Britain's public debt remains problem despite economic recovery

The continued economic recovery in Britain is failing to translate into a reduction of the national debt, which pushes the government off course from reaching its targets of reduced borrowing to finance spending.
Figure for the public sector net borrowing requirement, which excludes financial intervention (PSNB ex), released Tuesday showed an increase of nearly 4 billion pounds (6.82 billion U.S. dollars) on the same period last year -- 11.4 billion pounds for June 2014 against 7.6 billion pounds in June 2013.
This brings the financial-year-to-date PSNB ex to 10 billion pounds above the 22 billion pound figure at the same period last year, and represents 40 percent of the planned government overspend for the whole financial year; yet it covers just one quarter of the year.
The causes of the rise in spending are mostly economic, although government spending has risen by 1 percent since the same period last year.
Tax receipts have been disappointing, with a 3.5 percent fall in this financial year on the same period last year, yet sales tax receipts have risen, at plus 4.3 percent.
This rise in sales tax is just a little ahead of economic growth, pencilled at 3.1 percent by the Bank of England (BOE) for 2014, and it could be expected that tax receipts would follow the same course.
However, the nature of the British economic recovery, currently the most robust among G7 nations and likely to remain that way for the next year, is revealed in the figures.
The growth in sales tax receipts reflects one of the main drivers of economic recovery, consumption by individual households. Households have been dipping into their savings to fuel the consumption-led recovery, with the household savings rates falling from 6.9 percent in Q2 2013 to 4.9 percent in Q1 this year. This is not sustainable in the long term.
The fall in income tax receipts represents two factors, and the first of these is a tax payment bubble in May and June 2013 created by the government's plan to cut the higher rate of tax by 10 percent from April 1 last year. Many higher-paid earners chose to defer some payments, like bonuses, to after the tax cut in order to maximise their income.
Second, and more worrying for the government, is the nature of jobs created in the economic recovery. Although the number of jobs in the British economy now stands at a record amount of 30.6 million, and the unemployment rate has seen a sharp fall in a year from 7.8 percent to 6.5 percent, those jobs are not yet returning higher tax yields for the government treasury.
The reason for this is twofold: many jobs are low-paid and less productive, and so produce less tax; many other jobs are the result of workers choosing self-employment, and these typically earn even less money and pay less tax than the average worker.
So, the headline figures for the British economy are encouraging -- GDP growth is strong, joblessness is falling, job figures are at a record high.
But if you look under the surface, all is not so positive.
ECONOMIC AND POLITICAL IMPLICATIONS
Clearly, the government's stated aim of reducing public debt is now off course, with potential economic and political implications.
Politically, the government would have liked buoyant and rising tax receipts in the run-up to the general election in May next year.
With the wind of rising tax receipts in its sails, the government would have been able to provide incentives to its supporters in the coming Autumn budget statement or in next March's budget proper.
This may not now be an option for Chancellor of the Exchequer George Osborne, and it may be significant in an electoral battle where none of the three main political parties has enough support to win an election outright.
Economically, the PSB ex going off course so strongly at this stage in the financial year is not good news for the government either.
Many economists see a slight slowdown in the strong pace of GDP growth in the second half of this year, and the central bank, the BOE, is forecast to raise the Bank Rate between now and next Spring for the first time in over five years from its historical low of 0.5 percent.
This will have a dampening effect on business and household spending and potentially slow down the rate of economic growth.
David Kern, chief economist at the industry representative body the British Chambers of Commerce (BCC) commented on the disappointing public sector borrowing figures, "Since the financial crisis, weaknesses in the financial sector and structural changes in the rest of the economy have created a major shortfall in the UK's ability to generate tax revenues, even as economic growth returns to normal."
He added, "The government must adjust to these new realities and continue to reduce the share of current public spending in GDP. This will be difficult, and perhaps unpopular, but it is essential if we are to secure a lasting recovery." (1 pound = 1.71 U.S. dollars)