A regular feature of UK economic life is that the current Chancellor of the Exchequer invariably likes to present himself (we are yet to have a female Chancellor unlike Prime Minister) as responsible. The modern word used is austere and George Osborne demonstrated this at Mansion House this week. He opened with something to make hearts sink a little.
A new settlement for the way we manage our public finances.
This is course is an area which has had so many changes in the era of QE (Quantitative Easing), ESA 10 (the “improvement” to national accounts) and the effect of the Royal Mail sell-off. But another is now proposed.
and that therefore, in normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.
In the Budget we will bring forward this strong new fiscal framework to entrench this permanent commitment to that surplus, and the budget responsibility it represents.
The moment I read/heard this various issues came to my mind. Firstly this Chancellor promised us that we would be moving into a world of budget surpluses round about now whereas reality is show below.
We have a budget deficit that remains, at just shy of 5% of national income, one of the highest in the developed world.
Secondly future governments can not be bound on a “permanent” basis by a current one otherwise Parliament would only meet about once a year by now. Also we have the getout clause of “normal times”. Thus any Chancellor with a deficit will claim that times are not normal which of course is the current situation. So about as much use as the structural deficit for rather similar reasons.
Just for political balance let me jump into Dr. Who’s TARDIS for a journey back to 1997 when another long-term Chancellor Gordon Brown was setting out his version back in the days when austerity was called prudence.
Our first fiscal rule is to balance the current budget over the economic cycle…..our second rule – to keep debt below 40% of national income.
The get-out clause here was “economic cycle” and I am trying to recall how much questioning there was of a target of 40% of national income for public debt? Actually in the early days of prudence Gordon Brown did actually run some budget surpluses which we are now still quite some distance from.
What is the reality of the situation?
The Office for Budget Responsibility suggests that it is much more like this.
The last two governments both set targets for the National Accounts measure of public sector net debt (PSND) – the difference between the public sector’s liabilities and its liquid financial assets. At the end of 2014-15, PSND was £1,484 billion, equivalent to 80.4 per cent of GDP or £55,600 per household.
So twice Gordon Brown’s Golden Rule and in fact the trajectory would still be upwards but for something of a short-term fix or “significant planned asset sales” . That is the truth I think behind the planned sale of shares in Royal Bank of Scotland which improve both cash-flow and the debt numbers (but not the fiscal deficit).
Other measures of public debt
Politicians love the headline number for the national debt in the UK as it is lower than the international standard. If we use the Maastrict standard common in the Euro area then 80.4% rises to 86.5% so you can see why they prefer the former! To the unwary we look as though we are doing better than we actually are.
We can go wider to the Whole of Government Accounts or WGA where I should warn those of a nervous disposition that the numbers are much larger for those reasons shown below.
the net present value of future public service pension payments arising from past employment was £1,302 billion or 73 per cent of GDP. This is £130 billion higher than a year earlier.
liabilities include £142 billion (8.0 per cent of GDP) in provisions for future costs that are expected (but not certain) to arise. Total provisions have increased by £11 billion since last year’s WGA. (For example nuclear decommissioning)
£63 billion (3.6 per cent of GDP) of quantifiable contingent liabilities had been identified – costs that could arise in the future, but where the probability of them doing so is estimated at less than 50 per cent (so they are not included in the headline total of liabilities).
I counsel caution in the precise numbers (£3189 billion) as for example the discount rate is affected by the current low level of interest-rates but you get an approximate idea. Also something about which I have concerns seems to have been removed.
the removal of the £30 billion contingent liability associated with the UK’s capital subscription to the European Investment Bank (EIB)
I am watching the EIB closely because it is expanding itself into all sorts of areas and the risk to the UK (16% shareholder) is rising and yet well the quote above speaks for itself. As Gary Jules sang.
It’s a very, very mad world, mad world
The WGA does offset the debt with assets such as the road network and the electromagnetic spectrum leading it to crunch an answer as shown below.
The overall net liability in the WGA was £1,852 billion or 104.4 per cent of GDP at the end of March 2014, up £224 billion on the previous year’s restated results.
The future trends
The OBR has looked at the next 50 years and sadly there are a litany of problems with this. Firstly the OBR in its life so far has shown an inability to look beyond the end of its nose without getting things wrong, so 50 years is over 49 years too long for it! Also in terms of specifics you end up with things like this.
we assume in our central projection that whole economy productivity growth will average 2.2 per cent a year, in line with its pre-crisis average rate.
I suppose that if the OBR forecasts this every year then evetually one year it will be right but to assume it for the next 50 years is to ignore the evidence of the last 7 years.
And as to North Sea Oil the OBR seems to be just splashing around in the dark without a torch.
mean that in our central projection just £2 billion of receipts will be raised in total between 2020-21 and 2040-41. That is down from around £37 billion in last year’s projection.
One factor that will be having an impact is this, unless of course the obesity crisis gets even worse.
An ageing population will put upward pressure on public spending.
Today’s data releases have indicated that we have sometimes very little idea of where we are let alone where we are going! From the Office for National Statistics on UK construction in the first quarter of 2015.
Output is now estimated to have decreased by 0.2%
You will see the problem when I point out it was -1.1% only a few weeks ago. Okay why?
the incorporation of late data, new seasonal adjustment parameters and the introduction of an interim solution for deflators.
Those who follow the US economy will be wondering if “new seasonal adjustment parameters” are the new flavour of the month! Also we seem to have replaced “improvement” with “interim”.It is a shambles.
Should these numbers prove to be more than interim then the UK economy grew by 0.4% in the first quarter and not 0.3% (assuming no other changes). Also on a similar road 2014 was revised up from 2.8% to 3.1%.
Sex and Drugs and Rock and Roll
Well illegal drugs anyway. You will be pleased to know that the UK ONS has apparently been carrying out some exhaustive research on your behalf in this area.
A correction to the street price of illegal narcotics. The impact of this ranges from a decrease of £1.0bn in 2007 to an increase of £0.7bn in 2001.
Quite how they know that from 2001 is a marvel of these times or as Matt Brookes replied to me on twitter.
@notayesmansecon you do know what they’re smoking to come up with those figures, right?
The numbers here do seem to fly around more than a bit.
Improvements to the measurement of actual and imputed rental prices. This impacts only on 2010 where it reduces the level of current price GDP by £1.7bn.
So there you have it. In terms of what are very important numbers which are the construction ones for the UK which are 6.4% of our economy we are not far off being clueless. Perhaps I should go out and count the many cranes in Battersea! Accordingly looking fifty years ahead is rather arrogant in its conception unless you just look at general trends.
As to public debt there has been in recent years much more of it to go around. Even here there is uncertainty over the numbers especially when politicians manipulate and exploit them. Oh and central bankers too because what if the Bank of England simply cancelled the Gilts that it has bought? It is for these reasons that I like to remind myself of the words of Willem Buiter for a little perspective.
I know I know nothing; but at least I know that