Britain’s public finances were dealt a vicious blow by the financial crisis of 2008. We’ve come a long way since then, says Simon Wilson – but meeting the government’s goals will require higher taxes.
How are the UK’s public finances?
There’s good news and there’s bad news. But overall, it’s more bad than good. On the bright side, our annual deficit (or “public sector net borrowing” – the amount the government overspends each year) is back to where it was before the 2008-2009 financial crisis – in fact, it’s slightly lower.
At the peak of the crisis (in terms of its fiscal impact) in 2009-2010, the UK deficit surged to 10% of national income. But in 2017-2018, it was just 1.9% (£40bn) and is expected to fall in coming years. Already, this is the lowest deficit we’ve had since 2001-2002, and it is £18bn lower than the Office for Budget Responsibility was predicting last year – reflecting a sustained period of (albeit low) economic growth.
So what’s the bad news?
The national debt (our overall debt pile) has ballooned, and there’s no sign of it coming down, even if the deficit remains low-ish. At the end of the last financial year (March 2018) our national debt was £1,763.8 bn (or £1.76trn), which was equivalent to 85.8% of gross domestic product (GDP). This sort of level is not entirely unprecedented. For much of the 20th century (until the 1970s) the UK’s national debt was far higher than it is now, and in the 19th century, when Britannia ruled the waves, it was often more than 200% of GDP.
That said, both of those examples were essentially the result of wartime spending, whereas our national debt is now higher than it has been for half a century, despite the absence of a world war, or an empire to run. And it is more than 50 percentage points higher (as a share of GDP) than before the 2008 crisis.
But if the deficit is falling, won’t the overall debt?
Probably not. According to the Institute of Fiscal Studies (IFS), which this week published its “Green Budget” overview of the UK’s public finances, a deficit of 1.9% (the projected figure for 2018-2019) might easily – in the past – have led to the overall debt falling quite quickly (as a percentage of GDP). But not now.
Due to lower growth forecasts compared to the historic average (and to the fact that the way the UK accounts for student loans flatters its headline borrowing measure) a deficit of 1.8% “could easily leave debt on a rising path as a share of national income over the long term”, says the IFS.
Any more bad news?
Yes. Last week the International Monetary Fund (IMF) published an international table examining the fiscal “net worth” of various big economies – totting up all the assets available to each government, then subtracting the long-term liabilities. The results, which give an indication of the long-term fiscal health of each country, make uncomfortable reading for European nations in general.
Only Norway, with its oil-based sovereign wealth fund, has a large positive net worth (of more than 400% of GDP). Other countries with positive figures include Russia, Australia, and South Korea. By contrast, Germany, France, Britain and Portugal are all in the red – with only Portugal being in a worse position than us. On IMF figures, the UK (which, to be fair, the IMF has praised for its “fiscal transparency”) currently has less than £3trn in assets and £5trn in liabilities – a negative net worth of more than £2trn (more than 100% of annual GDP).
How has that changed over time?
Since the financial crisis, that negative net worth has doubled (according to the IMF). By contrast, Norway, which has enjoyed a similar windfall over the past few decades from North Sea oil (but has a much smaller population) has seen its positive net worth grow by 167% in cash terms. The UK’s relatively poor position reflects the fact that the government owns few assets compared with most countries following the waves of privatisation in the 1980s and 1990s.
It does, however, have large public debts and future pension liabilities. That suggests that in the future the UK will need to tax more heavily – and if it wants to bring assets close to parity with liabilities (as seen in the likes of India, Japan, and the US) it will need to run budget surpluses.
But isn’t austerity ending, at least?
“Austerity” is obviously a politically loaded term, rather than a fiscally objective one. But the IFS reckons that on the “narrowest possible definition”, ending austerity (as the prime minister indicated at the Tory party conference) would require the chancellor to find £19bn of extra public spending relative to current plans by 2022-2023. That would leave unprotected departments’ spending constant in real terms, and falling in terms of share of national income.
And it would still leave in place £7bn of further cuts to social security. Even this interpretation of “ending austerity” will not be compatible with the government’s objective of eliminating the deficit by the mid-2020s, says the IFS, without “much higher growth or substantial tax rises”.
So will we see tax rises in the Budget?
It’s certainly an option. For example, raising tax revenues by 1% of national income would take the overall tax burden in the UK to around 35% of national income. That would be the highest level since the 1940s, but would still leave Britain well below almost all similar EU nations (with the notable exception of Ireland). However not many commentators expect big tax rises this year, especially given the febrile political situation, and the uncertainty surrounding Brexit.
Instead, says Chris Giles in the Financial Times, this month’s Budget will more likely be something of a “holding statement”, with the big decisions on austerity, tax and borrowing to come in 2019, once the scheduled date of Brexit is out of the way (on 29 March). “The details and the presentation of this defining moment will have to wait, but the essential element is clear: Britons will have to pay more tax.”