The public sector borrowing figures out today are still pretty grim. Borrowing for August was almost exactly the same as last year (both around £14.4 billion) whilst overall the current budget deficit was higher in August 2012 (£13.2 billion) than last year (£12.8 billion). This means that overall the cumulative current budget deficit is £12.9 billion higher for April-August 2012 than April-August 2011. The British Chambers of Commerce estimate that the Chancellor will overshoot his borrowing target for the whole year by £20 billion.
But what’s driving the higher than expected borrowing so far this financial year is a much slower growth of tax receipts than expected. The Budget implied these would grow by 3.9% across 2012-13, but so far since April overall growth in tax receipts has been just 0.4%. In particular, receipts from income tax, CGT and NIC is overall just 1.1% higher in the last five months compared to last year, whilst the expected growth set out in the Budget was 2.4%.
In contrast, current spending is 3% higher in the past five months than last year, whereas the OBR forecast it would be 3.1% above 2011/12 by the end of 2012/13. So current spending is roughly in line with what the Government expected. It’s worth noting, however, that the OBR had factored in a 5.8% growth in benefit spending for the whole year, in part driven by the growth downgrades but also because the government decided last year to continue uprating many benefits by more than 5% after the high inflation last year. This, combined with the slower than expected growth, has meant overall net benefits are up 6.5% on the year. In contrast ‘other current spending’, whilst still rising in nominal terms, is below the growth expected.
What does this all mean? Well, the current deficit is higher *than expected in the Budget* because of sluggish tax revenues and higher than expected net benefits – i.e. because of low growth. But policy decisions (to uprate benefits generously, triple lock on pensions etc) have meant that expected expenditure on net benefits was always going to grow quickly this year, and we should question whether these policy decisions were wise.
The figures do highlight the precariousness of the Chancellor’s fiscal rules, however, and how linked they are to growth. Any measures to raise the growth rate without adding to borrowing would be most welcome.