Wednesday, 14 February 2018

UK government gets more money via borrowing than from tax??

Well that’s the claim made by Ann Pettifor in an article entitled “Do tax revenues finance government spending? To quote, she says:

“…governments do not finance their investments, or even their activity, from tax revenues. Most of the government’s big expenditures are financed via the issuance of gilts – government bonds.”

Actually it’s the other way round, to put it mildly: i.e. governments get vastly more from tax than they do from borrowing. Reasons and calculations are as follows.

The first slight problem involved in quantifying things in this area is that the amount of borrowing governments do varies hugely depending on whether the economy is in recession, or the opposite, i.e. overheating. Thus to get a rough idea as to how much the UK government gets from borrowing and tax, I’ll take a relatively long period, that is, 1965 to the present: just over 50 years.

I’ve actually chosen that particular period because the debt/GDP ratio was 90% at the start and at the end of that period. (See first and second charts below) I.e. I’ve chosen that period because it keeps things simple. That might seem a cheat, but actually as you see by the end of this article, the actual amount of cheating is negligible. (Charts are taken from this site.)

Next, we need to compare real GDP in 1965 with GDP in 2017. According to this source, UK GDP expanded about two and a half times in real terms between 1965 and 2017.

Thus the increase in government borrowing between 1965 and 2017 was 0.9(2.5-1.0)=1.36x(1965GDP). Thus over that 52 year period, government got an amount of money from borrowing each year which on average equaled 1.36/52 times 1965GDP, which comes to 0.026 times 1965GDP: about 1/40th of GDP.

As to the proportion of GDP allocated to public spending, that’s hovered around 40% for a long time – see chart here.

So to summarise, 40% of GDP is allocated to public spending, and as for the money to fund that that comes from borrowing, that’s about 2.6% of GDP. 40/2.6= about 15. So about 1/15th of public spending is funded via borrowing, with the rest (over 90%) necessarily coming from tax.

Returning to the question as to how much of a cheat is involved in  choosing the period 1965 to 2017, the answer is: “not much”. That’s because one could go back another 50 years or so to around 1918 when the debt was also around 90% of GDP. (See above chart). That would make the total period a century: hardly unrepresentative.

Conclusion: the amount of money government gets from tax is roughly fifteen times what it gets from borrowing – unless I’ve dropped a clanger, which is not impossible...:-)

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