The election forecasts for the UK’s fiscal deficit and national debt are pretty much useless

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?


13 thoughts on “The election forecasts for the UK’s fiscal deficit and national debt are pretty much useless

  1. sorry Shaun

    so long as that can blows up on the other guy’s shift is all they care about

    The systemic issues with the UK economy go on grinding down

    until the USA moves away from its policies , because they help us, then we will not see who had shorts one !

    I’ll make one prediction , the SNP will get their way and get a independent Scotland , most likely in the first year , ie by summer next year

    And this will be helped by a higher oil price (!) there stuck my neck out again !


  2. It’s all very depressing Shaun, thanks very much.

    I guess if the next recession is triggered by a banking/financial crisis – again. Then no doubt TPTB will redouble their efforts to hide just how much it costs the country to support a broken system.

    • Hi Eric

      The essential problem should the next recession arrive anytime soon is that the levers which are supposed to help at a time like that have not been reset. For example UK Bank Rate is 0.5% so unless there are rises in the meantime we would go to 0% and probably into negative rates. The catch is that they do not work well at such levels.

      More QE would be an option but that would be adding to the existing £375 billion which has not been trimmed at all. As some Gilts have firm holders because they have been bought against something such as insurance or annuity risk they could start to find it hard. Although I guess in a new banking collapse they would be issuing plenty of them! But that poses its own problems.

      We return to the lack of reform and change…..

  3. Great article as always Shaun. All of parties are outlining how they’re going to bribe us with our own money. None of them are explaining how we’re going to pay for it. How long can we keep kicking the can down the road?

    As Forbin mentioned, the moment the US raises rates, will mark the beginning of the end….

    • Hi Anteos

      The United States can be very insular so that may have less of an impact on the Federal Reserve than one might otherwise think. Also whilst it is a large trading nation it is a relatively small part of its economy. However the matter delaying an interest-rate rise in the US is the struggles in its own economy. So it is still in the distance.

      However according to the Across the Curve blog Deutsche Bank are predicting trouble when it happens.

      “Take 1994, the annus horribilis for bond traders. The selloff of the 10-year note sent its yield up 203 basis points as the Fed raised its benchmark by 250 basis points, according to Bloomberg data.

      In 1999, the Fed began boosting rates in June, extending a decline that left the yield up 179 basis points in the year. By 2003, disappointment the Fed didn’t cut more deeply was reflected in a rise in yields of 43 basis points over the year with a surge of more than a percentage point in the third quarter.

      Even a rate cut in January 1996 was followed by a rise in 10-year rates of 85 basis points over the course of the year as signs of economic strength led investors to rein in forecasts of more reductions.

      That takes us to 2013, when a signal that the Fed would soon start winding down bond purchases generated the “taper tantrum.” The yield ended the year 127 basis points higher than where it began.”

      With things as they are even minor bond yield rises would cause plenty of trouble. It is apparently news that the German ten-year yield has risen to 0.16% which is now only some 1.36% lower than a year ago!

  4. Hi Shaun,
    Judging by the vox pops on the news, politicians only need to pay lip service to these issues to show that it’s on their radar because most voters judge economic issues by their own experience. It basically seems to have been reduced to a very shallow popularity contest as far as I can see.

    • Hi Zummerzetman

      I agree and one of the worst examples was the leaders debate on the NHS. They all just mouthed platitudes and engaged in some sort of fantasy bidding game where each promised to spend more than the other. There was no actual plan in evidence or indeed any real plan for what the NHS is supposed to do.

      The NHS has given pretty good service to my family over the past 6 months or so although we have seen the weaker side such as very long waits in A&E. But just throwing promises of money around does not help and if financed in a PFI fashion may actually make things worse.

  5. Hi Shaun

    Your final question (what happens when the next recession arrives?) is a very pertinent one. What surprises me is that all the comment and analysis rarely mentions this possibility; it’s a steady march to the sunny uplands. This is not only a Panglossian view of the World it also assumes that the economic cycle no longer exists!

    I think what will happen is that there is likely to be doubling down (or is it up?) of the failed policies that got us here in the first place. We may see QE on stilts as if liquidity was the root cause of the problem and the final reduction in IRs to give us literally ZIRP.

    None of this will work of course because no one wants to face up to the issues which I think are not merely cyclical but powerful secular ones: ageing populations; technology; globalisation. These are of course in addition to the man made excrescences such as the Euro. These forces are acting to reduce consumption and thus undermine the motive power of economies, particularly like those of the UK who major in consumption and shopping generally rather than wealth creation or technological innovation.

    What I’m afraid of is that the second bust will be much more serious than that of 2008 and we have far fewer tools to fight it.

    • I’m not afraid of a second bust.
      The tools we fought the recent one with were all paid for by the 99%.
      The next one can’t be.

    • Hi BobJ,I share your views on the potential for another and potentially far more aggresive downturn. Interest rates are in the nil effect zone as Shaun ably reminds us so we shall turn to Gordon Brown.who rescued us all last time and there will be monumental money printing which I forecasg will also be rendered ineffective. Paul C

    • Hi BobJ

      I just wanted to add to the replies that if the Bank of Japan is any guide then we will see official purchases of equities and real estate funds. Over there influence has been put on the state pension funds to move from bonds to equities too. So no wonder the Nikkei 225 index has gone back over 20,000!

      Oh and don’t worry about the bond market there is always the QQE of the Bank of Japan.

      That sort of saga could easily be our future.

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