How Brexit boosted the budget

For all the talk of ending austerity, you might think there was any in the first place.

But I can’t see any budget surpluses on any charts.

Government debt to GDP flatlined for three years around 88%, it didn’t really go down.

If you call that austerity, then the Italians are doing fine.

In the late 90s, Britain lopped 10% off its debt to GDP. The Australians more than 20%, with a string of actual budget surpluses. You might not remember what that is – when spending is less than tax revenue. Prime Minister John Howard claimed to have paid off the country’s debt.

Not that the debt to GDP statistic is useful in the first place. Because the government doesn’t have a claim on GDP to pay its debt. It has a claim on tax revenue.

With £775.8 billion in tax revenue expected this fiscal year, and a debt of almost £1.78 trillion, the more meaningful figure is a debt to tax revenue ratio of 229%.

In 2015, we narrowly avoided hitting the top ten worst countries by this measure. The top ten included Italy, Ireland, Portugal, Spain and Greece.

But 229% doesn’t sound so bad, does it? A homebuyers’ debt to income would be far higher.

Keep in mind that government debt is on top of our private debt. The government robs Peter to pay Paul, it doesn’t create GDP. At least, not over time.

If it is adding to GDP during deficit years, what’s it doing during surplus years, when the debt is actually reduced?

If the government is robbing economic growth from the future by borrowing, what does that mean for our future?

But the point is, austerity never actually happened. Britain hasn’t improved its debt situation.

And yet, the politicians are already on the move to make things worse. None other than the Guardian is chastising the chancellor for ending the planned return to a budget surplus: “[Philip] Hammond no longer on track to balance budget, says OBR”.

Robert Chote, the chairman of the OBR, said: “If he had sat on his hands and done nothing, [the chancellor] would have reached his long-term objective of balancing the budget by 2025, which is in the legislation and is something he must do. But looking at the outlook now, it doesn’t look like he is on track to make that target.”

2025! And that was austerity?

Try pitching this sort of belt tightening to your bank when you have to use the credit card to pay the mortgage.

How Brexit delivered the budget boost

It’s not just the marketing that doesn’t add up. The Financial Times is suspicious about the figures too:

Mr Hammond appeared to achieve the impossible in his Budget speech: increasing funding for the NHS by up to £28bn a year by 2023-24, cutting income tax and boosting the generosity of the government’s troubled flagship welfare benefit, while keeping the public borrowing forecasts almost exactly as they were in his March Spring Statement.

Achieve the impossible? We’re talking about 2023. He’s merely using his imagination.

And imagining the impossible is far from impossible. Especially when it’s the future you’re daydreaming about. The only question is how good your imagination is.

Reality doesn’t come into it until the future actually arrives. And it’s unlikely to be what you imagined. Especially if you’re a politician.

If you dig into the Treasury’s economic forecasts, the truth is even more absurd. It turns out that the chancellor’s success at forecasting (imagining) a better future is primarily down to his past forecasting error.

In the past, he’d expected lower tax revenue thanks to poorer economic growth. But his forecasts are now rosier, allowing him to claim his budget made up for the improvement…

These days, a politician can be lauded for improving the financial position of the country merely by forecasting it would perform poorly in the past. Then, any policy changes can take credit for what are really just updated economic forecasts.

Do you see the sleight of hand?

I’ll lay it out with a simpler example.

I tell you things will be bad in two years’ time, so we have to spend less. One year later, my forecast is looking too pessimistic. Next year, things look like they will be fine after all. So I add some spending to the budget and point to the future projections, gleefully proclaiming that my budget fiddling brought about our wonderful new future. But it was really just the updated forecast.

The underling cause of Hammond’s budget boost is Project Fear. By making miserable projections about the future of Brexit Britain, Remainer politicians are getting the credit for subsequent outperformance…

The only thing that matters

Meanwhile, the FT dug up what’s really going on. The UK’s tax burden is at a 30-year high, it reports. Brits haven’t been paying such a high portion of taxes since the late 80s.

And even that wasn’t enough to balance the budget…

Which tells you what’s really going on.

Tax policy and debt are mere consequences, or symptoms. They react to the only variable that truly matters – government spending. Without it, there would be no taxes or government debt.

This isn’t a chicken or egg problem. If you want to lower debt and taxes, you must lower government spending.

Hammond’s budget does the opposite. It raises spending and cuts taxes. But he’s getting all the credit! Pun intended…

To summarise, these last few years, the UK has benefited from politician’s mistakenly gloomy forecasts. How long do you think that will last? I’d say it lasted until yesterday.

Now we’re back on track for a debt debacle. As if we ever weren’t.

Until next time,

Nick Hubble
Capital & Conflict

Category: Brexit

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