UK Public Finances deteriorate and the economic effects of banks being allowed to overcharge

Yesterday saw some action on what are considered to be the fringes of the European Union and the euro zone. We saw Ireland downgraded by Moodys but as this in the main only brought it in line with the other ratings agencies and only had a small impact with her ten-year government bond yield rising only a little to 5.59%. However she does have some bond issuance planned for today. Hungary however had a much more difficult day after her government ended up suspending negotiations over terms for further tranches of funds from the IMF/EU. By the end of the day the Forint had dropped from 281.25 against the Euro to 291.88, and against the Swiss Franc it fell from 207.14 to 213.81. So if you are a Hungarian with a Swiss Franc mortgage ( one of the 1.7 million) your mortgage rose by 3.2% in one day. If that does not show how risky such mortgages were and indeed are I do not know what will. I am still amazed that this was ever allowed, were the relevant regulators asleep again? Also the BUX equities index fell by 2.9% so let us hope that any repayment vehicles were not invested on the Hungarian stock exchange.

Panorama and bank behaviour

I was intrigued by this programme when I saw the trailers. The subject of a hidden transfer of money to the banking sector via allowing banks to overcharge for loans and overdrafts whilst of course the official ZIRP ( Zero Interest Rate Policy) keeps savers returns low. This allows the middleman or bank to make rather nice profits. Combining this with the way central banks around the world have supplied cheap money to banks which has allowed them to invest it in higher-yielding assets and again make a profit. Quite how this is considered a punishment for past misdemeanours is baffling to me. Of course it is much more likely that having poured so much taxpayer money into the banking sector politicians in general want to show us a profit even if it is financed by a another transfer to the banks from the same taxpayer. Politicians really do have a low regard for their voters.

Implications for Monetary Policy

In one of my first posts (15th December 2009) I wrote about the difference between official and unofficial interest rates in the UK. I thought then that by losing control of interest rates in the early part of the credit crunch the Bank of England had in effect made it worse.

In the UK we had a sustained period of market interest rates exceeding the official ones. This lasted in its most severe form from August/September 2007 to September 2009. This has some interesting implications for what has happened I believe.

1. UK monetary policy was tighter than intended and was in fact contractionary for much of this period.

Having failed to do much about a very contractionary effect on our economy led the Monetary Policy Committee to then follow an over expansionary approach in my view which has helped create our inflation problem. However these extreme cuts from over 5% to 0.5% then took official interest rates away from market ones again.

Until this weekend it was possible to invest money on a one year basis with National Savings (backed by the UK government) and get a gross return of 3.95%. Some savings institutions are offering rates of around 3% on instant access. Now if we look at mortgages tracker rates are around 3% for new mortgages at best,and the average 2 year fixed rate according to money facts is at 4.86%.

To try to normalise the situation (which if you think about it is related to Keynes’ idea of a liquidity trap) and also to look to try to head off an incipient inflation problem (remember this was last December) I suggested the following.

Accordingly I remain of the view that raising interest rates to 1.5% will be a beginning in us negotiating our way out of our current difficulties.

Back to Panorama and our banks

If one could fight ones way through the way that the BBC chooses to present programmes these days there were some useful insights. For example a bank which is nationalised in all but name HBOS now charges £1 per day for overdrafts which on a £10 overdraft leads to an annual interest rate of 3650%. On the comments page to this programme I noticed this “I got charged £156 last month for going overdrawn twice in one month by £30 and this month I have gone overdrawn again because of the charges.” According to the programme authorised overdrafts cost an average of 32% which it compares with advertised rates of 19%. Personally even 19% seems a very long way from the official 0.5%.

So to my mind the programme highlighted an important area even if it was a little short on facts. On this subject I have question for readers about the BBC. I watched coverage of the Open Championship over the last few days. In many ways the BBC’s coverage is very good but it has an obsession with having its “star” presenters chatting (two hours on saturday and 1 1/2 hours on Sunday) when golf is being played. I also noticed that a skill which existed 10 or 20 years ago which is the ability of a cameraman to follow a golf ball in flight has declined in a much higher tech era. I have started to feel that the BBC’s celebrity obsession is affecting basic skills. Am I alone in this?

 Back to the subject of unofficial and official interest rates I wrote this on the subject on the 21st January

I have written before on the difference between official and unofficial interest rates in the UK. On this subject I notice that the Skipton Building Society is going to raise its standard variable mortgage rate from 3.5% to 4.95% on the 1st March.

Remember the official rate has not changed for quite some time and such behaviour I feel is shameful. But a combination of our finance sector and our politicians is letting it happen.

Our politicians and their behaviour

The new Coalition government claimed that it would be a breath of fresh air when compared with its predecessor although I am sure all new governments say that! One of the more respected members of it (in opposition anyway) Vince cable added this to the Panorama programme.

