Britain’s still deep in the red

The government’s plan to cut the deficit (the annual government overspend) has hit a setback. The government borrowed £11.4bn in June, only marginally less than in June 2013.

April and May also saw big deficits, leaving borrowing in the first three months of the 2014-2015 tax year 7% higher than in the same period last year.

Yet, the Office for Budget Responsibility expects borrowing to be 10% lower in 2014-2015 as a whole, so this is hardly a promising start. The overall debt pile has risen to a new record above £1.3trn, 77.3% of GDP.

What the commentators said

The recovery has trimmed the budget deficit over the past few years, but the trend now seems to have gone into reverse, said Phillip Inman in The Guardian. Still, “there is no sign of panic in the City. It is a long time since anyone worried about the reaction of bond traders to each decimal point increase in the government budget deficit.”

Don’t rule out another fiscal crisis, said Allister Heath in The Daily Telegraph. The deficit is still “extraordinarily high by historic standards”: it reached 6.6% in 2013-2014, down from 11.3% at the height of the recession.

The current “snail-like” pace of consolidation implies the budget won’t balance until 2019. So “if anything at all goes wrong” over the next few years – Russia or China triggering a global slowdown, say, or a new government turning the spending taps on again – Britain’s creditors could start to worry about borrowing hurtling out of control.

The immediate problem is that spending is being cut too slowly, while tax receipts are “remarkably subdued” for such a supposedly strong recovery. While there are more people in work than ever, falling productivity is keeping wages, and hence income tax, subdued.

There are grounds for optimism on this front, however, said Capital Economics. A key problem for productivity has been a lack of business investment, but this is now rising – it is up by 10% year-on-year and the latest data suggest it will be “stellar… in the near term”. Surveys covering salaries are pointing to above-inflation pay rises later this year. It’s too soon to panic about the public finances.

Merryn

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