Today has seen the last set of UK Public Finance figures before the upcoming General Election. So no pressure there then! Of course the UK political establishment keep misrepresenting the numbers and the statistical establishment has not helped either by its changes in the course of this Parliament. It is all quite a tangled web and the media does not help at times either for example Stephanie McGovern the business presenter assured us this morning that the UK fiscal deficit was of the order of £30 billion. Oh if only! Let us therefore go straight to the actual numbers and skip the hype and debate.
UK deficit and debt
The opening salvo is already rather ominous for the view that we only have a £30 billion problem.
In March 2015, PSNB ex was £7.4 billion; a decrease of £0.4 billion compared with March 2014.
Only one month of twelve in a year and nearly a quarter has been used. As we have just completed a financial year we can see the full picture for it.
In the financial year ending 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £87.3 billion; a decrease of £11.1 billion compared with the same period in the financial year ending 2014.
From this number we see the general pattern which is that after a period earlier this fiscal year when there was no improvement in the data that latter part has seen us borrow less which is welcome. For example the income tax take in the self assessment period was an improvement on 2014 which replaced an earlier period where income tax receipts were lower year on year. So the UK economic boom is having an effect albeit one which is smaller than one might have expected or hoped if you had known how quickly the economy would grow. However if we return to what the next government will face it will be a still substantial deficit, one which is trending lower, but one that will take a long time to be eliminated at the current rate of decline.
It was not supposed to be like this
Back in the heady days of the beginning of this Parliament we were told by the then new Office for Budget Responsibility or OBR that the deficit would be well on its way to being eliminated by now. It was supposed to be £37 billion and having fallen by £23 billion on the year before. So quite a wide miss on both counts.
Or as the Rolling Stones put it.
You can’t always get what you want
What about the National Debt?
Our political establishment love to use phrases like “paying down the debt” whereas the reality is that the UK National Debt has sung along to the Electric Light Orchestra.
You took me, higher and higher
It’s a livin’ thing,
The rises in it are a consequence of the fact that not only have we have continued to borrow we have found ourselves borrowing at a much higher rate than expected.
At the end of March 2015, public sector net debt excluding public sector banks (PSND ex) was £1,484.3 billion (80.4% of GDP); an increase of £82.2 billion compared with March 2014.
It was supposed to be 69.4% of GDP and falling rather than rising.
Actually there is another problem as our numbers are much lower than if we used what is the international standard or benchmark.
At the end of March 2015, General Government Gross Debt (Maastricht debt) was £1,598.5 billion (86.6% of GDP) and General Government Net Borrowing (Maastricht deficit) in the calendar year 2014 was £102.4 billion (5.7% of GDP).
You may note that the borrowing figure is a fair bit higher too.
An awkward truth
This is in spite of the fact that the annual cost per unit of borrowing as represented by bond yields has dropped by a large amount. At the time of the UK 2010 election the ten-year Gilt yield was just over 4% and in spite of a jump up yesterday it ended less than half that at 1.7%. That saves a lot of money when you consider that new issuance for the UK is of the order of £150 billion per year. Also things which reduce your borrowing tend not to be emphasised by a government when it is overshooting its borrowing as it leads to the (correct) view that things are worse than it is claiming. If we were borrowing now at 5% as the OBR expected we would be paying a lot more on debt interest leading people to ask what happened to the money?
Reality was once a friend of mine
This Parliament has seen some extraordinary attempts at misrepresentation. Of course that is no surprise when reality has seen more borrowing than expected. But we saw the Royal Mail sell-off reduce the numbers by £28 billion when in fact it was an expected liability for UK taxpayers. The effect of Bank of England QE was to flush money in and out of the numbers on a large-scale with frankly bizarre Euro area rules on what counts – some £’s are more equal than others – meaning that the fog got thicker. Then of course the statisticians joined in as the effect of ESA was to raise GDP by around 4% but also to raise our national debt by around £120 billion. Aren’t you glad that it is so clear?! The effect has been along the lines of this from Those Magnificent Men in their Flying Machines.
They can fly upside with their feet in the air,
They don”t think of danger, they really don”t care.
Newton would think he had made a mistake,
To see those young men and the chances they take.
Those magnificent men in their flying machines,
they go up tiddly up up,
they go down tiddly down down.
What do we know about what will happen post-election?
Much less than you might think. You see in spite of the wall to wall coverage that frankly has been tiresome for a while there is a lack of clarity and often no clarity at all. From today’s Institute of Fiscal Studies analysis.
All four parties have said they would reduce borrowing in the coming parliament. None has managed to be completely specific about how much they want to reduce borrowing, or exactly how they would do it.
They mean the traditional 3 parties and the SNP. The next swerve comes on the subject of eliminating tax avoidance which is the got to area if your numbers are not adding up!
The Conservatives have squared this circle with an aspiration to raise 0.2% of national income (around £5 billion) from clamping down on tax avoidance
Ah an “aspiration” as we flick through my financial lexicon for these times to check its real meaning. Also if it is an aspiration we are left wondering where it has been the last five years? This is compounded by the fact that their colleagues claim to have been keen on it all along too.
The Liberal Democrats……. relying heavily on unspecified
measures to reduce tax avoidance and evasion (£7 billion)
Seems a bit weak after five years in government does it not? In a way it is a confession of failure although of course both will spin it very differently. Not to be left out Labour seem to have won the game of Top Trumps here as they predict an even larger number.
On top of this, Labour have also said that they would aim to raise a further £7.5 billion from tax-avoidance measures by the middle of the coming parliament.
As these three parties have been in government in the UK throughout the lifetime of everyone in the UK perhaps someone might sit them down and ask why they have not bothered with this before? I am reminded one more time of Alice In Wonderland.
Why, sometimes I’ve believed as many as six impossible things before breakfast
The SNP approach to this area is by contrast refreshing.
Unlike the other three parties, the SNP have not factored into their main plans any revenue increase from anti-avoidance measures.
The last five years have taught us that the economic and financial future is as hidden from us as it has ever been. You might think that the leaps in information technology would help but I note that the UK fiscal and national debt picture is nothing like what we were told. Of course some of that is due to the rose-tinted forecasts that were used back then. If you look at today’s forecasts we have not learned much! Accordingly the flood of media headlines about the expected world in 2019/20 are meaningless and to coin a phrase tomorrow’s fish and chip wrapping.
The deficit looks set to be with us for a while and the debt will continue to rise too. As long as interest-rates and bond yields remain low we can accomodate that but the catch of such can-kicking into the future is that our capital burden rises and we are weaker. It reminds me of the real question of these times, what happens when the next recession hits us?