It's Still Getting Worse

TUESDAY, JULY 20, 2010

It's Still Getting Worse

No improvement

When it comes to our horrendous fiscal deficit, the Labour Party, the BBC, and the rest of the left have long argued that we can afford to wait before starting with the knife. Today's rather nasty public borrowing stats underline just how deluded (and self-serving) that argument is.

Because once you strip out the effects of the various financial sector support operations - which the government insists are temporary - then borrowing in the first 3 months of the current financial year was actually higher than that in the same period last year. And that despite the fact that the economy almost certainlygrew over the period (we'll get the official GDP update on Friday).  And despite the fact that public sector investment spending went down.

So what happened?

What happened was that although tax revenues increased by £8bn - boosted by a £4bn jump in receipts from the higher rate of VAT - all of that increase was used up covering a 6% increase in current spending.

6%! Can they be serious? Here in the midst of Austerity Britain, HMG has somehow allowed its current spending to roar away by 6%? WTF are they doing?

For sure, some of it is accounted for by an increase in the welfare bill, as might be expected with higher unemployment. But when you scrutinise the figures, you find that only acounts for 1% of the 6% overall increase.

The rest?

Well, spending on goods and services (staff and procurement) rose by 3%. Which is somewhat alarming, given all the talk of budgets being pared to the bone.

But the biggest contributor - by far - was the explosive growth of debt interest payments. The ONS says these grew by a pant-wetting 54%. 

54%.

We've blogged the looming debt interest crisis many times (start here). And at the risk of boring you, let's just remind ourselves of the key point - the longer we go on running these horrific deficits, the worse it's going to get. Our outstanding debt will increase, and there is always that risk that the markets will take fright and rack up the interest rate they demand from HMG. 

And even though George has announced tight targets for spending cuts than Darling ever did, the debt interest bill is set to spiral anyway.

So next time the BBC tells you we can afford to wait before facing reality, remember this. Remember that the debt interest bill is already sending shockwaves through the public sector accounts, and that we're picking up the tab. 

PS It turns out Tyler Senior is the future. No, straight up. He may be 85, but age is all in the mind - he's still the future. You see, he lives in the Royal Borough of Windsor and Maidenhead, and the Royal Borough is one of the four local authorities picked to trail-blaze Cam's Big Society idea - the idea that local authorities, volunteer groups and charities should take over the running – and the budget – of local services, away from the dead hand of central government. And as it happens, Tyler Snr is in pole position to take a leading role. Because he is already one of the driving forces behind a highly active and well-supported community group - precisely the kind of operation on which Cam is going to base the future. Time to find out how you milk get funding from Cam's Big Society Bank.

MONDAY, JULY 19, 2010

How Big Is The Government?

[NB Anyone not ready for full frontal descriptions of government accounting conventions should look away now]

Just how big is our Big Government? 

One of the key measures - the one we quote in our sidebar - is public expenditure as a percentage of GDP. And it is important. Because it shows how much of our national income has been grabbed by politicians to spend as they wish, rather than leaving it with us to spend as we wish.

In the most recent complete year (financial year 2009-10) the Treasury says that percentage was 47.5%, which we have rounded to 48% for the sidebar.

But as several readers have pointed out (most recently Bill D), 48% is significantly lower than some other widely quoted estimates. In particular, the OECD gives a figure around 4-5 percentage points higher, quoting 52.5% for calendar year 2010. Which has the politicos outrageously controlling more of our our income than we do ourselves.

What's more, the OECD's figures show that Britain's politicos have managed to grab a bigger slice of the national pie than the politicos of virtually any otherdeveloped country. The average percentage across the OECD is 44.4%, and theonly top 10 economy with a higher percentage than us is France (55.9%).

So who's right?

Start with the Treasury. Its figure is calculated by taking what they call Total Managed Expenditure (TME) as a percentage of GDP at market prices. And TME is defined as follows:

"TME is an aggregate drawn from National Accounts. It covers the current and capital expenditure of the public sector, net of some receipts. It therefore includes expenditure of central and local government and also the capital expenditure of public corporations. TME excludes grants and interest payments between parts of the public sector (as it is a consolidated measure) as well as all financial transactions (such as lending). So TME is the expenditure side of the equation that gives public sector net borrowing, a measure of the fiscal stance."

Sounds sensible. In 2009-10, TME was £669.3bn, GDP at market prices was £1408bn, so the public spending ratio was 47.53%.

What about the OECD? Its figure also uses GDP at market prices, but it draws on a different definition of government spending. Instead of TME, it takes the "Total Outlays of General Government", defined as follows:

"The figures for total outlays consist of current outlays plus capital outlays. Current outlays are the sum of current consumption, transfer payments, subsidies and property income paid (including interest payments). Data refer to the general government sector, which is a consolidation of accounts for the central, state and local government plus social security."

So what's the difference between that and the Treasury's measure?

The big difference is clearly that the Treasury's definition of spending is wider. It focuses on the entire public sector, including public corporations (ie nationalised companies), whereas the OECD restricts itself to so called General Government - ie just central and local government, excluding public corporations. 

Fine.

Except shouldn't that mean the Treasury's number ends up bigger?

And here we enter the realm of riddles, wrapped in mysteries, inside enigmas. If the Treasury uses a broader definition of spending, you'd expect it to end up with a higher figure for the size of government. So WTF is going on?

Tyler has been scrtching his head about this for some time. He's burrowed into explanatory handbooks, applied his microscope to smallprint footnotes, and even consulted one of Britain's foremost experts on such matters. All to no avail. He's still bemused.

However, a rough explanation is emerging. And it says that the Treasury's version of public spending is seriously understated. 

The reason is that the TME measure is not a clean measure of gross spending. It nets off certain receipts to give what is only a net measure of spending. In contrast, the OECD seems to have a much cleaner separation of outlays and receipts. And that probably explains why the OECD gets both a significantly higher figure for spending and a higher figure for receipts. 

One example is that TME includes only a relatively small net figure for the annual cost of those notorious unfunded public sector pensions (£3.1bn in 2009-10). But in reality, there is a substantial gross cost, partly offset by the receipt of contributions, and partly offset by non-recognition of the true annual cost accrual. And according to Table D1 in PESA 2010, these two items together reduced the pensions cost included in TME by £37.6bn (net of pensions in payment).

Which is very interesting. Because £37.6bn is equivalent to nearly 3% of GDP - in other words, the bulk of the unexplained gap between the Treasury and OECD estimates for the share of public spending in GDP.

Bottom line?

We are switching our source for the size of government from the Treasury to the OECD. As a result our sidebar number increases from 48% to 52%.

At a stroke our Big Government just got even bigger.

PS Very interested in hearing from anyone who thinks Tyler's got this wrong, especially if they can explain the difference between the Treasury and OECD calculations.