This morning's public borrowing figures show a budget deficit (PSNB) for April–August 2009 of £65.3bn, compared with £26.1bn in the same period last year. Extrapolating these figures forward suggests that weak tax receipts will push borrowing some way above the Treasury’s £175bn forecast for 2009/10 as a whole.
The figures confirm the dire state of the public finances. It seems likely that budget deficits will overshoot Treasury forecasts not only in 2009/10 but for some years to come, resulting in pressure to tighten fiscal policy by more in the medium term than the Treasury's Budget plans suggested. Reining in borrowing would also be prudent to prepare for the costs of an ageing population and to build up a buffer against future recessions.
It would be premature to tighten fiscal policy before there is more evidence that the economic recovery is sustainable. However, it is likely that both additional tax rises and further spending cuts will be required over and above the 8.6% cumulative reduction in real departmental expenditure assumed in current Treasury projections for the three years to 2013/14.
The increased budget deficit for the first five months of the 2009/10 financial year reflects central government receipts being down by around 11.5% on a year earlier. Compared with the Treasury forecast of a 7.6% decline for the year as a whole, this implies a shortfall of around £16bn in tax receipts for 2009/10 – after adjusting for an estimated £3bn boost to revenues in the last three months of 2009/10 due to the standard rate of VAT rising back to 17.5% on 1 January 2010. It also reflects central government current spending being up by around 5.3% on a year earlier. This is lower than the Treasury forecast of a 7.4% rise for the year as a whole and so might imply a current spending undershoot of around £9bn for 2009/10 as a whole.
Additionally, it shows net public sector investment being up by 37.8% on a year earlier; when compared with a Treasury forecast of a 16.2% rise for the year as a whole, this might imply a net investment overspend of around £19bn for 2009/10 as a whole. However, this is subject to large margins of error given the lumpy nature of capital projects and might not be considered undesirable to the extent that higher public investment supports the economy at a time of recession.
Simple extrapolation from these figures would suggest a budget deficit for the year as a whole of around £200bn (c.14.5% of GDP). But great caution needs to be shown about such estimates at this relatively early stage in the financial year, particularly in relation to public spending profiles that may vary from year to year.
There are signs that the economy is stabilising so that the rate of decline in tax revenues might be less marked in the second half of this financial year. Nonetheless, today’s figures still point to persistent weakness in tax receipts that make an overshoot in the budget deficit likely relative to the latest Treasury forecast of £175bn in 2009/10 from the April 2009 Budget. Borrowing could also remain higher in later years given that the Treasury’s fiscal projections are based on assuming economic growth of 3.25% per annum in the three years to 2013/14, which is some way above latest consensus forecasts of around 2.3% per annum average GDP growth in 2011-13.
All of the tax and spending options for fixing the public finances involve painful choices. The option of tax increases, including the big three of income tax, national insurance and VAT, will have to be looked at. On the spending side, efficiency improvements will be necessary, but these will not be sufficient on their own to fill the fiscal gap. There is a need to revisit the role of government and put all options on the table, including stopping some activity and prioritising some areas over others.
Jon Sibson is a partner and Government & Public Sector leader at PricewaterhouseCoopers
