The UK Public Finances continue to suggest a pre-election stimulus

Today sees the latest installment in the troubled path of the UK public finances. For a considerable period it was possible to blame underperformance in this area on the lack of economic growth in the UK economy. However that changed as the UK economy turned for the better and began its current growth the beginning of 2013. Since the first quarter of 2013 we have seen quarterly economic growth go 0.5%,0.7%,0.9%,0.6%,0.7% and 0.9% in the second quarter of this year. Added to that is the expectation that we will see economic growth of the order of 0.7/8% reported later this week by the Office for National Statistics.

The Labour market has been strong too

One factor that  you might have expected to have been a major factor in the UK public finances if you had been able to pick the period of weak economic growth has been something of a dog that has not barked. This is social spending on the unemployed which has been kept lower than you might have reasonably thought by this.

There were 30.76 million people in work.Comparing June to August 2014 with a year earlier, there were 736,000 more people in work.

There were 1.97 million unemployed people, 154,000 fewer than for March to May 2014 and 538,000 fewer than a year earlier. This is the largest annual fall in  unemployment on record. Records for annual changes in unemployment begin in 1972.

So the background for social spending has been positive and if we look  at the explicit claimant count measure (Job Seekers Allowance) we see a fall from a peak of just over 1.6 million in late 2011 to 951,900 this September. So the quantity factor here as in the number of unemployed has been stronger than might have been expected.

Wages are a problem

It is in fact the other part of the labour market which has been posing a problem for UK tax revenues. This is the issue of the lack of wage growth and the increase in lower paid work combined with the trend towards self-employment. Added to this has been the policy of raising the Personal Allowance such that the starting point for income tax is a higher level of income. Putting all this together has led to these disturbing numbers below for the fiscal year (April onwards) so far.

income tax-related payments increased by £0.1 billion, or 0.1%, to £71.5 billion;

Whilst we need to make an allowance for the bonus  payments which were made last year to avoid the 50% income tax rate this is disappointing to say the least for an economy growing at around 3% per annum! If we look at the numbers for the month of September which should be clear of that impact they are better but still disappointing.

income tax-related payments increased by £0.2 billion, or 2.2%, to £10.7 billion

That is a fair distance behind the 4% growth in VAT (Value Added Tax) revenue in September.

The official view is that we will catch up with the lost revenue when the self-employed report and more importantly pay income tax on the more recent period of economic growth. I know that at least some of you think that there will also be some self-employed who will report very little at all due to pressure to leave the unemployment numbers. Also if you read read between the lines of this from the Office for Budget Responsibility there are plainly concerns about the ongoing situation.

Employment driven growth is less tax rich because a given amount of labour income attracts a larger number of tax -free personal allowances, reducing the effective tax rate. This suggests that recent increases in the income tax personal allowance will have been more costly than they otherwise would have been. And slow
earnings growth reduces fiscal drag the positive effect on receipts of earnings rising faster than tax thresholds and allowances.

Pension payments

This is a part of social spending which the government via its “triple-lock” for state pensions has boosted somewhat. To the individuals receiving it the amounts may not seem large but expenditure was pushed onto a higher trajectory by the surge in inflation in late 2011and has continued. It seems that public-sector pension payments are adding to this factor. Below are the figures for the fiscal year so far.

net social benefits (mainly pension payments) increased by £2.8 billion, or 2.9%, to £99.6 billion mainly as a result of increases in state pension payments (within National Insurance Fund benefits) and social assistance payments and public sector pension payments;

Actually the rate of increase in this category was even higher in September.

net social benefits (mainly pension payments) increased by £0.9 billion, or 5.4%, to £17.0 billion,

A fiscal stimulus?

I have analysed this issue before where the publicly proclaimed austerity looks rather more like a pre-election stimulus if you ignore the hype and just look at the data. In today’s release there is a component which does add to this theme.

central government net investment (capital expenditure) increased by £3.3 billion, or 25.7%, to £16.4 billion, largely due to a £2.0 billion increase in gross capital formation.

If we move to wider public expenditure it is hard to make any sort of austerity case from these especially if we recall the economy’s growth rate.

Central government expenditure (current and capital) for the financial year-to-date 2014/15 was £344.1 billion, an increase of £10.1 billion, or 3.0%, higher than the same period in 2013/14.

With the falls in the annual rate of inflation such numbers would to a Martian look much more like a stimulus than austerity

The effect of these influences
In essence they are summarised by the numbers below.

PSNB ex was £11.8 billion in September 2014, an increase of £1.6 billion compared with September 2013.

In case you were wondering if this was some some sort of fluke here are the numbers for the fiscal year so far

Public sector net borrowing excluding public sector banks (PSNB ex) from April to September 2014 was £58.0 billion, an increase of £5.4 billion compared with the same period in 2013/14.

So up is indeed the new down in the world of “paying down the deficit”! If  we compare where we are now to where we were expected to be the disappointment mounts.

the public sector net borrowing excluding public sector banks (PSNB ex) was £58.0 billion for the financial year-to-date (April to September) 2014/15, while the full year OBR illustrative projection for 2014/15 was £86.6 billion.

It is true that we tend to borrow less in the second half of the fiscal year but not that much less!

There is much to consider here. I think that the best perspective is provided by going back just under a year to the 2013 Autumn Statement. Back then it looked as though the UK public finances were on the verge of a considerable improvement. Since then recorded economic growth has been as strong as one could reasonably have hoped back then. But rather than improving they have deteriorated. Whilst this has become a regular feature of many austerity programmes the rub here is that UK economic growth has arrived. So right now there is more evidence for a (pre-election) stimulus in the UK data than for any form of austerity.

On that basis the national debt will continue to mount.

