Has austerity really been cover for a fiscal stimulus in the UK and Portugal?

Regular readers will be aware of my financial lexicon for these times which coves the true meaning of words regularly used in the mainstream media to cover finance issues. Next to temporary in length of definition comes austerity as it means many different things to different people. The conventional view is that it involves a reduction in fiscal deficits involving lower public expenditure and higher taxes. However in the Euro area and in Greece especially it has also lead to higher fiscal deficits compared to economic output or GDP (Gross Domestic Product) at times due to the fact that it’s consequences collapsed output even faster and led to higher expenditure on social issues.

This week has seen new numbers from the UK and Portugal which have raised yet another version of austerity. This is where we get open mouth operations from government claiming it but if we step back and look at the overall picture it also looks awfully like an ongoing fiscal stimulus.

The UK

If you recall that the UK GDP numbers have had a good couple of years plus then you would not be expecting this.

Public sector net borrowing excluding public sector banks increased by £1.4 billion to £12.1 billion (0.6% of Gross Domestic Product) in August 2015 compared with August 2014.

Now we know that single months figures can be erratic as for example the July figures saw a surplus so let is look at the fiscal year so far.

Public sector net borrowing excluding public sector banks decreased by £4.4 billion to £38.4 billion (1.9% of Gross Domestic Product) in the current financial year-to-date (April 2015 to August 2015) compared with the same period in 2014.

Again if we consider the economic recovery this is disappointing on two counts. The first is the slow pace of reduction and the second is that in only five months the UK still needs to borrow some £38.4 billion. If we start with the slow pace of reduction we see that revenue growth has been strong (3.7%) but that public expenditure has risen too by 1.2%. So we have two issues for austerity here as firstly it plainly does not mean an outright fall in spending! Secondly as we are continually told by official numbers (CPI) that there is no inflation this is a real terms increase which looks more like a fiscal stimulus than austerity does it not? Also something is about to push the figures higher.

However for State Pensions there is a “triple guarantee” that mean that they are uprated by the highest of the CPI, increases in earnings or 2.5%, which is the rise for the financial year ending 2016 (

In fact we are behind the official target for borrowing. OBR is the Office for Budget Responsibility.

The OBR forecast for the financial year ending 2016 (April 2015 to March 2016) is £69.5 billion which is £20.6 billion below the outturn in financial year ending 2015.

This begs the question of how long it will take to eliminate the deficit if reductions are so slow when if I may put it “the sun is shining!”. If we look back we see this for the UK fiscal deficit as a percentage of GDP.

10.2% in 2009/10 then 8.6% then 7% then 7.2% then 5.8% then 5%.

You may note the rise in 2012/13 which has led to the suggestion that the reins were loosened back then or what in the past would have been called a fiscal stimulus took place. Also there has been quite a fiscal stimulus compared to this forecast by the OBR back in November 2010.

PSNB is expected to fall from 11.1 per cent of GDP in 2009-10 to 1.0 per cent of GDP in 2015–16.

Care is needed as economic growth underperformed for a time but if we look at the past couple of years we have gained little ground if we consider the favourable economic environment. Fiscal Stimulus 2.0? That is very contrary to the mainstream media presentation.

The impact on the National Debt

This is what it was supposed to do via the OBR back in November 2010.

Public sector net debt (PSND) is forecast to peak at 69.7 per cent of GDP in 2013–14, then decline to 67.2 per cent of GDP in 2015-16,

And this is what it is now.

Public sector net debt excluding public sector banks at the end of August 2015 was £1,505.5 billion (80.6% of Gross Domestic Product); an increase of £68.9 billion compared with August 2014.

As we observe up being the new down yet again I would also like to add the numbers below so that we can have a like for like comparison with Portugal.

General government gross debt at the end of August 2015 was £1,651.7 billion (88.4% of Gross Domestic Product) and General Government Net Borrowing in the financial year ending 2015 (April 2014 to March 2015) was £93.5 billion (5.2% of Gross Domestic Product).

I like seeing that number at the front of the ONS Statistical Bulletin partly because I suggested it.

Portugal

This is a nation that has been through the mill of Euro area austerity and the falls in economic output and GDP associated with it. More recently the Portuguese economy has been able to edge forwards and see a little growth. So we are now seeing austerity? Well decide for yourself. From Portugal Statistics.

The net borrowing of the General Government was 12 466 million Euros in 2014, a more negative result than the observed in the previous year……… corresponding to 7.2% of GDP.

Now after all that claimed austerity a debt to GDP ratio of 7.2% poses the same fiscal stimulus question. It was also quite a rise on the previously published 4.5%! If they hoped that nobody would notice they failed and it was due to an issue I have pointed out on here before which is the attempt to hide the costs of yet another bank bailout. Novo Banco in this case.

The behaviour of capital expenditure is explained mostly by the recording of the capitalization of Novo Banco as capital transfer by the amount of 4.9 billion euro.

Also there were other problems with the banking industry.

Capital expenditure also increased as a result of the recording of the capital transfers related to the financing of STCP and Carris, the writeoff of nonperforming loans of BPN Crédito owned by Parvalorem S.A..

This is the opposite of a gift that keeps on giving and shows the problem of kicking the bank problem can into the future. All this time and the costs are only now catching up in the official records.

What we find though is that the deficits persist and this time for a different reason to the UK which took its bank pain up front oh and rather sneakily did its fiscal numbers excluding banks. Sir Humphrey Appleby played a blinder on the mainstream media as I recall for example it came as a surprise to Stephanie Flanders of the BBC when she finally spotted it!

