Osborne Problem in Two Sentences

From today's Guardian:

UK government monthly borrowing rises more than expected to £8.6bn.

Fall in corporation tax receipts hits George Osborne's chances of meeting his deficit reduction targets for this year.

Or more succinctly, as the  IMF has been saying since this time last year, the government's approach to managing the economy is causing tax revenues to shrink exacerbating the government's problem.

You have no idea how much it pains me to agree with the IMF. But there is it. However the article also contains this:

A Treasury spokesman said: "The economy is healing, but it still faces many challenges..."

Now the first part of this statement is just bullshit. The economy is not healing, it is actively haemorrhaging still. Which is why government borrowing is rising still.

Remember the falling unemployment figures? Puzzling. But here we see the truth - business might be creating a lot of part-time jobs, but it is paying less tax. This either means that everyone is doing better at exploiting tax loopholes, or that they are making less profit. Only the government can do anything about the former, and despite the fact that they are long on rhetoric on this subject, to date there is not even a substantive proposal for tax reform, despite all the other reforms pursued by this so-called "Conservative" government.

One of the chief reasons revenues continue to fall is that demand is low, and one of the chief reasons demand is low is that debt repayment is soaking up a huge proportion of GDP. When debt is 492% of GDP (according to Robert Peston) what are the payments on it likely to be - I've asked many economists to offer a guess and they uniformly ignore me. Perhaps the answer doesn't bear thinking about?

A conservative is someone who seeks to preserve the status quo. The so called Conservative element of the coalition government is strongly reformists and has been shaking up the establishment from top to bottom to no great purpose. The Conservatives have morphed into the NeoLiberal Party.

Gloomy News

I was pondering the popularity of prophets of doom today. Regarding the economy I'm far more predisposed to believe a gloomy forecast than an optimistic one. Last week John Major (out promoting his new book) was giving optimistic forecasts ('green shoots' blah blah).

Today the UN Warns of Global Food Crisis & the IMF says UK austerity is 'costing and extra £76bn'. While they used IMF backing to justify government policy in the early days, now that the IMF have changed their tune the government is ignoring them. And UK construction sector contracts again in August. It will be interesting to see what employment figures are like.

I'm persuaded by those people who say that deleveraging in the private sector has only just begun, and that it will be a long time before we see growth again. One of the questions that is raised by another correspondent on Renegade Economist is the possibility that growth will never get back to the point where we can afford the interest on our loans (which remember are about £7tn at present vs. GDP of £1.5tn). Japan in a similar situation took 15 years to get out of technical recession in 2005, then the credit crunch hit in 2007. They've had near zero growth for 17 years with no change in sight.

What happens to the UK if we have 17 years of near zero growth? Is anyone actually thinking about or planning for this? Or does the blind optimism of the government that this recession is like all the others and we'll bounce back?

If we can't pay our loans we'll end up defaulting. I've already noted the upward trend in business insolvencies. I think we'll see this trend continue. As businesses overburdened with debt during the madness of the debt bubble of the 90's and 00's succumb as Travelodge and Biffa both recently did.

And If we don't bounce back can I get a job as a special advisor to the government?

Austerity? What Austerity?

Scott's been saying in comments that "there is no austerity". What do the figures look like? This the graph produced by publicspending.co.uk with the treasury estimate for 2012 (which the government are likely to overshoot).

A rise of £6.63 billion, 

from £681.33 billion to £687.96 billion

 Clearly the rate of increase in spending has slowed, but the total of government spending has continued to increase. So in a sense Scott is right - there is no austerity. In terms of a percentage of GDP total government spending will drop from 45.13% to 44.11% a drop of 1.2%. However we know that the government are likely to overshoot and so it's likely that even in %GDP terms the government will have spent more.

But some sectors have had real cuts. Comparing the 2011 figures with the OBR projections for 2012 (which are unlikely to be very accurate, but are all we have to go on at present).

A cut of £140 million.

A drop of about £20 million 

which is much less than 1%.

