How will the UK Public Finances feature in the upcoming General Election?

This morning has seen another sign of a shift in the political landscape in the UK as the second member of parliament from the UK Independence Party has been elected. This does represent a change and I have to confess my first thought is to have a wry smile at all the “experts” who told us that this would not happen. In this respect politics is just like economics is it not?! However one area where the overall political situation is unchanged is the fact that we are approaching a General Election where our political parties are again indulging in fantasy economics and accountancy with regards to our fiscal deficit and national debt.

Back on the 30th of April 2009 just before the last election I quoted this from a comment to the Financial Times which seems just as apt now.

The modern career politician wants to BE something, not to DO something. To that end, they will say anything they have to say, and do anything they have to do to, and any problems they face in office are a bridge to be crossed when they come to it. A term in the hand is worth a dynasty in the bush.

This reinforced a theme of the last election campaign which I pointed out on the 23rd of April 2009.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

So last time around nobody told us the truth and I am reminded of a quote by Kenneth Clarke from back then which seems likely to apply one more time.

The most urgent question in this campaign is, quite simply, which party is capable of tackling public spending and getting a grip on the deficit.

Actually the debate has changed since then as the economics camp which argues that deficits are unimportant and do not matter have become ever more emboldened. Mostly I think that lower government bond yields have done this to them apparently bond yields can never rise again or something like that! My fundamental point is that this is bound to influence our political class as they are always happy to loosen the fiscal purse strings.

Just to be clear this is a critique of our political class not a political statement in itself but we are near to ending a parliament which was supposed to “deal with the (fiscal) deficit” and yet we find that it is still rather large. The first move of the brand new Office for Budget Responsibility involved telling us that the fiscal deficit would be 3.9% of GDP (Gross Domestic Product) this year and that the national debt would be 74.4% of GDP. Post the first Budget of the current government it is hard now to believe that we were told that the fiscal deficit would be 1.9% of GDP now and that the national debt would be declining. Please no sniggering at the back of the class and no this is not a spoof! Here is a direct quotation.

Public sector net debt (PSND) is forecast to peak at 69.7 per cent of GDP in 2013–14, then decline to 67.2 per cent of GDP in 2015-16,

Office for Budget Responsibility

I think that one post-election money-saving move should be to scrap this body which if we are being polite has had at best a hapless record. What actual good has it done apart from a minor boost for the economy via high paid jobs for establishment economists?

Today’s data

Let me offer a little initial ray of sunshine as this is the first time this has happened in the current fiscal year.

PSNB ex was £7.7 billion in October 2014, a decrease of £0.2 billion compared with October 2013. (They mean Public-Sector Net Borrowing excluding the banks).

Unfortunately the underlying picture is still disappointing when we allow for an economic growth rate of around 3% and rising employment.

Public sector net borrowing excluding public sector banks (PSNB ex) from April to October 2014 was £64.1 billion, an increase of £3.7 billion compared with the same period in 2013/14.

If we look back to the fantasy economic forecasts of the OBR the total borrowing for this year was supposed to be just under £35 billion. So we would have to repay £30 billion in the rest of this fiscal year to get there! Just as a reminder the National Debt was supposed to be 68.8% of GDP and falling whereas it is.

Public sector net debt excluding public sector banks (PSND ex) was £1,449.2 billion (79.5 % of GDP) in October 2014, an increase of £97.1 billion compared with October 2013.

I have discussed the way that austerity seems to actually involve higher public spending (up 2.9% in October on a year ago…) many times before so below I will give a different perspective and focus on one issue which is growing in importance.

The problem that is wages

Earlier this week we were told this.

In April 2014 median gross weekly earnings for full-time employees were £518, up 0.1% from £517 in 2013. This is the smallest annual growth since 1997.

Adjusted for inflation, weekly earnings decreased by 1.6% compared to 2013

So according to the official wages data we have had very little nominal growth and real wage falls. If we also factor in rises in the income tax personal allowance look where we now stand.

income tax related payments decreased by £0.3 billion, or 0.4%, to £81.5 billion;

The problem with wage growth is affecting us in more and more areas is it not?

We have found £522 billion down the back of the sofa!

No that is not a misprint as the Office for National Statistics explains.

Public sector net debt including public sector banks (PSND) was £2,285.3 billion (125.8% of GDP) in last month’s bulletin. This figure has now been revised down to £1,763.0 billion (97.0% of GDP), a decrease of £522.3 billion, primarily due to the re-classification of LBG to the private sector.

A song from the 1970s from the group Pilot is now playing in my mind.

Oh, ho, ho
It’s magic, you know
Never believe it’s not so
It’s magic, you know
Never believe, it’s not so

The National Audit Office (NAO) is not impressed

The NAO has compiled a report on UK tax reliefs and it does not make for pleasant reading. I could do a blog post on it alone but a summary of its disdain would be to quote the football terrace chant.

