“Austerity” or “overspending”? The truth behind yesterday’s Budget

PLUS: Gary McCormick on guerilla warfare against the banks

Summary:

• Commentators are, as ever, divided on whether the Budget has spent too much or too little

• Relative to the size of the economy, the government is unquestionably seeking to shrink the state

• Spending, however, is still increasing in pure dollar terms, something to which conservatives object

• The government’s aim is to balance the books largely by suppressing spending, but there are other options available to it

• Fears about government indebtedness, meanwhile, appear to be overstated

Navigating between wildly varying accounts of the Budget

For some, it was National delivering “another Labour Party Budget”, replete with “overspending”. For others, it was a Budget of “austerity”. So what did Nicola Willis really deliver yesterday?

Rising and falling simultaneously

One fundamental reason for disagreement is that government spending is – perhaps confusingly – both rising and falling, depending on how one looks at it, and that allows people on different parts of the political spectrum to make very different claims.

The table below may help clear things up. It looks at the government’s revenue (nearly all of it tax) and its spending on day-to-day items (such as hospital operations, teachers’ salaries and conservation projects). It is generally accepted that, although spending can exceed revenue during crises as the government props up the economy, the two lines should return to balance during good times. Otherwise the government is making up the gap between revenue and spending by borrowing money for day-to-day activities, something generally regarded as unsustainable in the long run.

In the table, the first two lines, drawn from the Budget’s Fiscal Strategy Report, set out the government’s projected income and expenses in dollar terms. Revenue rises from $133 billion to $162 billion. Spending, starting at $139 billion, rises at a slower rate, but reaches the same point of $162 billion. The two roughly balance – on this projection – by 2029.