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The Spring Statement

3 fiscal home truths highlight the still precarious outlook for the public finances.

A decade on from the financial crisis, public debt is now falling at last as a proportion of GDP, albeit slowly. Public borrowing is projected to decline from 86 per cent of GDP this year to 78 per cent of GDP by 2022-23. However 3 fiscal home truths are a reminder that the outlook for the public finances remains precarious.

First, the projected decline is as a proportion of GDP – the absolute amount of public debt goes on rising to £1.89 trillion over the same period. It will be almost 20 years since the onset of the recession, before the budget deficit finally turns into a surplus.

This is snail pace reduction. Waiting for a budget surplus in the UK is like waiting for Godot.

In the wake of extraordinary monetary policy, the Chancellor seems to have forgotten that the economic cycle is not dead, and an economic downturn over the next five years is more than likely. The trigger could simply be the effect of normalisation. Or it could be something more severe, such as a US stock market crash or a Chinese debt crisis. Whatever the cause, we are likely to go into the next downturn with the public finances already in deficit. This is hardly prudent policy.

Prudent fiscal policy (and Philip Hammond’s predecessor should take most of the blame here) would have been to say that the 10 per cent of GDP deficit in 2010 would be reduced to zero within a decade. Economic downturns can quickly add two or three percentage points to the budget deficit. Deep recessions can add four or five percentage points. Unfortunately, fiscal policy in the UK is not prepared for the next downturn.

Second, the Chancellor should also be framing fiscal policy to allow for forecasting error. If economic history over recent decades is any guide, the forecasting error on public sector net borrowing could be around one per cent of GDP per annum over the coming years. The annual deficit could be one per cent of GDP higher or lower than projected next year, two per cent higher or lower than projected the year after, and so on. In other words, five years from now public sector net borrowing could still be deep in deficit and public debt could be much higher than projected. At the turn of the century, before Labour ramped up spending, public debt in the UK stood at just 30 per cent of GDP. Public debt has almost tripled as a proportion of GDP since and needs to be brought down significantly.

Third, beyond cyclical concerns, there are structural worries about the public finances related to an ageing population. Various estimates suggest an ageing population could add around 5 per cent of GDP to public spending in the long-term.

Again, there is no attempt to prepare for such an eventuality. Quite the opposite in fact. The Chancellor’s upbeat tone in the Spring Statement seemed to be preparing us for more public spending in the autumn.