Today is the day of the UK Autumn Statement and this one has particular significance as it will be the last one before next May’s General Election. It is one where the Chancellor of the Exchequer George Osborne would dearly love to pull a rabbit out of his hat accompanied by rapturous applause from his supporters. This was a world that we were promised back in 2010. Back then we were told that the structural deficit would be eliminated by now which would have left the Chancellor plenty of room to hand out sweeties and goodies today. From the Office for Budget Responsibility.
the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16
Readers may already have noted that there was some weaseling in the use of “cyclically-adjusted current deficit” rather than deficit! So let me put on the guise of Morpheus from the film the Matrix and..
You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes.
What went wrong?
The first issue was that forecasts of economic growth back then were written by fans of Mariah Carey.
But it’s just a sweet sweet fantasy baby
The previous UK government established a benchmark for expected UK economic growth of around 3% and the rest of our political establishment supinely went along with it. If you look back to April and May 2010 on here I was very critical of this illusion. Meanwhile reality was very different especially in the period when the UK economy flatlined. The official view on this period is below.
Quarterly growth in this period was also erratic, with several quarters between 2010 and 2012 recording flat or declining GDP.
Accordingly we lost ground as revenues disappointed. Also the government’s version of austerity never meant to actually cut overall spending the plan was for it to grow more slowly than economic growth as measured by the Gross Domestic Product (GDP) numbers. You can already see the catch when we had a period where GDP stagnated. Instead government spending grew faster than economic growth.
What about now we have economic growth?
As we moved into 2013 economic growth did begin to move towards the projected numbers but of course this left us like Alice In Wonderland.
My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.
There have been two particular issues here. Firstly UK public spending has continued to be a contrast with the austerity mantra spread by so many.
Central government expenditure (current and capital) for the financial year-to-date 2014/15 was £398.7 billion, an increase of £9.0 billion, or 2.3%, higher than the same period in 2013/14.
As you can see whilst this is below the current rate of economic growth it is now above inflation. Please do not misunderstand me I know that people have individually suffered austerity as I know those who have had no pay rises and others who have lost their jobs. But someone somewhere else has gained more in an unequal and unfair twist of fate.
Added to this tax revenue has disappointed as it has grown much more slowly than the economy.
Central government receipts for the financial year-to-date 2014/15 were £340.6 billion, an increase of £3.8 billion, or 1.1% compared with the same period in 2013/14.
The particular disappointment has been income tax revenue.
income tax related payments decreased by £0.3 billion, or 0.4%, to £81.5 billion; (so far this fiscal year)
This poses several questions about the underlying health of our economy. Part of the issue has been the substantial and in many respects welcome rises in the tax-free personal allowance. But we are left wondering if the growth in self-employment has been at the lower end of the income scale. The official view is that this will be put right by the self-assessment numbers and payments in January but I thought that last January so there may be a case of “jam tomorrow” here.
Also it is not just the self-employed affecting this as the latest annual incomes survey or ASHE showed.
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, the first year for which ASHE data are available……..Adjusted for inflation, weekly earnings decreased by 1.6% compared to 2013.
Therefore the UK labour market situation of strong employment but weak wage growth has also undermined the fiscal arithmetic. It is also unusual when you consider the economic growth that we were seeing back then and if the more up to date revenue numbers are accurate it appears to be continuing. It is the economic message of our time.
George Osborne’s problem
If we now bring all the factors together we find this.
Public sector net borrowing excluding banking groups (PSNB ex) for financial year-to-date 2014/15 (up to October) totalled £64.1 billion, an increase of £3.7 billion, or 6.1% compared with the same period in 2013/14.
Remember how this year was supposed to have a “cyclically-adjusted deficit” of zero? Oh well as Fleetwood Mac put it! Arguing that the cyclical adjustment is £64 billion and rising this year is too much even for our political class as even the parts of the media which copy and paste official press releases might also have in their hands the one declaring robust economic growth!
Indeed even in the world of adjusted expectations things are not going quite so well. From the Financial Times.
The Office for Budget Responsibility is expected to upgrade growth forecasts to 3 per cent this year and 2.5 per cent in 2015, but weak revenues mean the deficit will not fall by anything like the £11bn to £86.6bn as originally forecast.
We find that up is the new down one more time! So far the deficit is higher not lower and at £64.1 billion there is not a long way to £86.6 billion is there? We should still beat (as in lower) the £97.5 billion of 2013/14 but that still leaves us with a lot to do after five years of apparent austerity. Instead of eliminating the deficit we have taken a bit more than a third off it.
The National Debt
Sadly we often hear sound bites such as “paying down the debt” whereas we are borrowing more and more and more. If we look back then at the end of this fiscal year it is now expected to be some £208 billion higher than back in the heady days of the original June 2010 Budget. An expected national debt to GDP ratio of 69.4% has been replaced by one of 79.5%. Of course disappointing economic growth has also been a factor in the latter ratio.
War Loan Repayment
The Chancellor has announced this earlier today.
This is a moment for Britain to be proud of. We can, at last, pay off the debts Britain incurred to fight the First World War.
Apparently borrowing the money elsewhere counts as a “pay off” of the debt. Actually we are exchanging cheaper shorter-term debt for more expensive longer-term debt. At current yield levels this is probably sensible but not actually a repayment in the full sense of the word.
It remains awkward that the UK taxpayer will be paying 100 for something which as of last nights close was priced at 96.24.
As we approach the end of today’s journey you will now be aware of the reason why the announcements made so far about extra NHS spending involve so little new cash. There is very little to go around as we are reminded of this note from the previous government’s Treasury Secretary Liam Byrne.
there’s no money left
Of course that was never literally true as even at the higher levels of borrowing back then the UK government continued to spend. More specifically there is much less money now than hoped and whilst there may yet be a rabbit produced from the hat it will be like the White Rabbit of Alice In Wonderland. There as fast as Alice found something to shrink her she found something else to enlarge her.
As to measures popular in politics and the media such as structural or cyclically adjusted deficits here is a guide.
How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.
Meanwhile in a ray of economic sunshine the UK purchasing managers reports have been strong this week.
The survey data available so far for the fourth quarter are signalling a GDP rise of 0.6%
Whilst according to the British Retail Consortium prices are falling. Apologies on their behalf for the way they confuse deflation with disinflation.
Overall shop prices reported deflation for the nineteenth consecutive month, unchanged at 1.9% in November.
There was a time that this would be reported as a type of economic nirvana. How times change!
View from a Russian Oilgarch
Should a Russian oilgarch (sorry!) be observing London property prices he or she will see them as being some 18.8% higher than a year ago (Office for National Statistics to September) from a currency which has dropped by 50%. Some price rise!
That is assuming their money was in Roubles….
I shall be discussing the Autumn Statement on the Global Perspectives show at 1pm today and I shall return for the evening show at 5pm.