Figures built on flimsy assumptions

Yesterday the Chancellor stood up in Parliament to deliver a speech in which he set out his Spending Round. Civil servants’ pay would be frozen, welfare reformed, government spending curbed, departments shrunk and investments made in infrastructure. For more, see here.

The over-all thrust of the day was that Osborne’s government had inherited a shambles from the previous Labour government, which had borrowed and spent too much and cast Britain into a fiscal slough. The Chancellor made much play of how he planned to get borrowing down: “We’ve made real progress, putting right what went so badly wrong,” he said.

Borrowing may be coming down—but a look at the government’s own numbers shows that, in nominal terms, overall spending is rising and will continue to do so. This year it will be £720bn, next year £730bn, and rising by jumps of £10bn per year until 2017. The image presented by the Chancellor of a new thrifty regime is somewhat dispelled by these figures.

However, also included in the Government’s figures are its estimates of spending expressed as a percentage of GDP. In 2013-14, these figures claim, spending will equate to 45 per cent of GDP, next year 44 per cent, then 43 per cent, 41 per cent and in 2017, 40 per cent. So the government is predicting that, although nominal spending will continue to rise, as a percentage of national output government spending will really be falling.

The only way that this can possibly be the case is if the British economy starts to grow. This morning, the Office for National Statistics revealed two things—first that the UK has not undergone a double dip recession, thus contradicting an earlier assertion that it had. This is good news for Osborne. Second, the ONS revealed that the economic contraction suffered by the UK economy after the financial crisis was much more severe than previously thought—the economy shrank by 7.2 per cent, not the 6.3 per cent as previously thought.

So although the ONS upheld its analysis that the UK economy grew by 0.3 per cent in the first three months of 2013, Britain is still a very long way from attaining the growth that it enjoyed pre-crisis. This calls into question the strength of government claims that growth will now be slow and steady up until 2018. The recent suggestion by the Chairman of the Federal Reserve Ben Bernanke, that the US will begin to wind down its Quantititave Easing programme sent shivers through global markets, a stark reminder of just how fragile the global economy still is. The Eurozone remains precariously weak and the Chinese economy is also in a state of uncertainty and volatility.

Osborne’s assumptions in this Spending Round about economic growth stand on flimsy ground indeed.