Good news from the Office for National Statistics; the first significant reduction in government borrowing since the start of the financial crisis. Borrowing in July 2010 was £3.8bn compared to £6.1bn this time last year.
So how has that happened? Has the government’s austerity package started to work already?
No, don’t be silly! No-one has made any significant cuts yet; they’ve just talked about it a lot. In fact, public spending rose by 5.7% in July 2010 compared to the same time last year.
So how did borrowing fall by so much then? Simples! Tax receipts have jumped by 10.5%. Even our sluggish recovery has increased the tax take, thereby reducing the monthly deficit.
Despite what the government would like us to believe, the most significant single cause of the soaring public deficit was not an increase in public spending but the catastrophic collapse of the UK’s tax revenues. It is therefore reasonable to assume that the most effective way to reduce the deficit would be to increase those tax revenues and try to get them back towards where they were in 2007.
The only way to increase tax revenues is through economic growth and, as this month’s statistics show, even a little growth goes quite a long way.
None of this is to say that we don’t need to cut public spending. As I said in yesterday’s post, there is a medium term imperative to reform public services provision and reduce its overall cost. But if we want to reduce our deficit quickly and start paying off our accumulated public debt, growing the economy and increasing the tax take is a more effective way to do it than cutting public spending.