Yesterday we looked at the plans of Lord Skidelsky for fiscal expansionism. Let me add to that the implication of his lines of thought is that he would boost government spending now. Whilst we are not in a 2008 style slump he was clear that he thinks we have not recovered from it and some metrics confirm that. For example if you look at Gross Domestic Product and employment we have, but the case is much weaker with GDP per head and invisible with real wages.
This brings us to a familiar issue which is whether we have had austerity or fiscal stimulus in the credit crunch era? The problem with the assertions of outright austerity is that we have run a fiscal deficit throughout the period. Language shifts over time and I can recall when that would have been called a fiscal stimulus. This does matter as I can easily name two countries who are running what might be called outright austerity in the sense of both having and planning for a fiscal surplus and they are Germany and Sweden. In the UK sense it has meant reducing the fiscal deficit and in overall terms there have been two phases as there was a change made around 2012 that softened the effort. In practice we have also seen something of a lagged response to the effort. What I mean by that is that the deficit numbers took a while to respond to the economic recovery but more recently have picked up the pace.
Putting the issue into two numbers you could say that the amount we are borrowing now offers some support for Lord Skidelsky as it was £39.4 billion in the last financial year. But the amount we have borrowed heads us in the other direction because if you take the collapse of Northern Rock as the start of the credit crunch we have added some £1.23 trillion to the UK National Debt since. For those of you wondering how we have possibly afforded this let me point you in the direction of Threadneedle Street as it is the £435 billion QE Gilt purchases of the Bank of England which have allowed it via their impact on Gilt yields. In spite of the recent trend towards higher borrowing costs exemplified by the US ten-year Treasury Note yielding 3.09% the equivalent Gilt yields a mere 1.6%.
Let me hand myself a slice of humble pie to eat. The reason for that is if you had asked me where Gilt yields would be a decade or so later when the credit crunch began the chances of me being right would have been slim to none ( and in line with the joke slim was out of town). In an area I was right ( long time readers will recall I was long of some UK index-linked Gilts anticipating correctly a rise in inflation), I did not envisage that one day conventional Gilt yields would be so low that the price of linkers would be driven higher because they offered some sort of coupon.Madness! Or rather the consequences of the Sledgehammer QE of August 2016 about which history will not be kind.
We can continue the Bank of England theme as it has had an impact here too and one can only imagine the panic back in July and August of 2016 when they managed to devise schemes to do this.
Since August 2017, the net debt associated with the Bank of England (BoE) increased by £44.6 billion to £193.2 billion. Nearly all of this growth was due to the activities of the Asset Purchase Facility Fund, of which the TFS is a part.
The TFS closed for drawdowns of further loans on 28 February 2018 with a loan liability of £127.0 billion. The TFS loan liability at the end of August 2018 was £126.5 billion.
Yet again we find ourselves at least in terms of the official statistics indebted to provide yet another subsidy to the banking sector. This is a shame as our performance on this metric has been improving.
Debt (Public sector net debt excluding public sector banks (PSND ex)) at the end of August 2018 was £1,781.9 billion (or 84.3% of gross domestic product (GDP)); an increase of £15.9 billion (or a decrease of 1.8 percentage points) on August 2017.
The debt has continued to increase but has done so more slowly than economic output or GDP so in relative terms it has declined.
The Fiscal Deficit
We have got used to a sequence of good numbers so I guess we were due something like this.
Borrowing (Public sector net borrowing excluding public sector banks (PSNB ex)) in August 2018 was £6.8 billion, £2.4 billion more than in August 2017; this was the largest August borrowing for two years (since 2016).
It is hard not to have a wry smile as we investigate the reason for this because you may recall last month the UK had really crunched down on spending.
While current receipts in August have increased by 1.6%, to £55.6 billion compared with August 2017, total expenditure increased by 6.9% to £60.4 billion.
We are told that this was influenced by the “triple-lock” effect on the basic state pension (3%) but that seems weak to me as that has been in play since April. In fact every spending category was higher and after the excitement in Salzburg yesterday there is food for thought in this.
The UK contributions to the EU in August 2008 were £1.0 billion; a £0.6 billion increase on August 2017, seeing a return to a similar level as 2016 after a low 2017 due to an EU Budget surplus distributed to member states.
If we return to the underlying trend we see that in spite of this month we remain overall in a better phase for the deficit.
Borrowing (PSNB ex) in the current financial year-to-date (YTD) was £17.8 billion: £7.8 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).
This is because the rate of growth of revenues at ~4% is higher than the rate of growth of spending at ~2%. The latest strong set of retail sales figures are backed up by the VAT data and income tax is doing pretty well too. Also the overall trend to lower inflation has reduced debt costs by £2.3 billion via the RPI.
One area which is of note is a confirmation of a slowing of the housing market as Stamp Duty revenues have dipped by £400 million to £5.5 billion.
The UK has made considerable progress in reducing its fiscal deficit and as ever a time like this brings us to something of a crossroads. Some will want to press on with this and others will be sympathetic to a Lord Skidelsky expansion. The latter are supported by the reality that austerity such as it is has in some cases hit the weaker members of our society. The former may note that whilst the cost of our debt remains low a continuation of the recent rise in Gilt yields will begin to get expensive. The simple truth is that we have so much more of it these days as if we return to the Northern Rock collapse we owed £0.54 trillion as opposed to the £1.77 trillion now (year to July). Putting it another way that is why some of you have replied on here saying we cannot afford interest-rates and yields of more than 3%.
In terms of the underlying economy our present trajectory continues to be one of bumbling along so it should support the fiscal position and mean that the Office for Budget Responsibility is wrong again.The OBR’s only hope is that the weak monetary data acts as a stronger drag on the economy which is an irony as I don’t think it has a monetarist on it. Meanwhile the boost provided by the booming housing market is fading away.
As some Friday humour I present this to you from the Washington Post.
I wanted to understand Europe’s populism. So I talked to Bono.
Me on Core Finance