The Conservative Party has set much of their stall on the idea that they have succeeded in halving Britain’s fiscal deficit. For five years the UK has endured austerity policies geared toward reducing the deficit by cutting down on government expenditure – this has constrained and in many cases reduced public services.
Chancellor George Osborne has sought to convince people of the imperative to bring public finances into balance – failure to achieve the promised balancing could have voters going to the polls thinking, “all this was for nothing?” So, how has he done? Has the deficit been halved, as the Conservatives have claimed in their election poster?
The “deficit halved” claim is dubious at best. Even the true-blue Daily Mail found it difficult to swallow. As well it might, because the claim is demonstrably false.
The reduction of the deficit since the coalition government took office can largely be attributed to their approach to borrowing. As the chart below shows, the government has significantly curtailed government borrowing in a way that has hindered the UK’s economic recovery, which has in turn curtailed the deficit reduction.
Assessment of public borrowing is not free of ambiguity, because it is not always clear whether the “deficit halved” claim refers to central government borrowing or total borrowing. The chart above shows both by month.
In May 2010, when the coalition took government, central government borrowing was £150 billion and total borrowing £161 billion. Central government borrowing for the last quarter of 2014 dropped slightly down to £99 billion, while total borrowing was slightly greater at £101 billion.
Simple arithmetic produces a decline in borrowing of a bit more than a third – 35% for the central government and 38% for the total.
The apparently small difference, three percentage points, is important because it demonstrates that local government bore more than its share of the austerity burden. From the last quarter of 2008 to the same quarter last year, central government expenditure (excluding investment) rose by £41.6 billion, while for local government it fell by £6.2 billion.
A bit closer to the deficit halved claim is total borrowing as a share of gross national product, which is down from 9.8% to 5.4%, a fall of 48.6%, which edges in on half. However, this “halving” does not support the chancellor, it contradicts him.
Critics of austerity policies have consistently argued that borrowing would decline as a result of investment that produces economic growth. As the economy grows tax revenue rises and several important expenditures decline, for example payments to the unemployed. This process explains why total borrowing to GDP ratio fell by 49% and borrowing itself by only 38%.
Recovery delayed, target missed
These numbers considerably understate the failure of the chancellor’s policies. The expenditure cuts delayed the recovery, such that we are in the slowest recovery on record.
Without the cuts the economy would have grown faster and the deficit declined more. A study for the National Institute of Social and Economic Research by Simon Wren-Lewis estimates that austerity policies came at a cost of 5% of GDP in 2010. He concludes that “a conservative estimate” of austerity policies would be “about £100 billion, or £1,500 for each adult and child in the country”.
To put the matter simply, the claim to “halving the deficit” is false. As of December 2014 the deficit was down from £161 billion to £99 billion, needing another £18 billion for “halving”. Appealing to borrowing as a share of GDP is inappropriate, and worse, an admission of failure. In May 2010 the chancellor pledged to start “cutting into the national debt” by fiscal year 2015-2016, meaning an overall surplus next fiscal year.
In that context he projected a borrowing to GDP ratio of 2.1% for 2014-2015 for details. At the end of January with only two months to go in the fiscal year the annual equivalent figure was a long way off target, at 5.3%. Measuring borrowing is not without its ambiguities, but getting this down to the self-imposed target of 2.1% is unambiguously impossible.
Convincing people of the need to lower the deficit cuts both ways – when you fail you are in electoral trouble.