“One of the negative side effects of this crisis is that our banking system that was already very concentrated is now even more concentrated so there’s less competition, less choice and bigger temptation for banks to earn margins at the expense of their customers,”

I completely concur with that. However the day had another event in it. You see the part of the UK government which competes for retail savings, National Savings, cut its interest rates. There was a 0.25% cut in some rates and some savings certificates were withdrawn particularly the index-linked ones which have become “too popular”. The official reason is that National Savings has hit its targets. As the UK has enormous deficits to finance this really stretches credulity to breaking point. The true answer is that the banks desperately need retail funding and have been knocking on the governments door to stop National Savings competing so hard for funds. So not only can they charge what seem usurious rates to lenders they are allowed to offer lower rates to savers (an end of the spectrum Panorama ignored). So Mr.Cable’s government’s deeds do not match his words.


Not only is it quite plain in my view that our finance sector is getting another implicit bailout by being allowed to widen its margins but this policy is also affecting our underlying economy. The effects of this are many. Those paying high overdraft rates are hardly likely to be able to afford to consume as much. Firms are complaining that the banking sector is not lending to them. But instead of doing something about it we cross-subsidise the banks.

However in terms of the Bank of England’s control over the economy there are deeper problems. As it has a monopoly over money creation it can set any nominal interest rate it likes. However the way that official and unofficial rates have diverged has weakened it position and this has existed since late 2007. Its desired impact on the economy has played second fiddle to helping the finance sector. This needs to change. In some ways there are issues with this policy even for the banks. You see they make easy profits now but the retail deposits they so badly need are hardly encouraged by real interest rates which in the UK are negative. So a policy which is bending our whole economy is illogical in the medium-term to my mind.

UK Public Finances

The Office for National Statistics has published the following figures this morning, public sector net borrowing was £14.5 billion in June 2010, which compares with borrowing of £14.7 billion in June 2009. Public sector net debt, expressed as a percentage of gross domestic product (GDP), was 63.9 per cent at the end of June 2010 compared with 57.3 per cent at end of June 2009. Net debt was £926.9 billion at the end of June compared with £797.5 billion a year earlier.

These numbers are troubling in several respects. Firstly they are similar to last year’s when our situation had appeared to be improving and they are also worse than economists forecasts for them. Looking at the detailed breakdown is not reassuring either as we have reduced public investment since last year but the deficit has shrunk by less,so our public sector is consuming more and investing less. Just to add to the poor news the figures for April and May have been revised up by £1.4 billion in total. So for the financial year so far public sector net borrowing is £40. 3 billion which is only very slightly lower than last year’s £40.9 billion.

I always counsel caution on the reliability of economic figures and so will not over-emphasis these figures but I am concerned about the prospects for July as it is a month when self-assessment payments are collected and could be a time when we find out how the self-employed actually did in 2009. Of those I know there has been a clear trend to weaker performance and hence lower tax payments. I still also expect the 50% tax rate to have “transferred” tax payments into last year and to lead to a lower level of tax collection for that particular income group over the medium term. However caution is required again as past experience of UK recessions led me to over-estimate the UK’s likely borrowing in 2009/10.

National Audit Office

This institution has suffered some knocks to its credibility in recent times. However today it is back on form even if it adds to the gloom. It has in effect criticised the previous government for claiming spending cuts but not having any real plans to achieve them.Labour announced the target to cut spending by £35bn by the end of the 2010-11 financial year in 2007, but the National Audit Office said the government was currently not on course to meet it. Whilst the coalition government might see a chance for political advantage in this the NAO has also questioned its plans and found shortcomings.

“The scale of savings needed in the current financial situation means that departments will have to think more radically about how to reduce costs and how to sustain them in the longer term.”

In a way we are back to our (unsatisfactory) politicians again. I have written before that I question their resolve and ability to actually cut public expenditure and it appears that the NAO is joining me in such thoughts.


9 thoughts on “UK Public Finances deteriorate and the economic effects of banks being allowed to overcharge

  1. “I have started to feel that the BBC’s celebrity obsession is affecting basic skills. Am I alone in this?”

    Hi Shaun, no you are not. I have certainly come to the same conclusion.

    I also agree entirely with your comments re last night’s Panorama. The issues of the increased banks margins, the largest ever historical continued divergence between official base rate and market interest rates, and the disincentive to save due to net value erosion after tax due to continuing inflation were essentially omitted. Thus not an entirely balanced programme!

    The other issue is that a propensity to save is of course anti-inflationary, since it reduces the Velocity of Circulation, so it ought to be encouraged to assist in the fight against inflation – if there really were one. Of course the truth is that there is not! It has become evident that the policy of the new government is identical to that of the last. The intent is to use inflation to sequester a stealth tax from holders of fiat money to pay off some of the government debt. As Keynes wrote: “…By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of the citizens….” That is precisely what they intend, and this was completely omitted from the Panorama programme..

  2. Hi Shaun,

    In regard to the comments from the NAO. I feel this point could be expanded to all parties and indeed all independent government accountants. No party set out what they would cut even during the election. Whichever party came in they would have no mandate to cut anything specifically, compare this to promises of all three main parties not to increase VAT. It would have been good if the NAO could have mentioned this preelection as a matter of fact report. Noone was holding the parties to account on their promised cuts, unfortunately the electorate and the media were complicit in this.

