The UK Public Finance trends hint at the ongoing economic “war” between generations

Yesterday I noted the impact of the attempt in Greece to impose austerity and get the public finances back under at least some control. Of course Greece poses a warning for the implications and limitations of austerity as the effect there was to shrink the economy by so much that the process became self-defeating and so far without end. One warning it does pose for the UK which takes centre stage today with its public finance data is that what was considered not so long ago as unthinkable levels of Value Added Tax or VAT are not only now thinkable but in existence.

The UK Strategy

What is officially called the long-term economic plan (no laughing at the back please…..) has this as its objective. 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.

There are various issues with this, of which the one most immediately apparent is that future governments are always senior if I can put it like that to the current one for obvious reasons. Also there is a more technical one which is the level of Gilt yields or the price at which the UK can borrow which are amongst the lowest in UK history. Our 30 year Gilt yield is a mere 2.8% which is up on the lows of 2% we saw but is still very cheap if we look back. At such levels many types of investment would be likely to provide a positive return but we hit the problem of the choices likely to be made by our establishment when they realise the timescale is way beyond any comeback on them. In short they would probably waste the opportunity.

In terms of what one might call normal spending then we are in fact benefiting considerably from the current low and indeed at times ultra-low bond or Gilt yields. As the Mansion House speech also pointed out we are still borrowing a considerable sum each year.

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

That in itself is awkward for the long-term economic plan as it was now supposed to be 0%! Also there has been a favourable wind from the low Gilt yields which back in the day were forecast to be more like 4.5% now. That fact gets very little publicity. In spite of the fact that the government wants to take the credit for low Gilt yields it also wants to avoid that fact moving to the issue of it meaning that its own performance should have been better than it has been. Where did the money saved go?

Yet More Austerity

This is the topic of a report by the Financial Times today.

George Osborne will begin the process of finding another £20bn of savings on Tuesday as he launches the government’s spending review.

However as you can see below the journalist is confused as to how this will happen.

Mr Osborne hopes to find some of his £20bn through “billions of pounds” worth of sales of assets and public sector land. The rest will come from cuts to spending in unprotected departments.

The asset sales of the first sentence are very different to the spending cuts of the second sentence. The former provide a one-off boost of the type I criticised when Portugal used them and the latter provide a flow of savings over time. Indeed we get not a little hype too.

the chancellor will argue that the government has made savings of £98bn since the 2010 general election even as public satisfaction with some public services has improved.

What are the figures?

Today saw an improvement in the UK revenues and in particular a strong hint that the UK consumer was out in force in June.

VAT receipts increased by £0.7 billion, or 6.9%, to £10.9 billion

Also we managed to eke a little more tax out of businesses.

corporation tax increased by £0.2 billion, or 13.9%, to £1.7 billion

If we move to taxes on income then income tax rose by 2.5% but national insurance rose by 6% as we wonder if this is an impact of the rises in the tax-free Personal Allowance that have taken place. Also we got yet another boost from fining banks for bad behaviour.

a financial penalty had been imposed on Lloyds Bank Plc, Bank of Scotland Plc and Black Horse Ltd (all part of the Lloyds banking Group) for failing to treat their customers fairly when handling Payment Protection Insurance (PPI) complaints between March 2012 and May 2013. The receipt of this fine has increased “other” receipts by £117 million in June 2015.

We used to tax banks for revenue now it seems we have switched to fining them!

The expenditure side of the accounts had a somewhat awkward message for austerity claims as I note this.

Central government expenditure (current and capital) in June 2015 was £58.1 billion, an increase of £2.0 billion, or 3.6%, compared with June 2014.

If we convert to real terms we find of course with inflation hovering around 0% that we have seen a 3.6% increase which is rather unaustere if there is such a word.

One factor in this is the triple lock for the basic state pension which will rise at 2.5% compared to inflation of 0%.

net social benefits (mainly pension payments) increased by £0.6 billion, or 3.6%, to £16.6 billion;

I don’t think that anybody thought of the possibility of low or zero inflation when the triple lock promises were made.

Overall if we switch to the fiscal year so far the UK does appear finally to be making some decent progress in cutting its budget deficit.

Public sector net borrowing excluding public sector banks decreased by £6.1 billion to £25.1 billion (1.4% of Gross Domestic Product) in the current financial year-to-date (April 2015 to June 2015) compared to the same period in 2014.

