The Office for Budget Responsibility (OBR) is an independent body, created to help us hold the government to account. It’s their job to check the government clears the structural deficit within this parliament. So it’s pretty important that we understand what is meant by “structural deficit”.
But what exactly is the structural deficit?
The word “deficit” is bad enough. A lot of people confuse it with “debt”, and that’s not just in inadvertent typos. However, if you stop and think, it’s not so bad. ‘Debt’ is what we owe, and ‘deficit’ is how fast our debt is increasing.
The structural deficit isn’t so simple. The FT’s
definition is: “A budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors.”
Unfortunately, that definition doesn’t tell the whole story. To understand an OBR report, you have to understand other phrases, such as the “current deficit”, and the “cyclically-adjusted current deficit”.
The current deficit is the deficit, excluding capital spending. Capital spending is on items with a useful life of more than one year, so long term assets, like a new hospital or, er … the Millenium Dome. Current spending is on items which are consumed, like salaries or drugs in a hospital.
Some argue that the capital spending part of a deficit doesn’t matter, because it is investing in a long-term asset which will improve efficiency. But this isn’t always true. What about the aircraft carrier that’s being built, only to be mothballed? And are all replacement buildings so much better built and designed that they will pay for themselves in improved efficiency?
So there’s room for debate about whether we should worry about the capital spending part of the deficit.
In 2010, the BBC reported the OBR saying that the structural deficit would widen from 7.3% of GDP in 2010-11 to 8%.
But is that really what the OBR said? If you look at the OBR
report, you will search in vain for the words “structural deficit”, instead, they use terms like “cyclically-adjusted net borrowing”. In this case, the BBC used the phrase “structural deficit” to mean “cyclically-adjusted net borrowing” – in other words the structural deficit, including capital spending.
However, most commentators use the term in the same way the government does, in its target to balance the structural deficit excluding capital spending.
So, when you’re reading serious articles about the deficit, be careful how you read the figures. Different “experts” can mean different things by the same term. Their only consistency is that they don’t give you a glossary that explains exactly what they mean.
And I find that worrying.
The whole point of the OBR was that it should allow the voter to hold the government to account for its financial responsibility. If even financial journalists get confused, what chance has the poor voter?
The OBR publishes lots of useful data for academics and economists. But this isn’t enough. The OBR need to work harder at making their material more accessible to the general public.
A decent glossary would be a start.