UK budget data: more than meets the eye

Today's UK budget data for August look like a bit of a disappointment. Net borrowing for the month was a record £15.9 billion, compared to £14.1 billion in August 2009. (The report, jointly produced by the ONS and HM Treasury, is here).

There doesn't seem to be anything wrong on the revenue side, which is no surprise considering the reasonable momentum in the overall economy. Current receipts have risen smartly both for the month and the fiscal year to date. (There are also growing signs of the government, or rather the taxpayer, starting to make a return on the bank bailout, but that's a story for another time).

The problem seems to be on the spending side, with current outlays £4.9 billion higher than in August 2009. With a deft steer from the Treasury, most of the media commentary has focused on one element of this: debt interest rose from £1.3 bn in August 2009 to £3.8 bn this year. This is attributed to the rise in inflation over the past year, which has boosted interest payments on index-linked government debt.

That's not the whole story, though -- a quick glance at the data in the preceding paragraph will show that only about half of the rise in spending was a result of debt interest. Other categories of current spending also rose in the year, with social programme outlays rising by £0.8 bn and other forms of spending up £1.7 bn.

Given the fanfare with which Osborne et al announced their emergency spending cuts in the first days of the new government, these figures might be seen as a bit of a blow, so it's not surprising that the Treasury wanted to see more attention paid to the debt interest. And looking forward, just how loud will the howls of pain become when actual spending cuts begin, given how much outrage we have already heard when nothing significant has actually happened yet?

The official Treasury line on today's numbers includes a couple of odd statements:

"Although broadly in line with the Office for Budget Responsibility's budget forecast, today's borrowing figures demonstrate just why the government needs to tackle the deficit," said a Treasury spokesman. "If the government had not announced decisive action to bring borrowing down, debt interest would have been over £65bn by 2014-15, more than is spent on schools or defence."

As to the first of those, you could argue that the figures show why the government needs to encourage the Bank of England to keep inflation down. All that lovely index-linked debt, so cheap to service when price pressures are low, could look like more of a mixed blessing unless CPI gets back toward the target level. And as to the second, words fail me: before the spending cuts or tax hikes even take effect, and before their impact on growth and inflation is known, how can it possibly make sense to make an assertion like that, especially in response to data that could easily be interpreted as showing that reducing the deficit may not be as straightforward as all that?