Keynesian theory and public borrowing
RBC Capital Markets have a chart which illustrates nicely what today’s public finances figures mean for the Chancellor’s deficit reduction strategy:
They’ve stripped out all the distortions such as the Government taking on the assets of the Royal Mail pension fund, plus all the revenues coming into the exchequer from the bailed out banks.
What it shows is that annual borrowing has been falling in every financial year since 2009-10. But this year, since March, things haven’t been going well. Borrowing over the first two months of this financial year has been higher than the same two months last year.
Unless the economy picks up, that green line could end up well above that red dot, representing the Coalition’s target, by March 2013.
Keynesian theory says that overly hasty deficit reduction can be counterproductive. This is because cuts and tax rises depress overall economic activity and thus tax receipts. Depressed activity also pushes up unemployment and results in a bigger benefits bill.
The latest figures seem to support that. Income tax receipts in May were down by 7.7 per cent on May 2011 (£9.6bn vs £10.4bn). And welfare payments were up 11.6 per cent (£16.3bn vs £14.6bn)
The Treasury says that the welfare payments were artificially inflated in the month because a lot of tax credits went out in May for various reasons that would normally have gone out in June.
But it has no explanation for the weak outturn in income tax.
Both the Treasury and the Office for Budget Responsibility warn against placing too much emphasis on one month’s figures.
Fair enough. But keep watching that green line.Tagged in: deficit, obr, pubilc borrowing, RBC Capital Markets
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