Economic myths: what caused the UK public sector deficit.

Thanks to Icarus at HPC for additional input.

People are vaguely aware that the UK government has been running horrendous deficits for the past few years, around one-tenth of GDP, i.e. +/- £150 billion a year. Various explanations, nay excuses, are bandied around:

Excuse #1: A fall in tax receipts

Nope. According to the Public Sector Finances Databank Tab C1, tax receipts in the last pre-crisis year were £519 billion, and by 2009-10 they were down to £513 billion. Tab C1 also shows that taxes went down slightly from 38.6% of GDP to 36.5%, in other words that nominal GDP went up by 4.5% over the three years (which was still a small real fall after inflation).

So that's a fall of £6 billion.

Excuse #2: An increase in the cost of welfare

Nope. According to DWP's June 2010 Benefit Expenditure Tables, working age + child welfare went up from £46 billion in 2006-07 to £52 billion in 2009-10. Tax Credit spending is in addition to that, which according to Table 1.1 of the Public Expenditure Statistical Analyses ('PESA'), went up from £19 billion in 2006-07 to £28 billion in 2009-10.

So that's a total increase of £15 billion.

Excuse #3: The cost of the bank bail outs

Nope. Table 1.1 of PESA includes cash outflows for 'Financial sector intervention', but as explained in Box 2.A, those are zeroed out again, in other words they are treated as short term investments which are expected to be recovered, and so excluded again as 'accounting adjustments'.

The figures included under 'Resource Departmental AME' show a big expense in the first year of the bail-outs and then corresponding income in the following three years, the line appears to net off to +/- nothing.

The figures included under 'Capital departmental AME' show the amount invested in RBS and Lloyds shares and money lent to banks (total £122 billion), the shares are currently standing at a loss (I believe) but the cost of the shares was added back as an 'accounting adjustment', it's an investment not spending (allegedly).

So the net impact of the bank bail outs on official government spending was, according to Box 2.A +/- nothing.

Excuse #4: The current government has to deal with Labour's deficit

Not really true. From PESA, under the last three years of the Labour government, total public spending went up from £550 billion to £669 billion, that's even after excluding the cost of the bank bail outs. Under the Lib-Cons, spending is still drifting upwards, they've pencilled in total spending of £744 billion by 2014-15. So it's increasing less rapidly, but it's not falling in cash terms.

From PSFD, annual deficit was about £30 billion in the years up to 2006-07, and it shot up to £156 billion in 2009-10. The Lib-Cons hope that this will come down over time, but they plan to run deficits for the foreseeable future, their spending plans are a continuation of where Labour left off.

As Sherlock Holmes said...

"Once you have ruled out the impossible, what you are left with, however improbable, is the truth"

In this case, the truth is not improbable at all, the real reason for the deficit is quite simply that the UK government is spending money like water and makes no pretence otherwise. This has little to do with the tired old excuses listed above. From PESA, the total increase in annual public spending between 2006-07 and 2009-10 was £119 billion, and the annual deficit went up from £30 billion to £156 billion.

Either way, this looks like and increase in spending/deficit of about £120 billion a year.

If you want, you can deduct £6 billion tax revenue shortfall and £15 billion extra welfare spending from the extra £120 billion spending/deficit (these were a direct result of the financial crisis), and make some cunning inflation adjustment as well, but that still means that £100 billion of the extra annual public spending (compared to pre-crisis years) is unaccounted for or unexplained, i.e. it's just waste and crap (in addition to the £30 billion pre-crisis deficit which also went on waste and crap).

Just sayin', is all.