Civil servants trying to get to grips with financial management could do worse than consider the words of one of Charles Dickens’s most famous literary creations.
In David Copperfield, Mr Micawber offers this advice: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
The point here, as I tell people on the training courses on finance I run for government officials, is to live within your means, or at least not too outrageously beyond them.
Manj Kalar: The civil service's finance professionals must rise to the Brexit challenge
Public finances worsen in first figures since Brexit vote
Interview: Vicky Pryce, former head of the Government Economic Service – "Referendums tend to polarise, people lash out”
Reimagine travel: how driverless cars will redefine our roads
Of course this is easier said than done. Keeping the nation’s finances on track is not an easy task. But although national accounting is undeniably complex, some of the principles are really quite simple.
Before the advent of parliamentary democracy in Britain, spending by the monarch in excess of tax income tended to result in constitutional crisis for the monarch and misery for subjects.
Today, government deficits have become a political football. This article aims to provide an introduction to some of the features of the debate over government expenditure and income.
It is worth remembering that government expenditure as a percentage of Gross Domestic Product (GDP) versus annual government income, derived mainly from taxation, have been generally quite close to each other over the past century.
"Historically speaking, the relationship between recessions and deficits is far stronger than the link between whichever party is in power and deficit or surplus"
However, external events can disrupt longer term trends. In the years leading up to the Second World War, the government was responsible for spending around 25% of everything that was spent in the UK.
But the Second World War caused a huge spike in expenditure together with a steep drop in income. Waging war is a very expensive activity – in terms of money as well as lives.
In the decades since WW2, government expenditure has fluctuated at around 35‐40% of GDP. This step up from the 25% pre-war level was largely caused by the introduction of the National Health Service and the modern welfare state.
Although government expenditure tends to closely track government income, expenditure has more often than not exceeded revenues on an annual basis.
When the government spends more than its tax income, the result is a deficit. And when tax income exceeds expenditure, the result is a surplus. When expenditure exceeds tax income for several years in a row, the deficits pile up as debt.
There is a traditional view that parties of different political persuasions have different approaches to being in debt. However, official statistics suggest that there is at best only a weak link between the political complexion of the government of the day and the surplus or deficit during any given year.
Both Conservative and Labour administrations have seen surpluses and deficits. The reasons for this are often events beyond the government’s control. As one former prime minister, Harold Macmillan, once remarked when asked what he feared most: “Events, dear boy, events.”
The best example of such an uncontrolled event is the onset of recession. When there is an economic downturn, government expenditure tends to rise automatically – due to higher welfare payments, like unemployment benefit. At the same time, government income tends to fall – eg. less income tax coming in – resulting in expenditure exceeding income.
So historically speaking, the relationship between recessions and deficits is far stronger than the link between whichever party is in power and deficit or surplus.
The old adage, as articulated by Dickens, of spending within your means is worth bearing in mind, but may not always be achievable under the onslaught of events, dear reader, events.