In a sense we are ahead of Gordon Brown in starting to correct our behaviour
In a sense we are ahead of Gordon Brown in starting to correct our behaviour.So what does all this mean? Peter Spencer at the Item Club reckons we will “muddle through” and I think he is right. The club, now sponsored by Ernst & Young, uses the Treasury’s own model (Independent Treasury Economic Model, hence the name) but with its own inputs to forecast the economy. Indeed – and this seems to me to be the key point – it looks as though we are having good growth largely because of our deteriorating fiscal position If that is right, it is not sustainable. The US current account deficit is a problem but the fiscal one is not.Now look at Europe.
You would expect the large continental countries to be struggling with their fiscal deficits because they have such poor growth. But here we have decent growth and we still have a deteriorating fiscal position. Tax revenues ought to be strong and public spending on welfare benefits weak. The long boom in the US has resulted in a surge in tax revenues, with the result that the federal budget deficit is now around 2.5 per cent of GDP – lower than that of any of the large EU economies. All right, you can argue that because US growth is above its sustainable trend, this isn’t low enough. But given the uncertainties about what trend growth actually is, that’s not bad. Instead it is stuck at 3 per cent of GDP, or a bit above.When economies grow above trend ,they ought to improve their government’s fiscal position.
Spending is consistently higher than forecast at the time of the Budget and tax revenues are lower.The other concern is that given the solid growth performance, the deficit should be coming down. One is that this follows a pattern: public borrowing has repeatedly exceeded Budget forecasts for several years. More about the implications of that in a moment.These GDP numbers came just after the figures for the Government’s finances to the end of June. These show that public borrowing is already running ahead of last year, notwithstanding the Chancellor’s aim for borrowing to be lower. The right-hand graph shows what has been happening here.Of course it is too early in the financial year to panic, but there are two causes for concern.