Writing in the New York Times this week, Paul Krugman talks of the imaginary US budget and debt crisis. Despite all the fears of the deficit doomsters, the US federal deficit will be just 2.8% of GDP this year down 9.8% in 2009. The economy is growing and the deficit is falling. It's a fiscal fizzle. “We don’t have a debt crisis, and we never did”, says Krugman. Excellent news for them over there!
But is it so good over here? According to the figures released by the ONS today, in the first three months of the year, total borrowing was higher than the first quarter last year by some £3 billion. Total borrowing was £36.1 billion compared to £33.6 billion last year. Despite economic growth in the quarter of around 3% of GDP, the deficit is increasing rather than falling.
The government is off track to hit the deficit target of £95.5 billion in 2014/15. The deficit to GDP ratio was 6.5% in 2013/14 set to fall to around 5.5% this year. On current trends this is not about to happen. Total debt of £1.3 trillion has risen to over 77% of GDP. Analysts are beginning to call for more cuts in spending to resolve the problem.
Yet spending over the first three months of the year was up by less than 1% [ANLP basis] assisted by a fall in interest costs of almost 3%. (There is a value to QE after all!). The problem for the Chancellor - Exchequer: revenues actually fell, despite an increase in the VAT take of just over 4%. Income and CG taxes were down by 3.5%, which is bizarre in an economy growing by 3% in real terms and over 5% in nominal values.
The US economy invariably demonstrates an ability to rebound, evaporating the internal deficit in the process in quite dramatic fashion. Fiscal drag, generates the fiscal fizzle, improving the outlook for the Fed and vaporising the deficit in the process.
In the UK, the process is more protracted. The current trend is troubling. No need to panic just yet. We still expect a significant rebound in the tax take through the year as the economy continues to grow at over 5% in nominal terms. The deficit was revised down last year to £105.8 billion. The target of £95.5 billion appears to be a stretch for the moment. No fiscal fizzle more like a slow burn.
*The Fiscal Fizzle, An Imaginary Budget and Debt Crisis Paul Krugman NY Times 20 July 2014