Maastricht debt (General Government Gross Debt) at the end of September 2014 was £1,557.5 billion. (89.9% of UK GDP

We should be grateful that  the bond vigilantes are fast asleep and we can borrow extremelly cheaply by past standards. Perhaps our establishment thinks it can in extremis order the Bank of England to purchases any extra debt.

Still one form of tax revenue is booming in the fiscal year so far.

stamp duties (on shares, land & property) increased by £1.5 billion, or 25.2%, to £7.3 billion


14 thoughts on “The UK Public Finances continue to suggest a pre-election stimulus

  1. Great article as always Shaun.

    I always find it amusing that the tories are hated for being the party of austerity. The should rebrand themselves as the deficit spenders. I really can’t see a way out of this, until we have a party which is honest with the electorate.

    Either we have a massive increase in taxation, or living standards will have to be cut. No party will make unpopular decisions which will benefit us all in the long run.

    • Hi Anteos and thank you

      The truth is that modern era austerity has mostly seen deficits rise! The only exception I can think of is Germany which has returned to balance or a small surplus. Of course it now has other problems.

      As to us we face a problem posed simply as if we cannot cut the deficit with economic growth of around 3% what happens when the growth slows or even worse we see the next recession?

  2. Well Shaun, as I see things the state of the UK public finances is a function of the “rock and hard place” I alluded to yesterday; both of these are essentially creations of that bastion of ‘wise human deliberation’ commonly known as (treacherous, self-serving) Politicians. I am, of course, referring to Parasites (very rich, rich, poor and intermediate)..

    Until and unless events get to grips with the destruction to public finances wreaked by the pincer movement of the two main factions of the Parasites – the Parasites (very rich and rich) disproportionately starving the Treasury of inputs and the Parasites (poor and intermediate) disproportionately burdening the Treasury via excessive outputs the Budget will remain in Deficit.

    Furthermore, until and unless events get to grips with the seemingly systematic destruction of the UK economy by the decades’ old pincer movement of excessive imports, etc and relative deficiency of exports, etc the UK as a whole will continue to be an Economic Parasite within the World.

    I strongly suspect that “getting to grips” with these Parasite problems will be done re-actively rather than pro-actively; but whichever way the future looks very very bleak; and not just for the UK..

    Austerity – we’ve seen nothing yet!


    • Hi Critic Al Rick

      You are right to point out that the trade and fiscal deficits are two major problems for the UK economy going forwards. As I put in the post I hoped that the 12 months or so just gone would see a substantial improvement in the fiscal deficit whereas it has got worse.

      These days I am one of the few who bother to consistently report our trade deficit although I note Robert Peston of the BBC wrote about it yesterday. Perhaps he has been reading this blog.

      • Hi Shaun

        The mainstream media regularly comes in for criticism, but I think Robert Peston has probably had more impact than anyone in explaining the nuts and bolts of the crisis and it’s aftermath to the masses. In addition to your own essential posts, his blogs are usually the only ones I read.

  3. Hello Shaun,

    why does it come to mind when we discuss the trade and PSB deficit I think of a 2 men falling from a 20 storey building , and on passing the 10th floor down says to the other ” told you , alright so far! ” ……..

    We’ve been on this track since , what , 1983? Why stop now ? Even if the public stopped watching Xfactor for a second and took notice , which of the pollies would do anything ?

    I don’t expect the current trend of covering up employment to last long , until just after the election .

    And as we talked before , apart from Super QE ( which we both agree has a dismal past) what do they think we can do ? they have exhausted all the options they thought they had ( there are others but apparently they’re unthinkable )

    Kool Eh ? Pass the popcorn 😉


    • I think what’s depressing is that this has gone on for so long now and as with most of the rest of the world sticking plaster fixes is all we can manage. We’ve effectively been building our house on sand for years and it’s getting more and more costly to maintain. I think the only reason we get away with it is because we are not the only basket case; far from it in fact.

    • Hi Forbin

      There is a theory going the rounds that it does not matter how much we borrow because we can do so cheaply. The catch is that we will not always be in a situation where the level of government debt is ignored. If we were doing something especially productive with the money we borrow then a case could be made for it but it justs seems to feed ordinary spending.

      On another subject oil has recovered a bit but is still weak overall not having pushed past US $86 for a barrel of Brent Crude Oil with any conviction.

      • If we were doing something especially productive with the money we borrow then a case could be made for it but it just seems to feed ordinary spending.

        If only …

  4. Hi Shaun,
    Your contribution today illuminates the decay wrought by our crony capitalism. With Govt and big business in cahoots then it is all self-serving for them, to prevent change, innovation and competition. In the short run it suits those in charge but in the long run economic prospects are trashed. A spiral of sorts folk are actively or passively misled, the old are made to feel asset rich from which they dip for cruises whilst the young are forced into work at below living wages and told to be thankful for it. When will it unravel? Paul C.

    • Hi Paul C

      The problem with our present course and policies is that we get forever more caught in the spider’s web and we keep getting weaker. It is hard to see any change of course from our current political class so an outright change is needed.

  5. Shaun,

    Please have a go at this.

    Could it be that the increasing deficit, low wage growth and productivity puzzle are all related to the 280,000 new self-employed in the last twelve months?

    That is, most of the 280,000 are just labelled self-employed, they are not receiving JSA but still reliant on the state for WTC etc, they contirbute to the low average wage rise because their earning from self-employment are all but zero and they contibute to low productivity because they are almost non-productive.

    Kind Regards

    • Hi David

      You are making a point that is very similar to the one that Chris has made. In essence his argument is that people came under pressure to leave the unemployment and JSA numbers at the Job Centres and did so by going self-employed.

      Accordingly he is expecting January’s income tax revenue to disappoint as his underemployment estimate gets measured in receipt terms.

      As to the wage numbers the self-employed are not counted in the official data.

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