Was it the Budget that signalled the end of austerity, or one that assumed the sun would stay shining when there are clouds ahead? Stand back from all the detail and apply three tests.
Test one is the size of the annual fiscal deficit. This is now down to a touch over 1.2 per cent of GDP, and is projected by the Office for Budget Responsibility to rise a bit next year, then nudge down to around 1 per cent by the end of the forecast period. It is a very crude measure of austerity and a government that borrows a lot may be relieving current taxpayers of it, but is piling more austerity onto future ones who have to service that debt. But let’s see how we compare.
Well, Germany on that count has the most austere government of all major economies. It is running a surplus that last financial year reached 1.2 per cent of GDP, and this year looks more like hitting 1.8 per cent. It has been helped by strong tax receipts, up by more than 5 per cent, and by lower debt service costs. Unsurprisingly there is pressure to ease up.
At the other end of the scale is the United States. They have just had a huge tax cut. Last year the US was already running a deficit of 3.4 per cent of GDP. With the Trump tax cut, this is projected in the coming year, the fiscal year of 2019, to soar to 4.7 per cent of GDP. This is giving a sugar-rush boost to the economy, but to most outside observers (and a lot of US ones too) this looks dangerously high. No wonder long-term interest rates are rising.
Other major economies lie between these two. Japan’s is 4.4 per cent and has a plan to bring it down to 3 per cent. France is at 2.6 per cent, and plans to come down further too. Canada is just under 1 per cent. And Italy? Well, Italy is really interesting because there is this big punch-up between the new populist government and the European Commission (EC) right now.
Last year the deficit was 2.3 per cent, but the government wants to increase it while the EC wants it to bring it down. The government has just submitted a plan that it projects the deficit at 2.4 per cent, but no one seems to believe that this will be the case. Estimates range up to 4 per cent. Given Italy’s high debt-to-GDP ratio, 130 per cent, this is generally seen as too high.
So you see that the UK on this measure is now towards the bottom of the G7 scale, having been at the top in 2010. You could say that despite the spending increases, we are still being reasonably austere – but maybe prudently so.
Now test two: government spending as a proportion of GDP. Here the UK remains middle of the pack. In round numbers our public sector is now taking 37 per cent of GDP in tax and other revenues and spending between 38 per cent and 39 per cent. That is quite low by global standards, not as low as Switzerland or Australia, but only a little higher than the US at about 36 per cent of GDP. Remember, too, that Americans have to set aside more money for health insurance, so the overall burden there is comparable to the UK.
Germany is quite a bit higher, at around 42 per cent of GDP, and France higher still at 56 per cent. Indeed France has the highest public spending of any major economy, higher even than Sweden which used to have the biggest government of all on that measure. Italy? Just under 48 per cent.
So in terms of the relative size of its public sector, the UK is quite low by developed country standards. I am not sure whether that counts as austerity, or whether the high taxes to finance big government count as austerity. But it would be hard to claim that the British government is far too big, or that taxes are far too high. By world standards neither is true.
Finally public debt. You will have heard that one of the claims of the chancellor is that debt, again also as a percentage of GDP, is falling at last. That is right. But the decline is tiny, as we are still stuck with debt at 85 per cent of GDP, double the level before the financial crisis. Here is how we compare.
At the top end of the scale comes Japan. Debt there is 250 per cent of GDP. The country pays near-zero interest on it and I think most people assume it will never be repaid. It is held by the Japanese people who seem content to carry on financing their government for free.
Within Europe, Greece apart, comes Italy, with debts of 130 per cent of GDP. At the bottom, aside from oil-rich Norway which has no net debt at all, is Germany. Debt there is coming down very fast indeed, and I saw a suggestion that it will soon be below 50 per cent. France and the US are roughly the same as the UK in the 80-90 per cent range.
These calculations, however, are rather basic. You can pick a number of the amount of public debt but that does not take into account the age structure of the country, the state’s assets that should be counted against that debt, the growth performance, the private pension provision (which reduces the burden on the state) and so on.
With global interest rates remaining so low a high debt burden might seem not to matter – Japan has managed for a generation – but as and when rates rise then it may well come to matter more.
Maybe the best way to think about debt is that it increases public spending now at the cost of increasing taxation later. Debt levels that the UK had at the end of the Second World War imposed austerity on the next two generations of working people who had to service those debts. By world standards the UK debt burden is acceptable, but remember that we taxpayers are spending more on debt interest that we are on schools. Maybe trying to get debt down isn’t a bad idea after all.
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