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Our current budget deficit woe

    Yesterday’s public finances figures were very bad news. It showed the current budget deficit (i.e. the difference between all non-investment expenditure and current tax receipts) for October was 52% higher than the October figure last year.



    Overall, the current budget deficit has been £65.2 billion for the seven months April-October this year, compared to £58.3 billion for the same period last year (i.e. there has been an 11.8% increase in current borrowing). The OBR had thought the increase would be in the region of 0.6% for the full financial year.

    If this 11.8% increase trend were to continue, then our full financial year current deficit for 2012/13 would be around £106 billion - £10.7 billion more than the most recent OBR forecast suggested. The IFS suggest that overall borrowing would be £13 billion higher than planned.

    This deterioration in the public finances can be seen from the chart below, which shows a rolling 12-month current budget deficit. The direction of travel suggests we may well end up with a worse current fiscal position in 2012/13 than even in 2010/11.

    But what about all these cuts? Well, spending on net social benefits in nominal terms is up £6.2 billion or 5.7% on the April-October figure last year (not that much of a surprise, given lots of benefits were uprated by 5.2% in line with September 2011’s inflation figure). And other current expenditure is up by 1.7% (so a fall in real terms given our current inflation rate).

    In all, the government hasn’t made any inroads into total current expenditure since 2009/10. In the first two years of the Parliament overall current expenditure rose by £8 billion (with increases to welfare payments and debt interest offsetting modest other cuts), and so far this year current benefit expenditure has increased in real terms, more than offsetting modest real terms cuts to other current expenditure.

    The media again are going with the line that the current worsening of the budget is because of weak tax revenues. And to a certain point, this is true - tax revenues have certainly been weaker than the government expected. But these outturns show just how heavily predicated the government's plans are on healthy tax revenues. What if this was a completely unreasonable assumption?

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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