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