    I find it interesting that recently Alastair Darling has stated that he would like to have set out at least a few examples of what could be cut in his last budget. This adds to picture that his doommongering was silenced when in power.

    There seemed a huge majority of commentators at least who thought that the bailout of the banking should come in the form of a new bank set up to give out business loans to supply competition in the market. Who would have thought that this role of supplying competition would be such an important role of national savings.

    I thought Alan Sugar, the only nonbillionaire in the computing industry, was unwise when recommending national savings to the public in tv ads. Unbelievable to now think they are the only accounts that beat inflation.

    I would be happier if Cable actually gave his idealistic opinion and then the compromise of the coalition. I am not sure whether he has changed his mind more than his stated views are not his own. This holds true for the whole coalition minus backbenchers who then miss the point of a coalition.

    I agree the BBC seems to be dumbing down. First I rate highly the world service and BBC4 no complaints there. BBC news is becoming to much like a tabloid. It occasionally it mixes opinion with fact and thinks news now should cover entertainment stories. This happens to defend the licence fee it feels it needs ratings not quality.

    However I was surprised to cite sport as an example of dumbing down. I can only really comment on F1 coverage and the world cup. BBC TV football coverage was amazing compared to the ITV whose comments are best benign and at worst nonsensical. Though I did feel 5live spent too much time during other peoples matches talking about England.

    F1 is an interesting example where celebrity helps the coverage. They have big personalities on the show. This means that drivers actually follow them and that they enjoy asking hard hitting questions.



    • Hi Fletch
      I see the new move by the NAO as hopeful. It had a difficult time when it was discovered that it was led by a man who had enjoyed his expenses account….

      As to F1 I watch the coverage less than I used to simply because I used to prefer the old qualifying system and find the new rather dull. Having always been a Lotus fan I should be enthused by their return but somehow have not been. However imagine that you miss the first part of the race because Hazel Irvine is interviewing Prince Andrew and then prefers to tell you what happened yesterday rather than showing what is happening now. Also we missed a birdie put from Lee Westwood as we went to another dull interview. As he is currently the highest ranked player from Britain and indeed was 2nd in the event it would be a bit like missing say a Red Bull overtaking a Mc Laren..

      I am no great ITV fan (which has dumbed down even more) particularly as there were few highlights for an England fan in the World Cup and as a HD viewer on that day I did not see Steven Gerrard’s goal. So it is easy to persuade me that the BBC’s coverage was better!

      I agree about the World Service and might even advance a view that all stations with the number 4 in them are better than the others. BBC4,ITV4 and even Channel4 and Film4 are ok…

  3. I like BBC radio output and the BBC website. I occasionally watch a TV programme but usually through iPlayer.

    I don’t watch Sky and a don’t buy newspapers. So the BBC is quite important to me and I’d rate it as a successful organisation.

  4. The BBC has a chronic lack of training these days. There has also been over the last few years a desperate reduction of permanent creative (behind the camera / microphone) and technical staffing which naturally leads to loss of skills as those with good redundancy packages volunteer to go.

    This has mainly come about since the John Birt era. No longer are skills properly recognised. No longer are technical and production managed by people with an in depth knowledge of their areas. Above the most basic of hands on creativity there are rafts of bean counters.

    Much of the daytime dross on air these days has been filmed by production assistants after a day of camera training. Then the editor is often a very junior person (junior does not have to mean lacking in creativity) on not much more than minimum wage.

    The root is that the BBC is overmanaged at an accountancy level but undermanaged in creativity and technical standards.

    A possibility regarding the standard of the golf coverage may be that the BBC are taking a video feed from perhaps an international sports producer (such as TWI) and inserting their own studio material and iso (iso is where they have a camera of their own to add to the supplied material outside the studio).

    All F1 coverage on the track itself is also done this way by F1’s own TV outfit which is then distributed by the host broadcaster at each grand prix.

  5. Thanks for explaining why National Savings don’t seem to want our money. I’ve been puzzling over this for ages!

  6. Shaun – your blog is excellent and I read you every day in preference to the newspapers, as I know I get the unvarnished verite from you, and not some vested interest spin.

    Just a quick anecdotal in support of what you have been saying about HMRC. I have been waiting four months (and several letters, faxes and phone calls) for a tax rebate of less than £1,500. Are they really that incompetent? Or are they under orders not to release any repayments for the reason of self-assessment collections that are much lower than expected?

    Enquiring minds want to know.

    Keep up the good work –


    • Hi James,welcome and thanks

      As to HMRC then in general so far as I can gather they are paying promptly. However I do know someone who was in the 50k who had their details sent elesewhere, except in his case it included the tax refund he was due.Oddly,he does not find it quite as amusing as the rest of us…. Also there was a glitch in the HMRC online system which meant that if you changed a tax return the system froze and is still frozen in fact which is awkward with the July deadline so near.

      So I am sorry to hear you appear to be been unlucky but my dealings have been with their online system I do not have much information on how the paper based system is working

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