You don’t know what you’re doing!

Sadly the UK HMRC (Her Majesty’s Revenue and Customs) has been a shambles for some time now.

Comment

The Chancellor of the Exchequer should be facing the Autumn Statement with confidence as the economic growth surge in the UK should have given him the funds to pull a rabbit or two out of the hat. Of course he may yet do so,except that it will be from a weak rather than a strong position. If we look to the General Election we see that the political landscape on the deficit is a shambles. One party offers vague promises of more austerity combined with future income tax cuts whilst another offers a mansion tax proposal which struggles under the scrutiny of a violinist! All rather like last time is it not?

A combination of historically very low bond yields and the consequences of QE debt purchases by the Bank of England are what have glued this mess together. Oh and to some extent the recent economic growth as otherwise the situation would be even worse. On our current trajectory we may end up like Japan where the Bank of Japan is getting ever nearer to outright debt monetisation. As an illustration of the state of play let me give you our different official national debt measures.

Public sector net debt excluding public sector banks (PSND ex) was £1,449.2 billion (79.5 % of GDP) in October 2014, an increase of £97.1 billion compared with October 2013.

General Government Gross Debt (Maastricht debt) at the end of October 2014 was £1,569.7 billion and General Government Net Borrowing (Maastricht deficit) in 2013/14 was £100.6 billion.

Public sector net debt including public sector banks (PSND) …. has now been revised down to £1,763.0 billion (97.0% of GDP),

Are you glad that’s clear?

If there is an international standard it is the middle one which represents some 86% of our GDP.

What about Ireland?

The UK made a series of bilateral loans to Ireland as described below.

The aggregate amount of principal outstanding at 30 September 2014 was £3,226,960,000.

We charge Ireland this on it.

The new interest rate, which applies retrospectively, represents the UK’s cost of funding plus a service fee of 0.18 percentage points.

With Ireland having a ten-year bond yield of 1.53% and the UK 2.08% would it not be in everybodys interest for this to be repaid? That kind of begs a question…..

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18 thoughts on “How will the UK Public Finances feature in the upcoming General Election?

  1. Hi Shaun, I think the lovely Myleen is a pianist not a violinist, although that doesn’t reprieve the intellectual vacuity of the proposed “Mansion Tax” as set out last week by Mr Milipede. I’m all for taxing value of fixed capital rather than of work, but his proposal is quite ridiculous. Even if successful it would only raise enough money to cover less than three days running costs for the NHS.

    Anyway, I wonder if you may have been thinking about violinist and now disgraced Olympic skier, Vanessa Mae? She was also in the news last week having been found guilty by the IOC of cheating. So she is apparently a fiddler in more ways than one. I think it’s reasonable to conclude Vanessa Mae has the right credentials to could get a job at any OBR replacement, she certainly couldn’t do any worse than Robert Chote. Still, we’d probably have the likes of Malky Mackay and Dave Whelan making stereotypical comments on her ethnicity… this country really is in a terrible mess when you look at what’s going on everywhere.

    • Hi Andy

      I suspect you are right so let me apologise to Myleen Klass for describing her as a violinist and not a pianist. As to the mansion tax one of the ways out of our housing market problems is to reform our taxes but this particular change seems to create as many problems as it solves. For example there is no list of £2 million+ mansions in the UK.

      As to the debacle at Wigan I can only review i sadly as Dave Whelan had established a really good reputation for himself which let’s face it was only going to implode the minute he employed someone who is under the sort of cloud that Malky Mackay is under.

  2. Great column, Shaun, as usual. I wanted to ask about the mansion tax, like Andy Zarse. Mr. Miliband denied Myleene Klaas’ accusation that the mansion tax would hit a higher and higher share of homes going forward as the £2m threshold price would be uprated using a housing price index. I wonder if this has been carefully thought out. If one wants the mansion tax to act as a partial brake on real housing price increases, it would surely be advisable to uprate the mansion tax based on a consumer price series, not an HPI, or not to uprate it at all. The Mulroney government introduced Canada’s first VAT, the Goods and Services Tax, in 1991, with a GST new housing rebate, to provide for a lower GST rate on most new house purchases. The qualifying amounts were never uprated by any subsequent government so that only a small minority of new Canadian homes qualify for any rebate. Uprating the £2m would also seem to work against the revenue objectives of the tax, unless housing prices started diving. Or does Mr. Miliband see that happening in the near future, and that’s why he wants to uprate using an HPI?

    • Hi Andrew

      We so many political plans these days that fall under the category “I wonder if this has been carefully thought out?! Sadly the answer is usually no as only the politics and not the economics has been considered.

      You are right to point out that there are many issues with price indexation in such an area but let us go back a step to simply setting the price in the first place. This is the state of play for house price taxation in England and Wales.

