellor will be borrowing £64 billion more in 2014/15 than he originally planned, and there is a better than fifty: fifty chance he will borrow more this year than he did last year. Therefore, goes the argument, it is simply not true that the UK economy is being quashed by austerity. In fact, we are seeing a massive fiscal stimulus. Well, is that true?

Yesterday the Institute of Fiscal Studies presented its green budget. In the small world of economic reporting, this is a big deal. The great and the good of this world were there, as were economists from the IFS and Oxford Economics, who also worked on the green budget and gave us  a microscopic view of the UK economy.

A few key findings stood out in my mind.

First, the UK’s budget deficit is estimated to have been 6 per cent of national income in 2012. Only in Greece, Spain and Ireland was the deficit higher than this. Incidentally, Germany’s deficit was a tiny 0.2 per cent of national income, and Sweden’s was a big, round nothing.

The UK’s consolidated gross public debt is estimated to have been 88.7 per cent of national income at the end of 2012. Countries that were even more indebted by this measure in the Euro area were (listed in order of size of debt with the country with the largest debt first) Greece, Italy, Portugal, Ireland, Belgium, France, and Cyprus. The least indebted country by this measure was Estonia, followed by Bulgaria and then Luxembourg.

Of course, it all boils down to what you mean by debt. Do you count total debt, or rather debt minus assets? The IFS says the UK’s net debt is set to be less than 60 per cent of national income for the foreseeable future.

All told that is a pretty disturbing picture, although when you take assets into account, maybe the UK’s plight is not quite as serious as some say.

Now let’s drill down some more.

Firstly taxation: in the year 2013/14, the overall effect of changes to the taxation and benefits system will be a modest net giveaway. On the one hand, benefits for those in work will not be so generous, with families with children seeing the biggest cuts in benefits. On the other hand, the increase in personal allowance is outweighing the effect of benefits cuts.

Social security spending, however, is set to rise from 28.5 per cent of all public spending in 2010/11 to 32.5 per cent in 2018/18. So why is that? Why is social security spending rising while benefits are being cut? Well, you don’t need to look far for the explanation. It’s our old friend the baby boomer. Quite simply, as baby boomer retire, pension payments rise, which more than makes up for cuts in benefits.

So what about government spending?  The government is spending more, so why do people keep whining about the severity of the cuts? The reason is this. Some areas of government spending are protected – namely education, health, and international aid. This means the other sectors bear a heavier proportion of any cuts.

The IFS has taken a look forward to the next parliamentary term,  and – after assuming current government targets for  reduced debt over this period are adhered to – said: “If the total budget of the NHS and non-investment budget for schools were frozen in real terms between 2016/16 and 2017/18, and the total budget of the Department for International Development were increased in line with national income, then all other areas of departmental spending  would see their budgets cut by 12.7 per cent between 2015/16 and 2017/18.” The IFS added: “Over the whole seven-year period since 2010/11, these ‘unprotected’ areas of departmental spending would have their real budgets cut by 32.2 per cent.”

If the government then decided to protect spending on defence, the cuts in these so-called unprotected areas would be even greater.

And that in a nut shell is the problem. The cuts may not seem that drastic, not in absolute terms, but in some areas they are very severe indeed.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: austerity verses rising debt, Institute of Fiscal Studies Green Budget, is austerity a myth

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