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.
