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Economical with the truth on cutting the deficit.

It is unworthy of coalition ministers to repeat the absurd claim that the government has cut the deficit by a quarter. I hear it repeatedly. It is untrue, or in as much as it has any truth it is an unethical manipulation of statistics; unethical because of the consequences of misrepresenting the financial situation to the public. So where does the claim come from and does it stack up?

The claim comes from a comparison of Public Sector Net Borrowing (PSNB). It is convenient to choose the periods of comparison, for example a low year with the  high year. This is an old statistical trick. The problem of doing this is that the years chosen might contain elements that were exceptional and not typical of the underlying trend or position. This is why it is better to compare longer periods to iron out anomalies, exceptional one off items of expenditure or revenue. Furthermore, running deficits in a given year or period is not necessarily bad. Cutting PSNB is not in itself 'good'.

And this is why the claim made by government ministers is disingenuous. Statistics from the ONS show that for the period April to September 2012, the public sector net borrowing, excluding the temporary effects of financial interventions (PSNB ex), was £37.1 billion, which was £25.4 billion lower than in the same period of the previous year, when PSNB ex was £62.4 billion. It all looks good until you consider exceptional elements, or what factors contributed to the fall.


The April 2012 the net borrowing figures included two one-off transactions. The first was a £28 billion transfer of the Royal Mail Pension Plan and the second was a £2.3 billion transaction to the Government from the closure of the Special Liquidity Scheme.

When the effect of these two one-off transactions is removed, then PSNB in the period April to September 2012 would be £67.4 billion, which would be £4.9 billion higher than in April to September 2011. A decreasing deficit turns into one that has increased.

A better indication of the financial situation would be to consider debt as percentage of GDP, as this would be a measure of its sustainability. By this measure debt has been increasing. Public sector net debt was £1,065.4 billion at the end of September 2012, equivalent to 67.9 per
cent of gross domestic product (GDP).

Running deficits is not in itself an indication of bad financial management. It depends on what underlies the budget deficit. Running deficits resulting from investment, building infrastructure, getting people back to work and increasing productivity and high street sales, can be strategically sensible if it leads to increased revenue in later years that then cuts the deficit.

Bad deficits are of the opposite kind. They result from falling revenue against a background of increased spending on unemployment and welfare, the result of recession. This leads to a bad cycle of cutting spending further which simply aggravates the problem. This I believe is the situation Osborne has got us into.

Cutting budget deficit should not be the aim in the short to medium term. The target should be policies that stimulate growth and increased tax revenue. Simply cutting the deficit is bad strategy.

Postscript

An update on PSNB: For the period April 2012 to January 2013, public sector net borrowing (excluding the capital payment recorded as part of the Royal Mail Pension Plan transfer in April 2012) was £93.8 billion; this is £1.5 billion higher net borrowing than in the same period the previous year, when net borrowing was £92.3 billion.

Public sector net debt was £1,162.8 billion at the end of January 2013, equivalent to 73.8% of gross domestic product (GDP).

The Director General of the British Chambers of Commerce has today called on the government to act speedily with measures to stimulate growth.

“The Chancellor should seize the opportunity in next month's Budget to be radical, and introduce measures that create an environment of enterprise, stimulate export growth, kick-start infrastructure projects and create a structure of business finance which supports growing companies. Above all, these measures should create confidence. Our own research shows that firms across Britain believe they can drive growth this year, but they can’t do it alone. The government must be bold and do all it can to boost confidence so that businesses can create jobs, wealth and ultimately long-term growth.”

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  1. Thank you for an simple clear explanation to a finance ostrich

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