For once, the numbers on growth and public borrowing were better than expected, easing the pressure on George Osborne and offering a glimmer of hope for the future. Borrowing is still too high and growth too weak, but the figures at least show that things may have stopped deteriorating.
What is happening to the economy as we move beyond the fear of a triple dip, for now at least? Are the sunlit uplands beckoning, or will it be more of the same? The end of a fiscal year is a good time to take stock and the latest official numbers on what happened in 2012/13 are illuminating. Though the figures are subject to subsequent revision, the story they tell will not change fundamentally.
The big picture for the public finances was that, against all the odds, George Osborne managed to secure a small reduction in government borrowing in the year. Adjusted for one-off factors, public sector net borrowing was £120.6bn in 2012/13, fractionally down on the £120.9bn recorded for 2011/12. That tiny margin of error may get larger in time – the 2011/12 deficit was originally reported as £126bn – but that will not change the big picture of a borrowing reduction that appears to have stalled at around £120bn.
What that means is that in cash terms, borrowing remains close to its all-time high. The record was £156.3bn in 2009/10, followed by £148.6bn in 2010/11 and £120.9bn in 2011/12. The public finances are still a very long way from being restored to health. The 0.3% rise in gross domestic product in the first quarter was welcome – indeed, a source of considerable relief in the Treasury – for averting the dreaded triple dip. But, as noted last month, it will take a sustained period of economic growth to get the deficit down to respectable levels.
Examining the detail
If that is the big picture, the detail is, if anything, more interesting. On the face of it, 2012/13 was a better year for control of government spending. Current government expenditure rose by 1.8%, helped by a drop in the interest bill on government debt from £47.7bn to £47bn. Whether or not it is because of the government’s fiscal credibility – even after two ratings downgrades – ultra low gilt yields are helping to keep the public finances on track.
They would be even more on track if the strongest element of government spending, social security benefits and tax credits, was under better control. Benefits and tax credits rose by 5.6% in 2012/13, driving a coach and horses through the government’s efforts to control other elements of public spending. The good news, at least from the perspective of the public finances, is that the government’s 1% cap on increases in most working-age benefits should prevent anything like a repeat of this.
Of even more interest, perhaps, is the picture on tax, and the variations in different tax categories. VAT is behaving well: receipts in 2012/13 were up by 2.7% on the previous year. In fact, if every tax was behaving like VAT, George Osborne’s fiscal difficulties would be well on their way to being resolved. Admittedly helped by two hikes in the VAT rate (from 15% to 17.5% in January 2010 as the temporary cut was reversed, and to 20% a year later), revenues rose from £83.7bn in 2009/10 to £97.3bn in 2010/11, £109.8bn in 2011/12 and £112.8bn in 2012/13.
The record on other taxes, regrettably, is not nearly as good. Income tax and capital gains tax, combined, fell by 0.8% in 2012/13. Receipts, at a fraction over £151bn, have not risen in three years and are below pre-crisis levels. Corporation tax is even worse, with revenues dropping by 6.6% in 2012/13 to £42.7bn, their lowest level for three years. There is a slightly better picture for NIC, up 2.2% in 2012/13 to a record £103.8bn (in line with recent stronger growth in employment). But the overall conclusion has to be that tax receipts are a long way from firing on all cylinders.
What is the prospect of things getting better?
The revenue recovery needed to help mend the public finances is in income tax, CGT and corporation tax.
For income tax, one key question is the extent to which 2012/13 suffered from deliberate actions to avoid the 50% top rate of income tax. The Office for Budget Responsibility (OBR) has built in some of this effect into its revenue projections, but is nevertheless downbeat about the immediate outlook for income tax receipts. Weak pay growth and lower City bonuses are taking their toll. Stronger growth in pay is probably needed to generate a meaningful upturn in receipts.
As for corporation tax, one reason why it has been depressed is weak North Sea oil and gas activity, and prospects there are better. Another, however, is that tax revenues from the financial services sector, having taken a huge hit, are taking a long time to recover. These receipts will pick up, across the board, but will take time to do so. The OBR is reasonably optimistic on income tax receipts over the medium term – it predicts rises in receipts of 7% in 2014/15 and 5.4% in 2015/16 – but not on corporation tax, not least because of the chancellor’s reductions in the main rate of the tax.
So where do we stand?
Both borrowing and growth could have been worse. Not so long ago, the consensus was that there would be a big deficit overshoot in 2012/13, of perhaps £10–15bn. Weak construction and manufacturing seemed certain to produce a drop in GDP in the first quarter, and hence a triple dip, but services came to the rescue.
There is, however, a long way to go. The significance of both statistics was that they were better than expected, in contrast to most of the data we have had over the past two to three years. Maybe, just maybe, they are a harbinger of better times ahead.
David Smith is economics editor of The Sunday Times
