Today gives us another opportunity to see how the UK coalition government is progressing with its plan to reduce the UK budget or fiscal deficit. We will find out how far away it is from the promised land of a zero fiscal deficit heading towards a surplus. It is hard not to laugh at that now isn’t it? Except that the joke does backfire when we note that as we look forwards the same promise has been made. However governments can imposed burdens on its citizens in other ways and one has been highlighted only this morning. It comes from our troubled energy supply sector that has been so neglected by the UK political establishment over recent years and indeed decades. From the BBC.
In the government’s first capacity market auction more than 49GW of power capacity has been secured at a cost of £19.40 per KW.
That amounts to a total cost of £960m and will add around £11 to the average household energy bill.
The auction will provide power for the year 2018/19.
That is a form of pseudo or implicit taxation if you think about it. Also it makes me wonder how we end up paying more for power when the price of a barrel of Brent Crude Oil has fallen by 45% over the past year. I guess many of you are also thinking what about the years up to then as we imagine similar shady dealings happening.
In a universe far far away where our political establishment reside the response to this was as follows.
Ed Davey, Secretary of State for Energy and Climate Change, said:
‘This is fantastic news for bill-payers and businesses.
If £11 extra is fantastic news what would £22 be or £33? It also skips the implication of the fact that we had to pay to keep plants open because the plans of this government were to close them! Indeed on such grounds Ed Davey must have been close to orgasmic excitement when he promised Electricite de France double the current price of electricity to build some new nuclear reactors. That always looked a poor decision and at an oil price of US $60 (Brent Crude) looks a dreadful one. Please do not misunderstand me we needed new capacity (indeed any sensible plan would have begun a decade ago) but it was to coin a phrase part of “Rip-off Britain”. It is also contributes to our tendency to institutionalised inflation.
The UK political establishment has made a litany of errors over the past couple of decades on the issue of energy supply and left us vulnerable to both blackouts and higher prices.
What about the UK Public Finances?
This section opens with some numbers which on a headline basis do spread some seasonal cheer as shown below.
PSNB ex was £14.1 billion in November 2014, a decrease of £1.6 billion compared with November 2013.
A monthly fall is nice but we need some more perspective so let us take a look at the fiscal year so far.
Public sector net borrowing excluding public sector banks (PSNB ex) from April to November 2014 was £75.8 billion, a decrease of £0.5 billion compared with the same period in 2013/14.
That is the first time this year that we have seen this fiscal year improve on the last and is a big change on October’s £3.7 billion extra deficit. So let us dig a little deeper.
What happened in November?
Here we saw a surge in tax receipts (5.5% up on last year) compared to a year ago whilst government expenditure rose by a much smaller 2.1%. We can continue a seasonal style message with the fact that the previously troubled level of income tax receipts rose by 4.1% or £400 million in November compared to last year. But we cannot quite complete the theme tune to the television series Happy Days yet because of this bit.
other current receipts increased by £1.1 billion, or 59.3% to £2.9 billion as a result of £1.1 billion received in fines (see Recent events ; methodological changes).
Oh no! It was all looking so good. Also the phrase “methodological changes” makes us sing along with John Lennon and the Fab Four.
Help, I need somebody
Help, not just anybody
Help, you know I need someone, help
This is reinforced by the fact that we have not actually received all the money yet. Was someone keen to see an improvement recorded?
The fines amounted to £1.1 billion and although payments of the fines were spread over November and December the receipts have all been recorded in November when the fine liabilities arose.
Accordingly £1.1 billion of the £1.6 billion improvement has found itself moved to the one-off rather than the regular category. Although as we fine banks these days rather than tax them perhaps we should instead put it in the category of occasional payments.
However there is a rub as Shakespeare put it on the subject of bank fines. As they tend simply to recoup them by changing their prices and interest-rates then UK bank customers are a major loser here. Oh what a tangled web as we observe that for many this turns out to be yet another disguised form of taxation.
What about the year so far?
This looks as first as if we have seen an improvement in income tax revenues but with apologies to those with seasonal hangovers it is not quite a simple as that. The UK government also pays out tax credits to those on lower incomes and it has been decided that these are now benefits and not negative tax payments. So we need to look further for a real change as we observe yet another methodological change to trap the unwary.In fact there are a considerable number of relatively small changes which lead to this.
In the period April to October 2014, PSNB ex was revised down by £2.4 billion, while in 2013/14, PSNB ex has been revised down by £0.2 billion. These revisions are a result of changes across a number of sectors of government.
A shark in the water
Next month the UK Public Finances will receive something of a shock. This starts to get political so let me simply say that the UK statisticians are recording this in a different manner to the way this has been presented by the Chancellor of the Exchequer and the Prime Minister.
This means that in next month’s bulletin (due to be published on 22 January 2015) the central government expenditure will include £2.9 billion of EU budget contributions in the December figures.
There is much to consider if we combine the two announcements today from the UK government. First we discover that we will have to pay more in 2018/19 (and presumably in the years preceding it) to pay for their and preceding governments mistakes as we add the phrase “great news” to my financial lexicon for these times. Then we see better numbers for the UK public finances which then wilt somewhat under observation. However they are an improvement overall if only a small one. This means that once we allow for the shark in the water in December’s numbers we might end up being in line with last year’s performance. Of course at a time when economic growth has been running at an annual rate of 3% per annum that is in itself a disappointment.
From time to time I point out the dreadful forecasting performance of the Office for Budget Responsibility or OBR. Just as the outlook has shown signs of maybe stabilising it has done this.
As a result, despite strong economic growth, the budget deficit is expected to fall by only £6.3 billion this year to £91.3 billion, around half the decline we expected in March.
As Fleetwood Mac put it “Oh well……”
What about UK economic growth?
I attended a meeting at the Royal Statistical Society to discuss a paper written by Dr. Mark Courtney on the Retail Price Index (RPI). Here is a thought for you from his calculations. Putting the RPI back in the national accounts would reduce recorded economic growth in the UK by around 0.5% per annum in each of the last three years.