What can we expect from tomorrows UK Budget?

Tomorrow sees the UK Budget as the new Conservative government in the UK sets out its plans for this Parliament. However it would appear that one subject cannot be entirely avoided right now. From BBC News.

The government will do “whatever is necessary” to protect the UK’s economy against the fallout from Greece’s bailout referendum, George Osborne has told MPs.

Amazing isn’t it how such a small economy such as Greece’s can have such an apparent impact! I suspect that the truth is that our banks are not as stable as we are being told and that problems and contagion there is the real fear. So far the main impact has been on the currency as we have pushed to 1.41 versus the Euro which is good for holiday makers but not so good for exporters. Also we have seen the UK ten-year yield drop back to 2% as the main bond markets rally on a flight to safety move. Whether they actually are safe is a moot point but there you have it.

More hidden in the shadows in terms of public pronouncements is that the Eruo area overall is no longer being a drag on UK economic growth. It also grew at 0.4% in the first quarter of 2015 with the Markit business surveys (PMIs) predicting the same for the quarter just completed.

The survey data point to GDP rising 0.4% in the second quarter,

So the “headwinds” from the Euro area have gone for now at least which is why perhaps official attention is focusing on Greece!

What about the UK?

Here we see what used to be called moderate growth but for the credit crunch era we are seeing a good run. The 0.4% growth of the first quarter with the latest Market business surveys (PMIs) telling us this.

The survey data are indicating an acceleration of economic growth to 0.5% in the second quarter,

We await this afternoon’s update from the NIESR ( National Institute for Economic and Social Research) but as of last month it was a little more optimistic.

Our monthly estimates of GDP suggest that output grew by 0.6 per cent in the three months ending in May after growth of 0.5 per cent in the three months ending in April 2015.

One factor in the recent surveys is that there does not seem to be much of a “march of the makers” going on as they observe another tilts towards the services sector.

Markit: The UK manufacturing sector had a disappointing second quarter overall.

This was reinforced by this morning’s official data.

Manufacturing output decreased by 0.6% in May 2015 compared with April 2015………Manufacturing output increased by 1.0% in May 2015 compared with May 2014.

If you are looking for a cause of the monthly decline it is shown below.

The largest contribution to the decrease in manufacturing came from basic metals & metal products, which decreased by 3.7%.

Some caution may be needed as they may be struggling with their inflation measurement (deflators) in this area but there is little sign of a boom. Although oddly and against the theme I have just mentioned we are seeing this.

The sub-sector with the largest upward contribution was the extraction of crude petroleum & natural gas, which increased by 7.3% and contributed 0.8 percentage points to total production

Another episode of disinflation?

The UK may get another burst of commodity price disinflation. Yesterday saw sharp falls across the commodity sector which reminded me of Friday’s update on the problems in China’s equity market. The price of Brent Crude Oil fell 6%, Dr.Copper fell by 4% and Iron Ore fell by 5%.

Of course this is a very recent shift and may end but should the China crisis continue we could find ourselves returning to this particular theme. Contrary to the central banking view of this it does provide a boost to the UK economy via its impact on real wages. Should ages continue to increase at anything like the 2.7% seen in the June labour market report then another disinflationary episode could make 2015 a really good year for UK real wages and hence the retail sector.

Rip-Off Britain

There have been instances of this long-running theme emerging over the past couple of days. This morning has seen evidence of it in a familiar area published. From the UK Competition and Markets Authority.

the report has found that dual fuel customers could save an average of £160 a year by switching to a cheaper deal.

Of course one could also argue that energy consumers are letting themselves be ripped off to some extent although I would counter that with the argument that energy companies deliberately keep their tariffs complicated. Also the impact of such an issue gets higher the poorer you are.

We note that the poorest 10% of the population spend almost 10% of total household expenditure on electricity and gas, while the richest 10% spend about 3% of total household expenditure on electricity and gas.

If you want some context for all of this here is the trend over the decade they reviewed.

Average domestic electricity prices rose by around
75% in real terms between 2004 and 2014, and average domestic gas prices rose by around 125% in real terms over the same period.

