In next week’s spring statement Chancellor Philip Hammond will make much of the fact that public sector net borrowing has fallen to its lowest level since 2000-01, at around 1.2 per cent of gross domestic product (GDP). What he probably won’t say is why this has happened.
He’ll give the credit to the “tough choices” the government has made to curb spending. This, though, is only a small part of the story. To see the rest, remember a trivial accounting fact – that every pound borrowed is also a pound lent. The government can only reduce its borrowing therefore if somebody else is increasing theirs or reducing their saving. This much is clear from the Office for National Statistics' (ONS) sectoral accounts, in which net borrowing across sectors – government, households, companies and foreigners – sums to zero.
These accounts tell us that the counterpart to falling government borrowing in recent years has almost entirely consisted of increased borrowing by households. If we compare the 12 months to September 2018 (the latest for which data are available) to those five years ago we see that government borrowing has fallen from 5.3 per cent of GDP to 1.4 per cent, a reduction of 3.9 percentage points of GDP. During this time households have shifted from being net savers of 2.5 per cent of GDP to net borrowers of 1.3 per cent of GDP – a turnaround of 3.8 percentage points of GDP.
This hasn’t happened because there’s been a boom in mortgage lending. It’s largely because households are saving less: in the past five years the savings ratio has halved.
What’s gone on here is quite simple. Fiscal austerity has tended to depress wages. Households responded to this by maintaining their spending and saving less – putting less aside for rainy days. In maintaining their spending, households helped sustain tax revenues – not just VAT and excise duties but also the income tax paid by retail workers who’d have lost their jobs otherwise. And this has allowed the government’s spending restraint to lead to lower public borrowing.
To put this another way, imagine that households had tried to maintain their savings. The wage squeeze would then have led to bigger falls in consumer spending and employment and hence to lower tax revenue. Government borrowing would then have stayed high. We’d have suffered an acute paradox of thrift in which attempts by everybody to save more prove self-defeating.
This fall in household saving, however, is probably unsustainable. This isn’t because households have overborrowed, but because there’ll come a time when people will want to rebuild their savings, to put more aside for contingencies or old age. In truth, next week’s Office for Budget Responsibility (OBR) forecasts will probably recognise this. They’re likely to project government borrowing remaining around current levels for the next few years.
In theory, though, there are nicer ways in which government borrowing can fall. One would be if there were a global boom. In such an event, public borrowing would fall as the counterpart to a reduction in net savings by foreigners, as rising exports cause increased employment and hence higher tax revenues. Another would be if there were to be an increase in businesses’ investment opportunities, either real or perceived. In this case government borrowing would fall as the counterpart to increased corporate net borrowing, and as firms’ expansions create jobs and tax revenues.
Such benign scenarios are, however, only theoretical possibilities now. The truth is that attempts to curb government borrowing in an era of stagnation succeed only to the extent that the debt can be passed on to other people.
