Tuesday, December 9, 2014

Why The UK Budget Forecast Was Wrong in 2010 and Wrong Today

The UK Treasury announced a growth forecast in 2010, along with spending cuts that would balance the budget by 2014.  The economy was expected to grow by 8.4% compounded but it only grew by 4.1%.  Consequently, the budget is not balanced.  There is a 91.3bn deficit.  Lord Skidelsky explains why the government failed to meet its forecast and why its current forecast is worthless.  It really is quite simple.

Government spending in the UK is around 40% of GDP.  Consequently, the private economy must grow very fast to overcome the large cuts in government spending.  The Treasury reported that the budget deficit was largely determined by a decline in tax receipts.  That, of course, is exactly what happens when the private economy fails to grow fast enough to overcome the large cuts in government spending.  Skidelsky predicted that the government would not hits its growth targets and balance the budget when it announced its 2010 budget.  He claims that the government will fail to meet its deficit reduction target in its current budget for the same reasons that it failed to balance the 2014 budget.  Private sector growth will not overcome the cuts in government spending. 

The conservative government may be willing to accept budget deficits if it succeeds in cutting government spending on programs that it does not like.  Its real goal is to cut government spending,  and it is using deficit reduction targets, that it can't satisfy, as a cover for its real objective.  That seems very similar to what Republicans like to do in the US.  They use deficit reduction as an excuse for cuts in spending on government programs that Democrats seem to like.  They are quite happy with government deficits when Republican Administrations cut taxes for their constituency and spend money on programs that they prefer.

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