Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 21 March 2016

Budget accounting tricks

One of the problems with fixed date deficit (or in this case surplus) targets is that they encourage playing around with the public finances to hit the target. Generally, but not always, this involves making a saving today by shifting costs into the future. Privatisation is an obvious example. It may be justified if the net present value of the sale is positive, or if privatisation really improves efficiency, but all to often it is a device to meet a short term target.

As Jolyon Maugham shows clearly, Osborne has done his fair share of such tricks, and not just in the latest budget. I have nothing to add, except a thought on where this should take us. There are two roads not to take. The first, which is taken by many on the right, is to say that the Chancellor should have imposed more ‘real’ cuts to meet those targets. The second is to suggest that really the Chancellor is doing sensible macro after all, but is just trying to disguise the fact.

What accounting tricks show is that the target itself is nonsense, and not that the Chancellor should try harder to hit them. While these tricks should clearly be exposed, there is a danger that by focusing too much on them, we inadvertently legitimise the target they are designed to achieve. What they show is how difficult the Chancellor now finds it to cut public spending any further. I do wonder sometimes at the mindset of those who write that Osborne has failed because he did not cut enough to meet his targets. Have they internalised the anti-Keynesian propaganda so much that they actually believe it?

For the same reason, these accounting tricks do not show that Osborne is relaxing austerity in the way I and others have argued should happen. The planned decline in public investment is real enough. There were plenty of cuts in the budget, and while disability cuts as proposed have now gone (is this a record for the speed of reversal of a budget measure), they may simply return repackaged. The savage cuts to ‘unprotected’ department spending remain, as does the myth of protection itself. The Chancellor used tricks not because he had a change of heart, but because he ran out of options. Nor do cuts in capital gains tax or higher rate tax bands make for much of a fiscal stimulus, as they fall on groups who will tend to save much of it.

The Chancellor is culpable for sure. But his mistake was not to use accounting tricks, but in putting at the centre of his budget strategy a politically inspired target which makes no economic sense whatsoever.     

5 comments:

  1. I watched Corbyn interviewed by the BBC this morning. The whole discussion was about how the Government should meet its deficit targets. The discussion did not move on to the critical issue: the Government's strategy to reduce the deficit has failed. We need a new strategy to close the deficit through increasing long term tax revenues by increasing economic growth through increased investment (especially capital investment that will spur on productive economic activity). The Opposition, however, is not hammering that simple message home. They lack effective spokesmen.

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  2. Well, I'm shocked, shocked I say, that politicians would spew nonsense and then try to use tricks to justify the nonsense. Perhaps we forget that politicians sole goal in life is to get reelected, not to preform acts that might benefit the people or advance the country. The use of nonsense and trickery might be some of the more benign things they do. The greater problem is that we let them get away with it.

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  3. Sorry about the over-simplification, but as a physicist, I've always found "order of magnitude" calculations to be useful starting points.
    Apparently the Government is aiming for a surplus, instead of a deficit, of £10 billion in 2020.
    The National Debt is about £1.7 trillion (or £1.7 million million).
    So paying off this sum at the rate of about £10 billion per year means it will take 170 years to repay it.
    If the country is paying off its debt at this leisurely rate, why all the rush to balance the deficit?

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  4. My earlier comment pointed out that a very rough calculation showed it would take around 170 years for the National Debt to be repaid at the rate of £10 billion per year (the surplus predicted for 2020).
    The UK must have some very understanding creditors. These are people/organisations who are willing to wait for six generations before their loans are repaid. There seems to be no sense of crisis coming from these immensely relaxed people. As I said before: why all the rush to balance the deficit?

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    1. This totally misunderstands the public finances. People who lend to the government get all their money back, plus interest, when the debt matures.

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