One of the features of having a blogging record and career which now stretches beyond the five-year mark is that quite a few subjects have a habit of recurring. Also the way in which they are treated varies usually from not so good to outright manipulation. Today the UK Prime Minister David Cameron has stepped into such an arena with this quoted by BBC News.
When you look at the children you love, do you want to land them with a legacy of huge debts? Do you want to limit their future, to make life more difficult for their generation, because we refuse to do the right thing in our generation?
I say we have a responsibility to act. We can get Britain back to living within our means in a way that is fair and sensible and secure.
This is a subject regularly ploughed by the UK political class and the situation is that the connection between all of their rhetoric and reality is if we choose to be polite rather slim! I will discuss the debt situation in a moment but apart from being rather pejorative the phrase “living within our means” has a litany of alternative definitions. As we stand right now it is quite some way away if you translate it as ending our fiscal deficit by matching our tax and other revenues with public spending.
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.
Even in these times where we combine inflated numbers and statistics with recorded disinflation £75.8 billion for the fiscal year so far is no small sum. You may also note that in spite of the economic growth spurt which the UK has in many respect benefitted from the data of the public finances has remained grim with the income tax take in particular being much weaker than you would expect in such circumstances. Also a decrease of £0.5 billion on this time last year would only exhibit an enormously broad definition of trying to leave within our means. According to the Office for Budget Responsibility the state of play is as shown below.
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. That would be the second smallest year-on-year reduction since its peak in 2009-10, despite this being the strongest year for GDP growth.
Also as the starting gun has been fired for the UK General Election in May some perspective can be gained by the fact that as of the last general election we were supposed to be “living with our means” now or at least on the verge of it. Is it like a Mirage in the distance always a few years away?
Looking further ahead, we expect the deficit
to fall each year and – as in March – to reach a small surplus by 2018-19.
Whereas if we take the advice of Kylie Minogue and step back in time we see this at the time of the June 2010 Budget.
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.
Using “cyclically-adjusted” was always designed to mislead but as we are nowhere near it then it does not seem currently quite so important. Also exactly what cycle are we in?
The National Debt
This is one definition of a “legacy of huge debts” so let us examine it. The headline number for the UK is below followed by the forecast at the time of the June 2010 post-election Budget.
Public sector net debt excluding public sector banks (PSND ex) was £1,457.2 billion (79.5% of GDP) at the end of November 2014, an increase of £89.7 billion compared with November 2013.
public sector net debt (PSND) to increase from 53.5 per cent of GDP in 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;
As you can see there are two major differences between the forecasts back then and reality now. Firstly the debt to GDP ratio is approximately 10% higher and secondly it is continuing to rise compared to reaching a peak and then falling. In the meantime there have been some definitional changes (to the levels of debt and GDP) but for today’s purposes I am ignoring those as they do not change the broader picture.
Other National Debt Measures
The UK always looks better than other comparable countries because our headline data is calculated on a more favourable basis than what has come to be considered the international standard. This is very similar to the Eurostat measure and using it allows a more accurate comparison with our neighbours in Europe and it is shown below.
General Government Gross Debt (Maastricht debt) at the end of November 2014 was £1,583.3 billion and General Government Net Borrowing (Maastricht deficit) in 2013/14 was £100.4 billion.
On this basis the UK’s national debt to GDP basis is more like 86.4%.
Also there is a number which includes the bank bailouts which has pretty much only been publicised by me. Rather ironically it has actually been falling for some time now! Indeed it took quite a lurch downwards when Lloyds Banking Group was excluded from the figures as shown below from the official data.
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.
The reclassification of LBG in such a way is not a little farcical as the treatment makes it look as if someone has cried “abracadabra” and “shazaam”.
Whole of Government Accounts
These numbers are somewhat behind the times but the latest report is shown below.
An increase in the net liabilities of government to £1,630 billion from £1,347 billion in 2011-12, driven by an increase in government borrowing, growth in the expected level of pension liabilities (largely due to fall in the discount rate from 2.8% to 2.4%) and in provisions for other
As you can see as of 2012/13 the number was increasing rapidly and if you look at the quoted fall in the discount rate and look at bond yields around the world now there is plenty of food for thought. Firstly on how any such calculation can have credibility?! However you think of it this number is the broadest definition of the total position as it includes an estimate of and for future pension liabilities for example.
Some Debt Is More Equal Than Others
One area where a completely different official approach has been taken is that of mortgage debt. This has been driven by both the government and the Bank of England. We have had the Help To Buy scheme from the government and the Funding for (Mortgage) Lending Scheme of the Bank of England.Before this started we were reducing our mortgage liabilities but in more recent times net mortgage liabilities have been rising by around £2 billion a month. So we are not trying to live within our means here especially if we compare to growth in real wages over the credit crunch period. As of November 2014 then total mortgage borrowing was £1.294 trillion according to the Bank of England.
There has been an upwards trend in unsecured or consumer credit too which rose by £983 million in November 2014 in net terms and now totals some £18.98 billion.
On today’s journey we have seen the gap between rhetoric and reality. In this instance it relates to the government but in fact all the major political parties play fast and loose with both statistics and reality. Or as PM Dawn put it.
Reality used to be a friend of mine.
Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why,
but reality used to be a friend of mine.
There are quite a few different definitions of the numbers and the definitions have undergone recent changes. The credit crunch era has done to reality what we would expect should we be in a space ship in the vicinity of a black hole. However there is a dog which has not yet barked in the way that you might imagine and if we go back to June 2010 I can demonstrate why. The cost of our national debt (average of UK Gilt yields) was forecast to be 5% now whereas even a thirty-year Gilt currently only yields 2.34% so the debt cost may even have fallen in terms of interest to be paid. The catch is that for this to continue it would have to fall continuously.