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There was no deficit before the crash

There’s a perverse untruth about the fiscal deficit that the likes of the Institute for Fiscal Studies and their acolytes, like Stephanie Flanders on the BBC, keep going on about. This untruth is that we had one before 2008. The truth is that if government had accounted like a company – on an accruals basis – there would have been no deficit recorded at all.

The reality is that from 2000 to 2007 the economy grew, and at a significant rate. We could argue whether it was the right growth, but there’s no doubt at all that it grew. And no one complained about it back then.

And so too, partly as a result, partly because growth was predicated on it, did the public sector grow. That is also undeniable.

But now let’s acknowledge another truth – which is that much tax is paid late. VAT always has up to 120 days credit on it. PAYE is, admittedly, only paid a month late. But taxes on profits from companies and the self employed often lag up to a year behind the earnings to which they relate. And as recent evidence has shown – a lot of tax is settled way after its due date.

Now look at the patterns of growth in public revenues and spending, the data being taken form HM Treasury budget statements, as shown in this graph:

Then note what happens if the one year lag in receipts is eliminated i.e. taxes were accounted for when the liability to pay them arose and not at the time that payment was made. The situation then looks radically different:

Same data, just a different view, that’s all. And as a result one could even say the deficit between 2002 and 2007 simply disappears. There is no deficit at all.

This  is not an accounting trick. Within tolerable margins this is the refection of economic substance that accruals accounting allows and that cash flow accounting never does.

Now, that doesn’t solve the problem of financing a deficit. But it does suggest that all the argument about structural deficits of up to £45 billion a year is just wrong. There was no such deficit, there was just necessary extra borrowing needed to fund the government to manage the consequences of growth that benefited the UK.

Put this in another context: if this had been a set of corporate accounts that borrowing would not have raised an eyebrow. No one would have accused such an entity of over trading. It would have been considered an economic success: as it, at least in some ways, was.

So shall we stop this nonsense about there having been deficits and talk about economic realities for a change? The realities that proper accounting can reveal? That will let us focus on the current issue created by the failure of financial markets as a consequence of their own irresponsibility which the rest of us have had to underwrite and reveals that there is no underlying problem to be fixed at all. Which makes the whole issue look and feel very different indeed.


  1. Phil Ruse says:

    But you’ve accounted for ALL tax receipts as if they’re one year late? So yes, it looks different, but what % of those tax receipts takes that long? It still shows a continual overspend.

  2. CB says:

    Your argument falls on two points.

    1) Even in your second analysis, the deficit emerges in 2006.

    2) There is an accounting trick at work here. You appear to crudely shift receipts back, to prevent an apparent (and I would say entirely unproven) hypothesis that all taxes are paid late.

    By doing so, you conveniently allow the growth in the economy to offset the deficit. You can use the tax base of next year (ie larger) with this years spending (ie smaller).

    Now, this second point isn’t valid I concede if the data you are using is adjusted for the growth in the economy. But the rapid rise in both spending and receipts well in excess of the growth as a % of GDP implies that really you haven’t.

  3. Wise Chimp says:

    This isn’t strictly accurate because most large companies pay their corporation tax in quarterly instalments during the year on an estimation basis so using accruals to bring all corporation tax receipts forward a year is incorrect.

    In fact these estimates have probably worked to HMRC’s advantage, as the economy slowed, so an accurate accounting treatment would show the gap widening sooner.

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