Firstly thank you to those who posted such kind words and thoughts in the comments section yesterday. As to today the subject is the public finances of the UK and this is an even more major issue than usual because of the approaching general election. The numbers will accordingly be poured over as the various political parties establish their fantasies,excuse me plans. There is an element of deja vu about this as we went into the last election in the same manner. Back on the 15th of April 2010 I discussed what was called the “elephant in the room” as we approached that particular election.
Yesterday Vince Cable the prospective Chancellor for the Liberal Democrats used this evocative phrase to describe the question of the UK fiscal deficit and of course this also has an implied view for the National Debt. However this is an area where all three main political parties have similar flaws in their plans. 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.
We now know that a coalition government between the Conservative party and the Liberal Democrats took power in May 2010 and this is what they promised back then.
We will significantly accelerate the reduction of the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes……..We will set out a plan for deficit reduction in an emergency budget.
The emergency budget then went on to plan for this.
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; and
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.
You may note that there were some weasel words in the plan such as “cyclically-adjusted” which are even worse now as who has any real idea of what cycle we are in?
Today’s data release
The numbers are very different to what was forecast back then, at least as far as we can tell as there have been so many methodological changes in the meantime. Of course the changes which are invariably badged as “improvements” are often a sign that there has been trouble.
At the end of January 2015, public sector net debt excluding public sector banks (PSND ex) was £1,464.0 billion (79.6% of GDP); an increase of £86.1 billion compared with January 2014.
That is very different to the 69.4% of GDP promised above and other measures of our situation in this area are even worse.
At the end of January 2015 General Government Gross Debt (Maastricht debt) was £1,586.0 billion (86.2 % of GDP)
I have pointed out before that the UK calculation of national debt ratios is very different to what is used as an international standard. I am sure that many are led to believe our situation is better than it actually is by this.
Let us now examine the flow position for the year so far.
From April 2014 to January 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £74.0 billion.
That is approximately 4% of GDP and we have not yet completed the fiscal year. This is double the promised “cyclically-adjusted” deficit already and holds out no real hope for next year’s promised surplus.
Some better news
So far the UK boom which has been going for the last couple of years has done little to dent the fiscal deficit. I have written about how disappointing this has been if we consider the employment situation for example which was my subject of Wednesday and has turned out to be strong according to the official figures. However January’s figures show at least a glimmer of some sunlight in this area.
In January 2015, PSNB ex was -£8.8 billion (a surplus); an increased surplus of £2.3 billion compared with January 2014.
This meant that the picture for the year so far was finally showing signs of being an improvement on its predecessor.
From April 2014 to January 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £74.0 billion; a decrease of £6.0 billion compared with the same period in 2013/14.
Tucked away in the detail was something which is very welcome as income tax receipts have been struggling so much that at times they have shown falls which is odd to say the least in a boom phase!
In January 2015, self-assessed income tax receipts were £12.3 billion; an increase of £1.7 billion compared with January 2014.
There is a caveat here which is that we will not know the full picture for the self-assessment period until we get the numbers for February as well.
One part of the coalition agreement has come partly true but perhaps not in the manner intended.
it is deeply unfair that the Government could have to spend more on debt interest payments than on schools
The promise back then came with a tirade of illogic and phrases such a “paying down the debt” which has remained a mirage. The debt as I discussed earlier has continued to rise but the cost in terms of issuing conventional Gilts has in fact fallen. The driving force in this has been the pretty much worldwide trend to lower bond yields. As we ran into the last election period the ten-year Gilt yield was 4% and then fell below it whereas recently it has fallen to more like 1.4% before a rebound to 1.8%. Accordingly even though we have rising amounts of debt actual issuance costs are currently extremely low in historical terms. Even index-linked issuance has become cheaper as prices have been sucked higher by the bond boom and retail price inflation has fallen. The numbers for the year so far are below.
debt interest decreased by £0.5 billion, or 1.2%, to £41.2 billion
There has been a sequence of good economic numbers for the UK this week as we see that inflation is low, the employment situation continues to improve and now at last some sort of hope for the public finances. Care is needed as the public finances numbers do suffer from sizeable revisions but it is nice to finally have some hope even if the situation is still much worse than might reasonably be expected.
However not every number has been as positive.
Output per hour in the UK was 17 percentage points below the average for the rest of the major G7 advanced economies in 2013, the widest productivity gap since 1992. On an output per worker basis, UK productivity was 19 percentage points below the average for the rest for the G7 in 2013………..In the UK, output per worker also grew in 2013, but output per hour fell.
These are worrying but there are concerns over the quality of the data presented which is highlighted by this.
Above that of Japan by 15 percentage points
Now whilst Japan has its problems it still has a reputation as a manufacturer and troubled Italy is apparently doing far better than us.
Lower than that of Italy by 9 percentage points