Government borrowing is falling: latest figures show that public sector net borrowing so far this financial year was slightly lower than in the same period last year. This, though, is only partly a welcome development.
To see why, remember a basic and trivial fact – that every pound borrowed is a pound lent. Government borrowing, therefore, can fall if and only if somebody else is lending less or borrowing more.
That somebody is not companies. In aggregate, these are actually borrowing less. Official sectoral accounts show that they borrowed £21.1bn in the second and third quarters of 2017, compared to £36.5bn in the same period of 2016.
Instead, there are two other counterparts to the drop in government borrowing.
One is that households' net borrowing has increased. In the second and third quarters of 2017 they were net borrowers of £4.5bn having been net lenders of £10.5bn in the same period of 2016.
In this sense, borrowing has been privatized: it has been shifted from the government to households.
And herein lies a danger. The maths of public debt tells us that government borrowing is sustainable, because real gilt yields are sharply negative and well below trend growth. It is, however, not so clear that household debt is. Privatizing debt thus adds to financial risks.
There are two separate dangers here.
The obvious one is that some highly indebted households will get into trouble, causing them to either cut spending or default on their debt. We cannot say for sure how great a threat this is. As Columbia Threadneedle’s Toby Nangle says, “debt is an entirely distributional issue.” If indebted households enjoy rising incomes, there’s no problem. If, however, they suffer a shock drop then there is. Note that the issue here is what happens to the incomes of the well-off, as it is these who account for a lot of the debt. Of course, there are low-income households with unsustainable debt. But as Mr Nangle says, the sums involved are too small to cause systemic financial difficulties. Doorstep lender Provident Financial suffered losses last year, for example, without triggering a general crisis.
But there’s a different risk to the public finances – albeit a benign one for the economy as a whole. It’s that if or when household incomes recover, so too will savings. In this case, the public finances would deteriorate, other things equal.
In either of these scenarios, the recent improvement in the public finances would go into reverse.
Luckily, though, household borrowing isn’t the only counterpart of the recent drop in public borrowing. We’ve also seen a decline in global savings: in the last six months for which we have numbers, net savings outside the UK were £49.6bn compared to £61.9bn in the same period of 2016. In effect, foreigners are spending more – some of it on British goods which has boosted tax revenues. If this continues, the fall in government borrowing will be sustained. Our public finances depend not just (or even mainly) upon decisions made by the Chancellor. They also depend upon what’s happening in the rest of the world.
The point here is that a decline in government borrowing is not necessarily a good thing, nor an increase a bad one. It all depends upon why borrowing has changed. This point should be obvious, but I fear it is often forgotten.
