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The Summer Budget

It’s worth considering yesterday’s summer budget in the context of what actual government expenditures and receipts have been doing over the last few decades. Looking at the chart below one can very clearly see the austerity of recent years in the flattening out of the orange line since 2010, and the fact that revenues have been recovering well since the GFC. In fact, excluding interest payments on the national debt, the public sector is now in surplus, also known as a primary budget surplus. Looking at the chart one can also see a couple of periods in which expenditures very closely tracked revenues, one in the first half of the eighties and the other in the years leading up to the GFC, with both growing at a reasonable pace. While it is not always easy to achieve, this balance is what the current government should be aiming for.

So-called ‘supply siders’ would argue that the reason for the recovery in government revenues was that there was no crowding out by the public sector. In other words, the austerity allowed the private sector to mend, unencumbered by higher interest rates that would have resulted from excessive government expenditure (the Greeks and residents of other Mediterranean countries would not have sympathy with this argument).

So, what of yesterday’s budget? The increase in the minimum wage is probably the decision that has caused the most debate in terms of its likely impact. Ordinarily I would be against price fixing on the grounds that market-driven economies are generally the more efficient. But the reality is that the UK has a productivity problem, as low wages have reduced the incentive for companies to invest. The increase in the minimum wage may well give companies the nudge they need, as well as help to weed out the weaker companies that have been propped up in recent years, in the process allowing capital to flow to the more deserving.

Public Sector Spending & Revenues

Graph 1

Source: Bloomberg as at 31.03.2015

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