A drop of £1.6 billion

Up, then down, and now on the way up again

By Contrast some departments have seen massive increases:

Interest payments spiked in 2011 and continue to rise, 

though we're supposed to have low interest rates

Spending on defence is expected to increase by £170 million; 

but welfare by £2.4 billion, and pensions by £7.8 billion.

The increase in spending is clearly being drive by increases in welfare and pensions from this point of view. Though the IMF points to a drop in government revenue as the primary driver of increased borrowing overall.

Consider that older people are more likely to vote, and tend to vote Conservative. Cutting pensions would be a disaster for a Conservative government. And consider that the government have spent a huge, but undisclosed, amount on anti-welfare propaganda since taking office, and have made every effort to popularise the idea of welfare as payments to the unworthy.

Since they cast the main economic problem as one of too much government debt, this has made welfare cuts a popular policy. This has allowed government to attack people on out of work, illness and disability payments. And note that unemployment is 8% so a lot of people are out of work. Seen in this light the government scramble to cut welfare, thereby placing a heavier burden on the poor and disadvantaged makes good political sense - it not only protects Tory voters, but appeals to Tory moral arguments about the undeserving poor. They may be economic morons, but they have political cunning.

Meanwhile the country is slowly going downhill. The latest reports suggests that removing more regulations (i.e. protections from rapacious business) is the way to prosperity. The trend is to maximise regulations for people and minimise regulations for business. And I can't help thinking that the equation can not add up to anything very prosperous or happy for the masses.
 

IMF on UK Debt

There's a very nice little blog on an IMF report from 2011 on the Touchstone website. And it illustrates a good point about where we get our information from and to what extent we can trust the government and the media to keep us well informed.

Back in Oct 2011 the IMF were saying that if growth slows that austerity cuts would need to slow down. The said the same thing in their most recent report: the BBC reported it like this: "The government should slow the pace of budget cuts next year if UK growth does not recover, the International Monetary Fund (IMF) has said." So it seems the IMF is consistently telling the government to on cut public spending if there is sufficient growth. This is the lesson that Japan learned the hard way in the 1990s. The government on the other hand take the IMF report as a confirmation that austerity is the right thing to do.

Back to Oct 2011 there is another story in the IMF report which was not picked up on by the media and flatly contradicted by the government. And it relates to a graph.

All credit to Duncan Weldon for spotting this and telling us what it means. As the title says this graphs shows us what caused public debt increases post 2007 when the credit crunch hit - 5 years ago this week. All the figures are as a percentage of GDP. I won't talk about Italy because Italy is clearly in a class of it's own.

The red block is fiscal stimulus and the graph shows that compared to France and Germany the UK spend less on fiscal stimulus. Note that Germany spent much more on fiscal stimulus and now has a much healthier economy than most of the rest of Europe. These two facts are intimately connected.

The yellow line is amount spent supporting the financial sector, and here again Germany spend a great deal more.

The grey line is basically interest payments which went up either because of more debt or higher interest rates, or both in Italy's case. Clearly this is the primary driver for Italy.

Finally the blue line is revenue loss attributable to the economic downturn - the loss of production. Note that Germany which proportionally spent a great deal more bailing it's economy out, now has a negative contribution from loss of production - i.e. they gained revenue over this period. In France and Germany revenue loss was the major driver of borrowing.

As we know the government's austerity plan is resulting in increased borrowing, and projections are that it will continue to increase. And the IMF are telling us that the main driver of this is revenue loss. As we've heard this week the UK economy is still shrinking: growth was -1% for H1. While the Bank of England are forecasting +1% for H2, we also saw this week that construction is down 6% for the ytd, and "The main driver in this decline was the fall in new public works, which fell by 22% across the three months, reflecting the impact of government spending cuts." BBC. [my italics]

So, as Duncan Weldon points out, the major driver of government borrowing since 2007 has been revenue loss, not profligacy. And the reason the IMF have warned the UK government two years running to beware of cutting while growth is weak would seem to be because without growth the cuts will set up a vicious cycle: