Economists question ‘black hole’ in UK finances

A group of economists has questioned UK claims that a “black hole” in public finances needs to be filled with austerity and tax hikes.

The Progressive Economy Forum said the £50 billion “hole” would disappear entirely if the debt were calculated differently.

The government previously used a different measure of debt and if they went back to it they would be left with £14 billion, they said.

The Treasury said the public finances would be independently assessed.

The media debate over the Government’s tax and spending options ahead of the Autumn Declaration has been dominated by a so-called “black hole” in public finances, estimated at between £35 billion and £60 billion, which it is believed must urgently be “filled” with Spending cuts or tax increases.

But the economists said the “fiscal hole” is merely the difference between an uncertain forecast – how much the government will spend and borrow under current plans in the future – and what it can afford if it wants to meet an arbitrary target – That’s three or five years from now, the debt relative to the economy will start to decline.

If the economy grows faster or the time frame changes, the “hole” can shrink or grow dramatically – far more than it would due to spending cuts or tax increases.

Using official forecasts from the Office for Budget Responsibility, the study’s authors, economists Jo Michell and Rob Calvert Jump, conclude that small changes in projections of future interest rates and growth and what counts as government debt can dramatically increase levels change the apparent “hole”.

These changes to forecasts and accounting rules have a far greater impact on the £50bn hole than any changes in spending and taxes the government is reportedly considering for the autumn statement.

The reversal of a January 2022 decision to take the Bank of England’s debt out of the government’s own debt figure “completely erases the projected ‘fiscal hole’ and leaves the government with an additional 14 billion of its own debt targets by 2027, according to official projections,” they said you.

As chancellor, Rishi Sunak previously used a different accounting rule to arrive at his chosen number for the government debt in 2020 and 2021.

According to the economists’ analysis, changing the accounting rule for measuring government debt to the level before the autumn declaration in 2021 completely eliminates the “black hole” and puts government debt back on a sustainable basis.

Conversely, according to the report, a small increase in the government’s projected borrowing costs makes the “hole” much larger and the future debt path unsustainable, rendering the fiscal target “useless”.

“There is now a consensus among economists that austerity seriously damages an economy’s potential and undermines growth, as the experience of the UK over the past decade has shown us,” said Mr Calvert Jump.

“Further austerity will do far more harm than a ‘fiscal hole’ that disappears through adjustments to models or accounting rules.”

dr Michell said: “These results show that the government is basing its economic policies on very shaky foundations. The argument for austerity spending is that the ‘tax hole’ needs to be closed.

“But if the ‘hole’ disappears with small changes in forecasts or accounting rules, it is not a reliable basis for economic policy changes, especially on the scale the government is reportedly contemplating.”

A Treasury Department spokesman said the Office of Fiscal Responsibility will conduct an independent assessment of public finances.