What happened to Plan A? July’s Public Borrowing Figures

Today saw the release of July’s public borrowing figures, surprising many economists. Rather than the deficit falling by £2.8 billion as expected, government borrowing actually increased compared to the last year, up £600 million. July is the month where quarterly corporation tax payments are made, while also including the self assessment tax payments. People expected these payments to help push the government into a profit, rather than adding to the deficit, showing how much the £600 million borrowing was a shock.

In the past months, Osborne has announced that he will carry on with his so called Plan A, driving down government spending and helping to cut the deficit. However, others have claimed that he should take advantage of the low interest rates on government bonds to increase spending and drive the economy. Therefore, today’s figures will be disappointing to both groups. Osborne’s plan hasn’t been met, because the deficit is increasing, whereas the opposition groups will be disappointed that spending didn’t increase.

The main reason for the increase in borrowing and the increase in the deficit was due to the poor tax receipts from the North Sea Oil facilities. This should come at no shock, because increased tax on the fields have meant that exploration is now less profitable, thus less likely to happen. In all, corporation tax receipts fell by 20% compared to last year. Spending rose by 5%, but this was due to higher benefit payments.

It is now possible that borrowing for 2012 could reach as much as £30 billion more than in the previous year, and just below the levels seen during the height of the financial crisis when the Labour government rapidly increased spending to prop up the economy. Huge borrowing was unsustainable then, and it’s just as unsustainable now. Osborne claimed that he was going to sort out the country’s financial mess, but the latest figures have proved yet again that he hasn’t. You can partly ignore the deficit, as that is mostly due to the dire economic situation in Europe, but the Chancellor still hasn’t decreased government spending as he said he would. Even if you ignore the higher benefits payments that led to the increase, it’s likely that government spending might have still increased, or at the very best, flatlined. People claim that Plan A has failed, but the fact of the matter is, we haven’t even tried Plan A.

With this in mind, government debt is just going up and up, and it’s possible that the country could put itself into a position that jeopardises the country’s AAA rating. If the country loses this, we could then see ripple effects that make the situation far worse. In the short term, losing the rating isn’t a massive problem, but it could signal issues that are going to be a problem in the long run.

You will get people saying that the deficit is already so high, that we won’t see the impact of an additional £30 billion for infrastructure. However, we simply cannot afford to spend more and increase the level of government debt, as I wrote about last week. Increased borrowing might not have an effect on the markets, but it’s not worth the risk. We could then see higher borrowing costs, and the worsening snowball effect from there.

Although the latest figures don’t make for good reading, it simply shows that people cannot complain about the Chancellor’s Plan A, because we simply haven’t tried Plan A. Government spending needs to come down, and the fact that July saw such terrible corporation tax figures means that we need to look at policies designed to boost the private sector, including the North Sea Oil Fields. With the deficit and debt just going up and up, the financial situation is just going to get worse and worse.