Next term we’ll learn about the difference between fiscal plans, and fiscal outturns, or outcomes. Fiscal plans are the ones set out today by the Chancellor in his Autumn Statement. Fiscal outturns are what we’ll see over the next four years.
Probably the most spectacular differences between plans and outcomes come when recessions come unexpectedly, like with the 2008 financial crisis which put paid to Gordon Brown’s Golden Rule (not borrowing for current consumption over the “cycle”). The outcomes, as we all know, were very large deficits, up to 10% of GDP.
What is perhaps most striking is that for all the anticipation of where the cuts would fall, instead the news is all about what cuts didn’t happen: tax credit cuts cancelled, police, international development, healthcare and defence budgets all protected, with a list of additional goodies thrown in.
How was all this possible? Without resorting to cynicism about politicians dressing up the good news and hiding the bad news (hint: local government and various tax rises hidden in the small print), this Guardian analysis makes it clear what changed: an upward adjustment in forecasts for growth and hence tax receipts.
The idea is this: as the independent Office for Budget Responsibility provided a very positive forecast for growth and hence tax receipts (we pay more tax when we earn more and spend more), this meant that in order to keep to his fiscal plans to eliminate the deficit, Osborne had to do much less – growth would do the hard work for him.
But the main point is this: all of this is based on economic forecasts, rather than actual events – it’s plans, not outcomes. We have to wait until 2020 to see what the outcomes are like. It shows just how hugely important economic forecasts are, however – and why you should think about taking my forecasting module when you get to your third year 🙂
News today is that government borrowing for the month of October was the highest it has been for six years.
Borrowing like this contributes throughout the whole year to the deficit – the gap between government receipts (taxes, mainly) and government spending.
As you’ll be well aware given the recent passing of the Fiscal Charter, the government is set on austerity and on running a budget surplus – by 2019/20. So it’s not too much of a problem with regard the Charter that borrowing is up, but it nonetheless shows the difficulty of getting government spending under control.
Not least, various parts of the NHS are running large deficits, Network Rail projects (in and around Reading) are showing eye-watering overspends, and probably biggest of all, pensions continue to rise at 2.5% even while inflation is at -0.1%. The first two are symptomatic of the difference between fiscal plans, and fiscal outturns – things don’t always happen as expected and can impact government finances as a result.