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The fantasy of Osborne’s deficit cuts

Osborne as PinnochioThe gap between Osborne’s swaggering rhetoric in his conference speech and the cold reality of the Tory public borrowing figures is almost unbridgeable. The key point, though you would never guess it from Osborne’s bluster, is that public borrowing under his stewardship is now rising, not falling. The ONS Public Sector Finances report for August 2014 show that the deficit (public sector net borrowing) from April-August this year was £45.4bn, an increase of £2.6bn compared with the same period for last year. This 6% rise in public borrowing so far in this financial year could push the deficit, which last year was £99bn, up to around £105bn this year. Moreover there are good grounds for expecting this trend of rising deficits to continue in future years.

The higher levels of borrowing have been driven by falling NIC receipts (down 0.2%) and falling income tax receipts (down 0.8%). These reductions in government tax receipts closely reflect the annual fall in real terms (i.e. net of inflation) average wages – in other words the fall in aggregate demand in the economy feeds through to lower government tax revenues. What is astonishing is that this is happening in a year when economic growth is supposed to be 2.5-3%; one can imagine what the fall in tax receipts and thus the rise in the deficit will look like when that economic growth falls away, as is already forecast, in 2016-7.

Significantly, Osborne’s statement in his conference speech that he intends to continue with the freeze in public sector pay for another 2 years after the election till 2017 will simply reinforce further this fall in aggregate demand and thus also government tax receipts, and push up the deficit still more.

This indicates that the idea of eliminating the deficit by 2018-9, which is the avowed Tory aim, is pure fantasy. It cannot even remotely be achieved. Osborne has already declared that there will be no tax increases to cut the deficit. That leaves only reductions in welfare benefits and cuts in spending by government departments to hack back about £100bn in the next 4 years!

Cuts in welfare benefits and public spending on that scale will be politically impossible to achieve – it is already leading to industrial action in the NHS, including midwives, which is almost unheard of, plus Osborne’s announcement in his conference speech of a further £12bn welfare cuts which will hit the lowest paid in work with cuts in housing benefit for the first time and is bound to lead to evictions.

But even if such huge further cutbacks were politically manageable, they will still be counteracted by further real terms pay cuts which reduce government tax revenues. Whether all this leads to further rises in the deficit or to small net reductions, it is a million miles away from eliminating the deficit by 2018-9. That is for the birds, or those gullible enough to believe Tory fairy tales.

One Comment

  1. Robert says:

    I do not know whether cuts to welfare will be hard or impossible to do we saw New labour have a good go at cutting it to the bone.

    I’m not an accountant or do not know enough about affiance and the big banks and the Bank of England but I do know this whom ever wins the next election people who are sick disabled those who are on the poverty line may as well vote for UKIP or whom ever they want because the Tories and Progress will do sod all for you or me.

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