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 spurt.at 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.
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