UK real public spending declines modestly
At least up to the first quarter of 2012, UK real public spending was falling in line with government plans.
Revised national accounts figures released last week show a rise of 3.0% in general government real consumption of goods and services (including the services of government employees) in the year to the first quarter, to a new record. This suggests that efforts to restrain spending are failing.
The national accounts consumption numbers, however, are misleading for two reasons. First, they use a government-specific price index for the conversion into real terms, whereas the Office for Budget Responsibility’s real spending numbers are based on the economy-wide GDP deflator. The government consumption deflator is rising more slowly than the GDP deflator at present, reflecting a squeeze on public sector pay. If the GDP measure is used instead, real consumption of goods and services in the first quarter was 0.8% below a peak reached in the third quarter of 2009 – see first chart.
Secondly, and more importantly, consumption of goods and services accounts for only 49% of “total managed expenditure” (TME) – other current payments (i.e. on transfers and interest) make up 46% and gross investment the remaining 5% (2011 figures). The government has focused cuts on these components – they were 8.3% and 12.3% respectively below peak in real terms (using the GDP deflator for the conversion) in the first quarter. Real TME, therefore, was 4.0% beneath its all-time high reached in the fourth quarter of 2009 – second chart*.
The first-quarter level of real TME was 0.7% below the 2011-12 average, suggesting that it is on track to meet the OBR’s March forecast of a 0.5% decline in 2012-13 – assuming spending control is maintained.
*All figures are seasonally adjusted; consumption of goods and services and gross investment are released in this form while TME was adjusted in Datastream, with other current spending derived as a residual.
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