Austerity does affect people

Whilst we sometime struggle to see the collective austerity effort there are definitely effects on individuals and groups. The Institute for Fiscal Studies has pointed out today that some students will feel it.

The replacement of maintenance grants by loans from 2016–17 will raise debt for the poorest students, but do little to improve government finances in the long run……The poorest 40% of students going to university in England will now graduate with debts of up to £53,000 from a three-year course, rather than up to £40,500


Whilst one swallow does not a summer make we have in recent months been seeing that the UK economic growth spurt is finally impacting on the fiscal position of the government. Finally! As Ce Ce Peniston put it. If we look back to past periods this one has been tardy but nonetheless is welcome. Let us hope that we can keep it up and avoid another recession for long enough for us to make some significant inroads into the deficit. for those who like to know where we stand on the debt front here is in the number used for many international comparisons and for newer readers it is not the one used by media headlines.

General government gross debt at the end of June 2015 was £1,637.8 billion (88.2% of Gross Domestic Product).

Also today’s numbers and the updates remind us of another theme of this blog which is the economic war if I may put it like that between the generations. What do we see today? The retired benefiting from basic state pension rises which are considerable in real terms at least in percentages. Whilst students see maintenance grants disappearing and being replaced by you guessed it yet more debt. For some the future must seem debt filled or as LunchMoney Lewis puts it.

I got Bills I gotta pay
So I’m gonn’ work, work, work every day
I got mouths I gotta feed
So I’m gonn’ make sure everybody eats
I got Bills


23 thoughts on “The UK Public Finance trends hint at the ongoing economic “war” between generations

  1. This was a marvellous article regarding the economic war between generations, one that I really enjoyed. I especially loved the concise way in which it conveyed all the information required. Allow me a brief introduction: I’m a 15 year old with an interest in finance and economics who wants to share my views with the world at If you could read and reblog one of my articles, it would be very much appreciated! Thanks again for writing this brilliant article.

  2. “I don’t think that anybody thought of the possibility of low or zero inflation when the triple lock promises were made.”
    Analogous, although not exactly similar to the circumstances that destroyed Equitable Life?

    • Hi Mike

      In many ways yes. Some did foresee trouble as I recall an oil and equity trading house which I used to deal with who pointed out several times that they felt that there was trouble ahead for the Equitable. They knew it was overpaying which of course was exposed when falling interest-rates made the Guaranteed Annuity book too much to bear. Imagine the state it would be in now!

  3. Hi Shaun

    Great article as always.

    Well done for highlighting the ‘faux’ austerity the tories are carrying out. None of the MSM have highlighted this.


  4. Hi Shaun

    As to whether we can keep this slightly better fiscal performance up does, I think, depend on IRs being at zero, As you say we have at least some austerity pulling demand back so the backstop has been (and is) accommodative monetary policy. So what does Mr Carney think he is doing talking up IRs? Just talking, because we cannot afford IR rises, as you imply above.

    As to the war between the generations I am 70 and must admit that young people have it much harder than I did when I was their age. I came from a poor background but was able to attend a prestigious university and had a grant and this gave me a priceless foundation for life (not just career); I’m not sure I could do this today, which I think is very, very sad.

    • Like yourself, I came from a poor background but was able to go to grammar school and then to university on a grant. I doubt very much that this would have happened under the current scenario and it is indeed a pity. The difference between then and today is one of numbers. The system was very selective, entrance qualifications tough and only a few made it to university. The state could afford to provide grants. One of the early Blair governments decided that university should be for all without thinking through the financial consequences. Exams are regularly reported as being easier and the number of young people planning to go to university or further education are considerable. Whilst this may be a good thing it does cost and I doubt that the state could afford it. In my day the majority of 18 year olds went into the work place or attended day release college for further education that was funded by employers. Only a small number went to university. My own children, and all of their friends, believed that going to UNI was a right of passage and a coming of age that everyone did!

      • “Exams are regularly reported as being easier and the number of young people planning to go to university or further education are considerable” This is the problem, collapsing educational standards, most of the Uni students of recent years wouldn’t have made it in my day when the attainment bar was much much higher, so why turn out graduates with degrees which are the equivalent of the old GCE A’ levels?? Has there really been an improvement?

