Britain's Public Finances: Past, Present and Future

Why do governments tax, spend, lend and borrow? At a time when fiscal management is under intense scrutiny around the world, Robert Chote, Chairman of the Office for Budget Responsibility (OBR), explored this fundamental question for understanding the nation’s public finances, when he presented the Royal Economic Society’s annual public lecture at the University of Birmingham on Wednesday 14 December.

The lecture discussed the key reasons why governments tax and spend – to provide ‘public goods’ such as defence and criminal justice; to replace ‘missing markets in such areas as unemployment and incapacity insurance; to influence behaviour, for example, by discouraging social ‘bads’, such as smoking and encouraging social ‘goods’ such as putting money into pensions; and to redistribute resources via taxes and benefits.

Robert then explored the reasons why governments borrow – because of inevitable errors in revenue and spending forecasts; to support inter-generational fairness; to stabilise tax rates; to implement macroeconomic management; and finally, for political expedience as voters typically like having money spent on them more than paying taxes.

The lecture provided a snapshot of Britain’s public finances today, explaining the OBR’s latest forecasts for public sector spending, revenues, borrowing and net debt in 2011/12 as presented in the November 2011 Economic and fiscal outlook. Mr Chote also considered ‘Whole of Government Accounts’, a newly available measure of the public sector’s financial health, which makes it possible to take account of future debts that will arise because of past government actions.

Finally, the discussion moved to the impact of the financial crisis and the recession on Britain’s public finances, the scale of the repair job, the economic backdrop to the current policy debate – ‘Plan A versus Plan B‘ – and finally the role of the OBR itself as the UK’s independent fiscal watchdog.