      “Your council tax band is based on what the property would have sold for on the open market on 1 April 1991 in England and 1 April 2003 in Wales.”

      I bought my flat just over 22 years ago and at that time the price bands for council tax as I saw them ( a buyer in Battersea London) were already unrealistic and frankly incorrect. How is that going to work now after the extraordinary changes that we have seen? A countrywide audit would cost a lot and would open quite a few cans of worms…..

      So any reform needs to be wholesale in my view and not partial.

  3. Shaun, Today is indeed a day to touch on Politics. Please can we speculate as what UKIP will do with tax and spend? I’ve not looked but I doubt they have formulated a plan …..yet, however as you point out Mr Farage will most probably have ambitions to BE rather than to DO.

    I think that once we escape the comfort of our neighbouring EU friends and their damaged EURO currency I think we can look forward to very steep barriers for our beloved city financial services and indeed plain and simple UK export goods tariff walls. Can we survive a UKIP leadership or even a UKIP strong influence in coalition?

    Keep up the good commentry, Politics and Economics will be closer for a few months now.

    Paul C

    • maybe I mis understood – we’re not in the Euro

      leaving the European union does not mean we leave EFTA

      the EU is a political construct designed to make a United States of Europe , politcally wise I think we should all be asked if that’s what we want – I have never had the vote for this , even for the so called common market !

      Economics – well we’ll do what ever it takes to make a buck inside the Union or outside , don’t kid yourself we have much of a say if any on the machinations of the EU by staying in – and recent events show how much we have a say ! Re: the Bankers Bonus Tax !

      Oh well ….

      Forbin

    • There is not a cat’s chance in hell that the EU would erect trade barriers if we left.
      Have you SEEN our Trade balance with EU?

      Not pro-UKIP, just saying, like.

      • I like your counter argument, are you saying the Germans will be falling over themselves to ensure that we can still afford their Beemers?

        • We take goods from the EU to the approx value of £35bn, whilst we export to the EU approx £25bn, with a bit over £6bn in services narrowing the difference.

          That is per month.

          If the Govt. really did want to raise inflation, it could leave the EU and erect trade barriers.

    • Hi Paul C and thank you

      As to fiscal policy and UKip I am unclear (mostly because I think that they are too…) however Nigel Farage has been quite explicit in his support for QE and looser monetary policy. For example he wrote this in City-AM in March 2013.

      “Why I’m the first leader to support a looser Bank of England mandate

      The mandate of the Bank has been focused on avoiding a repeat of the last crisis, instead of addressing the root of the problem we face today. Its negative focus on fighting inflation is put to shame by the positive objectives of the US Federal Reserve’s dual mandate that it “shall maintain long-run growth of the monetary and credit aggregates, commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” That is the language of Ukip economics – maximum employment, growth, and a positive outlook.”

      He was also a big fan of Mark Carney back then.

  4. Hello Shaun,
    As you make clear, the coalition has talked austerity and walked stimulus, especially in the last two years.
    I suspect Labour in office would have walked much the same path but talked a little less austerity.
    Mr Market is happy with the UK’s unsustainable path and will continue be, until he changes his mind. I suspect there will be little or no warning of the change.

    • Hi Ian

      You have put your finger on one of the problems of democracy in these times, with a political class so separate from the rest of the nation how much difference does a change of government actually make?

      As to the markets I agree, should they change tack it is likely to be fast and without warning.

  5. UK net payments to Brussels will increase to approx 11 billion. UK deficit circa 170 billion. Hence Nigel Farage’s flagship costcutting measure would change little. And need I mention that Norway pays high fees to Brussels as an EEA member ….

    • Hi Forbin

      Yes the period of (even more) disinformation is about to begin.

      As to markets I note that in spite of the moves by China and Mario Draghi yesterday (which I have covered in my audio update today) the price of a barrel of Brent Crude only just struggled above US $80.

  6. “So according to the official wages data we have had very little nominal growth and real wage falls. If we also factor in rises in the income tax personal allowance look where we now stand.”

    There is a positive here which you have mentioned but overlooked – the increase in the personal allowance from £6035 pa in 2008 to £10000 pa in 2014 an increase of over 60% in 6 years – now that’s what I call inflation!! This was accompanied by a reductrion in the base rate of tax from 22% to 20%, albeit there has been a partial offset thanks to the self proclaimed “party of low taxation” increasing VAT from 17.5% to 20% and NI conts from 11% to 12%.

    This has particularly helped the very low paid and partially explains falling income tax revenues along with the increase in part time work and zero hour contracts (the remainder of the explanation lies with the growth in so called “Self Employment” where people are paid by the state to declare themselves self employed and do so little they don’t actually qualify to pay any tax).

    I don’t have time to do the calculation but I wonder how “badly” workers have done in their take home pay during the credit crunch?

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