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£6 billion Cuts - an 'Important Down-Payment'

By Andrew Smith, Chief Economist at KPMG 

The significance of the £6bn public spending cut announced by the UK government for this year is symbolic rather than material. Compared to the size of the task in hand, it is not big enough to have a noticeable impact on the budget deficit, or on the economy.  

To put it in context, £6bn is a little less than 1 percent of planned spending this year. It is around 4 percent of the latest estimate of the deficit in 2009-10 but, at £156 billion, that has already come in some £20 billion lower than forecast in the Pre-Budget Report of only six months ago, and £7 billion below that in the March Budget.  

Public borrowing is the difference between two very large numbers and projections only a short time ahead are vulnerable to small errors in forecasting spending, on the one hand, and revenues on the other. With all the goodwill in the world, £6 billion could easily disappear in the wash.   

In terms of its effect on the economy, too, the direct impact will be small, at less than ½ percent of GDP. With growth officially projected at 2 percent this financial year, this is not exactly welcome but again, the impact is well within forecasting margins. The average error for growth projections one year ahead is 1½ percent of GDP. And this early, albeit limited, move on the fiscal front argues against an early monetary tightening.   

Clearly a much larger axe, and probably tax rises, will be required in future years to bring the deficit down. This announcement is nevertheless important. The immediate impact may be small, but it represents a down-payment, indicating the government's intent to tackle the deficit - a demonstration all the more necessary in light of the crisis in the eurozone.

 

Contact

KPMG-LLP-(UK)-Chief-Economist-Andrew-Smith

Andrew Smith

Chief Economist
KPMG LLP (UK)

020 7694 8016 | andrew.j.smith@kpmg.co.uk