Today gives us the first set of data for the UK Public Finances for the new Conservative government albeit that they cover a period when it was still in coalition with the Liberal Democrats. Of course it is heading forwards with one or two elements from its future plans still apparently missing in action. For example depending on you point of view we were threatened with or promised some £12 billion of cuts to the benefits bill which were unspecified and undefined. On that road the General Election was a case of deja vu as the main parties repeated promises which had gaps in their arithmetic. One way of filling such gaps is to sell off what is sometimes described as the family silver to get some one-off gains and at the CBI this week Chancellor George Osborne confirmed that this would be the tactic for now. From City AM.
The plan is to allow government experts to work together in order to realise the government plan of selling off a wide range of publically-owned assets, including the sale of shares in Lloyds Banking Group, UK Asset Resolution assets, Eurostar and the pre-2012 income contingent repayment student loan book.
Why? Well in spite of a recent better trend the overall picture for the UK Public Finances has disappointed over the credit crunch era as our fiscal deficit proved to be resistant even when the economy returned to growth. Thus to fulfill the manifesto pledge below we need to indulge in the sort of thing that Portugal has been criticised for.
debt as a share of national income will start falling this financial year.
Both the background problem and the recent improvement have been illustrated by today’s numbers. If we start with the background issue it is demonstrated here.
In the financial year ending 2015 (April 2014 to March 2015), public sector net borrowing excluding public sector banks (PSNB ex) was £87.7 billion (4.8% of Gross Domestic Product (GDP)) a decrease of £10.8 billion compared with the previous financial year.
Whilst it is good that the deficit fell the size of the fall is disappointing when you consider that the economy grew by 2.4% over that period. The responsiveness of our deficit to improved economic circumstances has been lower than history would suggest. Another credit crunch change and of course why the “family silver” is up for sale.
However over the past few months there has been glimmer of sunlight and hopes for a faster improvement and that was demonstrated again by the April numbers.
In April 2015, PSNB ex was £6.8 billion; a decrease of £2.5 billion compared with April 2014.
The revenue numbers were good with Income Tax,National Insurance and Value Added Tax receipts rising by more than 3% on the same month last year. In these troubled times for corporate taxation it was nice to see the Corporation Tax take rise by 11.3% or £600 million on a year ago. After yesterday’s strong retail sales numbers for April up by 4.7% on a year before you might think that the VAT take would be higher but of course much of the rise in that has been driven by disinflation or lower prices (-3.2% on a year before). No wonder establishments hate disinflation and instruct central banks to push inflation higher!
The expenditure figures are hard to read this month as there is so much reshuffling between central and local government but rather oddly we seemed to have got less spending rather than a traditional pre-election splurge. There was a reflection of the themes of low bond yields and lower inflation as for now this bit may continue.
debt interest decreased by £0.4 billion, or 6.9%, to £5.0 billion.
What about the National Debt?
As politicians like to pick and choose their numbers let me give you the headline number used in the UK and also the international standard as they are rather different!
At the end of April 2015, public sector net debt excluding public sector banks (PSND ex) was £1,487.7 billion (80.4% of GDP); an increase of £83.6 billion compared with April 2014.
At the end of April 2015, General Government Gross Debt (Maastricht debt) was £1,602.1 billion (86.5% of GDP) and General Government Net Borrowing (Maastricht deficit) in the financial year ending 2015 (April 2014 to March 2015) was £92.4 billion (5.1% of GDP).
What’s 6.1% of GDP or £114.4 billion between friends? Also you may note that the fiscal deficit is higher too under the international standard.
You need to look hard for the other national debt measure including banks but it is now £1768 billion or 95.5% of GDP.
This is an issue as student loans have many issues, after all if we are now richer as we keep being told why can we no longer afford to subsidise students as we did in my time at the LSE? Perhaps of course because we have expanded the number of students but whilst politicians were keen to take the credit for this they were predictably much less willing to take the hit in financing terms as the Higher Education Policy Instititute explains.
First, the big shift from funding universities via grants from Whitehall towards funding students via £9,000 loans occurred partly because loans do not score towards the deficit. This is also one reason why some people now want maintenance grants to be displaced by bigger maintenance loans.
This is of course an extremely familiar theme where appearances change much more than the underlying reality. That has happened with the fiscal deficit so it was only a matter of time before it happened more and more with the national debt too.
because student loans appear in the main measure of the nation’s debt, selling off the loan book now looks good even if it leads to less government revenue in the future.
We are running up quite checklist here as can-kicking makes an appearance too! According to the HEPI the numbers were going wrong so we changed the definitions retrospectively.
A major fiscal challenge was averted in 2013/14 via a retrospective change to the accounting and budgeting rules, which allows higher loan impairments to be smoothed out over the following three decades.
It all looks a rather familiar shambles and as student loan non-repayments are now estimated at 45% and the level of debt is long the lines of the song from Queen quoted below,what could go wrong?
I’m a shooting star leaping through the skies
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go go go
There’s no stopping me
Why Paul Johnson of the IFS was wrong
Today’s data release on the behaviour of UK rents proves that Paul Johnson was wrong to recommend CPIH as the main UK inflation measure. The numbers from LSL tell us this.
Residential rents have grown 4.6% year-on-year – the fastest rate of increase since November 2010
Using house prices as your measure of owner-occupied costs would have picked this up a couple of years ago proving yet again how much changes in rents lag house price changes. Mind you the establishment will lap it up as you may note even this record increase is lower that the house price rises we have regularly seen. Arise Sir Paul……?
Also in terms of real wages this is not so hot for those who rent and I covered this issue on April 27th.
As it is a sunny day let us start with the good news which is that the recent trend for the UK Public Finances has improved so fingers crossed for the rest of 2015. However an underlying theme of misrepresentation of the numbers goes on. We have seen previously a net debt with the Royal Mail pension scheme presented as a reduction of £28 billion in the numbers and now we see that asset sales are en vogue. Yet we also see that our valuations on student loans which are one of the assets to be sold are in polite terms unreliable and unsure. Could this be like yesterday’s privatisation of profits and socialisation of losses like we have seen in the banking sector? I do hope that the Vampire Squid (Goldman Sachs) is not involved in all of this as we know then what will happen next.
Still at least we have an extra 318,000 people to help us pay it all off……..