This would mean that borrowing is some £60bn (3.5 per cent of GDP) higher this year than the OBR expected it to be in its 2010 forecasts.
All this tells us that forecasting the public finances is a mug’s game. Such forecasts are subject to a colossal margin of error. In fairness, the OBR acknowledges this. In March, it said that there was an 80 per cent chance of net borrowing this year being between 3.6 and 7.5 per cent of GDP. That was a more accurate and honest view than any point forecast.
Too accurate and honest for politicians and the media, of course. They fail to see that the public finances are, to a large extent, out of the control of government; their “debate” about government borrowing tells us more about the cognitive bias of the illusion of control than it does about proper economics.
To see this, imagine there are just the two of us. I sell you my services, and you sell me yours, and I’m borrowing from you which means you are saving. I then decide to stop borrowing, and so cut the amount I buy from you. What happens?
One possibility is that you’ll respond to your lower income by reducing your saving to zero. If this happens, I’ll succeed in stopping borrowing. You’ll be worse off, but your net lending and my net borrowing will both be zero.
If, however, you want to continue saving, you’ll cut spending on my services. The result will be that my income will fall too. I’ll continue to borrow and you’ll continue to save. All that’ll change is that we’ll both be worse off.
This simple example tells us that the government can only stop borrowing if the private sector wants to stop being a net lender.
And right now a big part of it doesn’t. Yes, the domestic private sector has greatly reduced its net lending since 2010; the gap between its saving and capital spending has almost disappeared. But foreigners have stepped up their net lending. The counterpart to this is that someone in the UK must borrow. That someone is the government.
To put this in more familiar terms, a big reason for UK government borrowing is that overseas demand is so weak; this is depressing UK exports which in turn is hurting tax revenues.
You might infer that this means that Mr Osborne’s austerity policies would have succeeded in reducing the deficit, if only the euro area economy weren’t so weak. I don’t think this excuses him. A policy that works only if everything goes right isn’t a sensible policy. Surprises are an inevitable fact of economic life, and policies - be they of governments, companies or individuals - must be resilient to them.
Instead, I infer that forecasts for government borrowing must also be forecasts for the financial balances of the domestic private sector and overseas sector. Government borrowing will fall if and only if these financial surpluses decline. And fiscal austerity will succeed if and only if they do. These conditions might exist in future. But they don’t exist now.