The last quote really exposes the current philosophy of central bankers. Finally in late 2014 we saw something which would make that situation better yet they treat it as if it is an enemy stirring up fears of some sort of Nightmare on Elm Street deflation.

Also I note this from Sally Copper.

The Euro has depreciated v. Sterling by 20% + the Swedish Krona by 40% since 2013.Why haven’t the prices of Swedish + European cars dropped?

It seems a fair point, have companies returned to importing cars from dealers abroad to take advantage of the mis-match?

The Public Finances

The essential issue to be faced tomorrow is based on this which is much more political than economic. From the Chancellor’s Mansion House speech.

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.

If we move from rhetoric to reality by stepping back five years in Dr.Who’s TARDIS to the same Chancellor at the beginning of a Parliament we would have heard rhetoric about a Budget Surplus about now. Instead his own words tell a different story.

We have a budget deficit that remains, at just shy of 5% of national income, one of the highest in the developed world.

So whilst we have seen a recent improvement in the Public Finances via am improved income tax take for example there is pressure on the Chancellor to raise money tomorrow. If he is going to do so then the beginning of a Parliamentary term gives the voters the maximum time to have forgotten it by the next election. This would also fit the pattern of the last Parliament where the austerity reins were loosened about two years in.

We also need to consider the concept of austerity as whilst we all know that individuals have suffered government spending overall has continued to climb.


We know of one change which is that £175,000 will be added to the Inheritance Tax threshold if it relates to a property. Rather than taking away the tax distortions on our housing market we seem determined to increase them especially as the Help To Buy ISA arrives.

Meanwhile in other news deposit insurance will be a victim of the Currency Wars.

For the majority of depositors currently covered by the FSCS, the existing level of deposit protection (£85,000) will be maintained for six months before changing to £75,000 after 31 December 2015.

Although temporary balances (6 months) of up to £1 million will be protected.


The Chancellor faces a much happier economic situation than he did in 2010 when the UK had just been hit by a severe recession and banking collapse. However in the subsequent five years he has in terms of the public finances only made around half of the progress that he hoped. If we continue to grow then this will help him in this Parliament as revenues get boosted and expenditure falls. Should we see another recession then as the film Snatch told us.

All Bets Are Off!


15 thoughts on “What can we expect from tomorrows UK Budget?

  1. 5% deficit and STILL cutting taxes for the rich.
    5% deficit AFTER forcing families out of their homes and communities with the bedroom tax.
    5% deficit AFTER benefit caps and stealing the possibility of a decent life from tens of thousands of disabled people.
    Any who still believes that austerity is about public spending deficits and not neo-liberal redistribution of wealth upwards, has his head lodged firmly up his jacksie.
    As for the stability of our banks, did anyone believe that they’d actually tell us if A bank was insolvent, never mind the whole rotten, corrupt lot of them?
    LOOK AT INTEREST RATES! Still at emergency levels!
    My credit card charges are 18.95%!!!

    • Yes therrawbuzzin, unfortunately, their idea of austerity and reform is to give Government contracts to Corporate Private sector who do a worse job at a higher price than Public sector with the extra expenditure loaded onto the deficit, which then increases borrowing and interest payments so then the most vulnerable in society (unemployed, disabled etc) are made culpable via benefits cuts for Governmental incompetence, errors and mistakes of which there are many!

  2. The FSCS isn’t worth the paper it’s written on.
    When one bank goes, they all go, because the whole system is insolvent, so no-one will be left to pay.

    • Hi therrawabuzzin

      In the end the deposit protection scheme in the UK depends on the backing of the taxpayer. The FSCS has some resources and can levy for more but of course as you suggest in a general crash how do you apply levies?!It is a little vague on its website but could rustle around £3 billion or so if the numbers on it are any guide.

  3. “The Chancellor faces a much happier economic situation than he did in 2010 ”


    interest rates are still 0.5% as others have pointed out , and as you point sout Shaun, are they afraid of a Greek bank collapse ? or is this just a qoute for MSM to blah blah about and to tak copy away from the real issues ?

    in this murky world I can be sure of two , sorry three , things

    1, they lie to us

    2, the Banks really are still insolvent , also the EU and the USA

    3, never believe anything until its officially denied !