    • Hi Bob J

      I benefited from a maintenance grant too and got it back in the times when they were being cut so I got in my last year what I got in my first term. So in a way I was pleased to discover that they still existed. That is being replaced by sadness that they are on the way out.

      • I don’t believe that exam results are debased.
        I believe that young people are far better educated than we were, (although there are still types of education) and work far harder than we did.
        More and more of them DESERVE to go to university, but those in positions of power hate to admit this, as they are mostly around my age (mid-fifties) and like to believe that only la-crème-de-la-crème of innate intelligence (obviously like themselves) are worthy of university.

        • My wife and I long have this argument. At school I was with people who could not do their buttons up, certainly needed help to do their ties (girls and boys) and were all excused sport. They went on to get firsts from good universities. Then sat and thought for the rest of their lives. There was another guy built a table and 4 chairs in woodwork in the time it took me to build a box with a sliding lid. He built a sitar from a picture. He runs a boat-building company.

          University is (was) for training thinkers. Most people do not want or need that. University is an inappropriate place for them. At a German firm I visited the engineers designed stuff and the technicians built it. Little difference in salary and standing within the company. Clear dichotomy of skills and abilities.

          So I think few people deserve to go to university. Everyone deserves tertiary education/training to enable them to excel at what they like doing which mostly means the things they are good at.

          The system we did have with university/tech/art college/apprenticeship meant a lot of people got to do the ‘right’ things. Problem was that once on the wrong path or in the wrong box it was very hard to get to the right place.

          Everyone for university is simply wrong…unless the word now covers all those different types of education/training.

  5. “The replacement of maintenance grants by loans from 2016–17 will raise debt for the poorest students, but do little to improve government finances in the long run……The poorest 40% of students going to university in England will now graduate with debts of up to £53,000 from a three-year course, rather than up to £40,500”

    You miss the point.
    This point is that the government knows full-well that only a tiny fraction of student loans will be repaid.
    Grants are government spending. Loans, even if they will never be recovered, only affect the balance sheet if and when they are written off, like not making a loss until you sell, so it’s a little bit of a red herring.

    • Hi therrawbuzzin

      Yes student loan debt is yet another can kicked into the future, this time with quite a solid boot.

      “We understand that BIS is in the process of updating its model as well, and a
      revised estimate of the public cost of issuing student loans of ‘around 45%’
      calculated using this model was given by Universities Minister David Willetts in
      response to a Parliamentary Question on 20 March 2014.”

      I think that the 45%+ is likely to be a baseline don’t you?

  6. So Shaun

    40% cuts in “unprotected” areas , why not 10% across the board?

    Still I think Argentina should be watching , last time we had tory defense cuts they invaded the Falklands

    I think they’ll get away with it this time though !


  7. At university I worked many part-time jobs. 5am starts in a bakery to wash up, evenings in restaurants. Holidays spent driving trucks, tractors and farming. Substandard accomodation etc. More recently part time study through the Open University. With hard work and creativity it’s possible to attend university without debt.

    It is telling that the govt cannot find commercial lenders to match their terms & risks. Many degrees cannot offer graduates realistic prospect of ever repaying the debt. Therefore I’d suggest these loans are being mis-sold.

    • Hi ExpatInBG

      As well as the grant I have mentioned in earlier replies I also worked term time as a barman and for an insurance company in the holidays. As to the loans being mis-sold I think that they are mostly being mis-sold to the taxpayer who will find a liability in the future rather than a more honest set of calculations now.

      A more honest set of calculations would also be likely to lead to a more honest appraisal of who is likely to benefit from a university education as it has been mis-sold too.

  8. Shaun,
    So pension payment increases match HMG spending @3.6% – case of Tories looking after their ( older) voters at the expense of the young who tend not to vote or not for them?
    Interesting youngest SNP MP repesenting the views of the younger society!

    • Hi ChrisL

      Didn’t all the main parties back the triple lock for the basic state pension? I think that they all spotted that pensioners as a group are relatively likely to vote. Of course there were also the Pensioner Bonds which were a bribe.

      Perhaps we need more younger MPs, after all they could hardly do much worse than what we have now.

      • Younger MPs won’t have such a keen eye on post-career sinecures-for-corruption, so the banks would never allow it.

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