Still No Sign Of Those British Spending Cuts

We’ve all heard the fairy tale of the big spending cuts and “austerity” in Britain. Yet there is no trace of that in the British budget statistics. During October for example, spending excluding interest payments was £48.3 billion, up by 9% compared to Ovtober 2011. That reflected largely calendar effects, but if you look at the August-October period as a whole, the increase was 3.7%.  And for the entire January-October 2012 period spending increased by 3.9% compared to January-October 2011. This is significantly above the rate of inflation (especially if you look at the GDP or domestic demand deflators) and also significantly above nominal GDP growth.

Because of that, and because of the fact that total tax revenue has been roughly unchanged in nominal termsm (which is to say they’ve fallen in real terms), the deficit has increased by about £10 billion. The increase would have been even larger if interest rates hadn’t been so low due to Bank of  England QE and because of the irrational investor belief in British bonds as “safe havens”., something that has caused interest payments to decline despite a rising debt level.

It could also be noted that because of a misleading accounting trick, formal net borrowing is down. What they did was to transfer the Royal Mail pension fund to a government institution, and then subtract the assets of that fund from net borrowing and net debt, while ignoring the liabilities that the fund has. This didn’t really reduce the real burden of debt, but it reduced formal net debt, and for this year, formal net borrowing.