    “the richest 1% spend about 0.3% of total household expenditure on electricity and gas.” – i guess they more afford the Solar panels for leccy and heating 🙂

    MSM keep bangin on about this garbage about saving money , its only applies if yoy go dual fuel with the same company DD ( DD the theif system , we take what we like, when we like as often as we like ) – I like to keep my gas and leccy in separate companies thank you . Prices will never be as low as 2005 . We have less vertical intergration then – so lets go back to separated gas supplier from gas producer so we can see which bit is making money and which is lying to us!

    FSCS – own goal !! womend lions come to mind but then again they have talent ( just more than Beckham I’d wager ) ……

    so Napoleon though we were a nation of shopkeepers , seems we’re a nation of gamblers looking at the TV ads and the stock market . press that housing button one more time !!!

    What do I expect from the budget ? pork pie , waffle and humbug !


    PS: just no popcorn !

    • Hi Forbin,
      I have my popcorn ready. It will be interesting to see if the financial system can actually cope with some real-world stress.

    • Hi Forbin

      I thought about that sentence as soon as I typed it! My point was that the last couple of years have been good as opposed to those that preceded 2010. As to going forwards well let us see what transpires in China…

  4. Hi Shaun

    I think the key to your piece is the final sentence: “all bets are off”.

    From my perspective the UK is in a much more parlous state than most recognise; we have sluggish growth; a horrendous balance of trade; a budget deficit that is still very high by historical standards; barely suppressed inflation and an international situation (quite apart from the Euro) that darkens by the day.

    We are overdue a recession and when this hits we have virtually no defences (IRs at ZLB) and will have to take the medicine raw and then the PSBR will rocket and, in five years time, Osborne’s surplus forecast may well look like an extremely bad joke – which it is anyway. The only thing available is the printing press and, if this is activated yet once more, which it most likely will be, then the reputation of all central bankers will be shredded in the eyes of the public.

    For me the straw in the wind was the reduction in the bank deposit guarantee from £85K to £75K which, although rationalised in terms of the strength of sterling may be a harbinger of things to come because, as you say in your piece, the banks may not be anywhere near as strong as they are supposed to be and, as we all know, it is utterly ridiculous to suppose that bankers themselves have to suffer the effects of their profligacy in the event of difficulties.

    • Hi Bob J

      Forbin has a point when he states that the Base Rate is still 0.5%…

      As to imbalances I was thinking of a couple as I wrote the piece in addition to the services/manufacturing one I mentioned. The first was the house prices which mercifully shows signs of slowing albeit at far too high a level. The second was the implication of a piece of possible good news which would be a solid year of real wage growth in 2015, would it push imports even higher and thus the balance of payments even deeper in to the red?!

    • “Some pensioners have used cash from their pension pots to pay for holidays and cars.”

      and when they retire ( most likely before then ) this will be known as the Great Pensions Scandal …..

      it will all end in tears and poverty for us plebs


  5. Hi Shaun another good blog. Are you expecting an announcement soon from the government regarding gas/electricity prices?. It has been reported that Amber Rudd has written to the companies urging them to do so.

  6. “our banks are not as stable as we are being told” Yes and you may take the planned reduction of the FSCS from £85000 to £75000 from next January as confirmation of both that fact and the fact the Government is not sure about it’s own liquidity either! Where does it say that the protections offered by an EU country cannot exceed the minimum coverage required by the EU?

    “So the “headwinds” from the Euro area have gone for now at least which is why perhaps official attention is focusing on Greece!” – There haven’t been any headwinds since last Autumn Shaun as I have been saying here since last Autumn the poor(ish) results in the last quarter were lagged representations of poor indicators a few months earlier. This also ties into my ongoing theme that you don’t ease into a mini boom a al ECB unless you want plenty of inflation in a couple or so years, regardless of Greek developments.

    • Hi Noo2

      In which case the commodity price falls of this week will be a real disappointment for the Euro area and ECB. Unless of course they are able to use them to have an even more expansionary monetary policy (apart from Greece) and push the Euro even lower.

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