However Portugal is less into a recovery phase than the UK but has had a persistent fiscal deficit which returns us to the austerity versus stimulus debate again. We were told that the deficit to GDP ratio had gone from 7.4% in 2011 to 5.6% in 2012 then 4.8% and then 4.5%. So progress if slow but the replacement of 4.5% by 7.2% puts a different picture on things. Is austerity just a lower fiscal stimulus?

For Portugal there are two main problems here. The first is the size of its national debt is now 130.2% of GDP far higher than the 120% previously used as a crisis level by the Euro Institutions (ex-troika in the way that Windscale became Sellafield in the UK). The next is not especially the annual burden as with its 6.6 billion Euro QE program for Portuguese government bonds the ECB is taking care of that. No it is a capital issue as we compare the capital burden with Portugal’s long-standing economic growth problem where over time around 1% is about as good as it gets.

Comment

UK Chancellor of the Exchequer George Osborne told us this in the Budget.

therefore in normal economic times governments should run an overall budget surplus, so our country is better prepared for whatever storms lie ahead…..In short we should always fix the roof while the sun is shining.

An interesting admission that we are not in normal times which gave an early clue to Bank of England interest-rate hike but then we got this too.

Thereafter, governments will be required to maintain that surplus in normal times – in other words, when there isn’t a recession or a marked slowdown.

You might like to read the actual numbers for the UK again. Or perhaps it is time for Alice In Wonderland to help us out.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

Let me see: four times five is tweleve, and four times six is thirteen, and four times seven is-oh dear! I shall never get to tewnty at that rate!

Perhaps Mariah Carey was right.

But It’s just a sweet sweet fantasy baby

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24 thoughts on “Has austerity really been cover for a fiscal stimulus in the UK and Portugal?

  1. Hi Shaun

    There are two things I’d comment on about your excellent piece.

    Firstly, as you say, the GDP figures have held up well but the PSBR still persists in misbehaving. But, without wishing to state the obvious, one of the main reasons GDP has been maintained is that the PSBR is so high and has given, and continues to give a substantial stimulus. Where would we be now if we had had “true” austerity in the last few years? My estimation would be – not a very good place. Osborne took his foot off the austerity pedal in 2011-2012 s you know because the figures began to look a bit sick.

    The second thing is the quote from Osborne as to what one should expect in “normal” times. Osborn must be aware that the tax take has hovered around 37/38% of GDP for quite some time and seems very reluctant to go above this. The clear, but unstated, implication of this is that long term public spending must be below this figure. Of course one could increase taxes sharply but this alternative does not exist in Osborne’s lexicon so we are left with the subliminal message that we must shrink the size of the state, which of course is his core policy.

    It should be obvious now that there is virtually no chance of achieving a small surplus by 2020, as estimated by the OBR; it is simply cloud cuckoo land, especially in view of the likely slowdown, or worse, between now and then.

    • ‘But, without wishing to state the obvious, one of the main reasons GDP has been maintained is that the PSBR is so high and has given, and continues to give a substantial stimulus. Where would we be now if we had had “true” austerity in the last few years? My estimation would be – not a very good place. ‘

      Beautifully put and something I shall use to hone my rant about this particular aspect of the economic growth we’ve enjoyed over the last few years.

  2. Shaun, great article as usual even if it does make me worry more! I have just had a friend staying with me who used to work at a very senior level in a well known bank. He now does part time work for two very large sovereign wealth funds who invest in the UK and he tells me that the UK’s debt and deficit is now very much on their radar and of concern. Unfortunately I can’t name names but it has left me feeling even more worried! The only thing saving the UK at the moment is that elsewhere looks just as bad!! He is also very scathing about the failure of western central banks to return to ‘normal’ levels of interest rates and, like yourself, wonders what they are hiding.

    • I suspect the big hide is that QE was used to buy assets that are “imaginary” and that all the money , as South Park put it , “its gone!”

      Forbin

    • The UK’s biggest asset at the minute is that it isn’t called Greece.

      Beyond that the outlok is awful for anyone who can state/see the obvious as Bob J outlined in his comment.

      We’ve been able to keep IR’s low because Sterling has remained relatively strong.But just look at Russia to see what a currency crisis looks like.

      Look at Brazil/South Africa.

      This isn’t going to be pretty when it ends.

      And I still have Joe Smoes telling me that I should buy some bricks and mortar on the drip-IO obviously-so I can tap off that handsome 4% gross yield.

      Whatever!

  3. Austerity was never about reducing the deficit. It was and is about privatizing gains and socializing losses, it was and is about privatizing the functions of the state. In that regard it has been an overwhelming success everywhere, the wealthy get a bigger piece of the pie of state spending and everyone else gets less. If the state wanted to preserve some capacity it needn’t bailout reckless speculators, it could instead buy that capacity after reckless speculators get bailed in, that’s what a private investor would do. The UK recently had elections and PT has elections in a few weeks, bread and circuses are in order. So long as ‘businesses’ can get by without customers the ponzi will continue.

    • ‘Austerity was never about reducing the deficit. It was and is about privatizing gains and socializing losses, it was and is about privatizing the functions of the state. In that regard it has been an overwhelming success everywhere, the wealthy get a bigger piece of the pie of state spending and everyone else gets less. If the state wanted to preserve some capacity it needn’t bailout reckless speculators, it could instead buy that capacity after reckless speculators get bailed in, that’s what a private investor would do. ‘

      Worth saying that twice.Some great bang on comments today.

      Crapita’s profitability sums up much that is wrong about the UK today.

  4. Hello Shaun,

    One must wonder what is needed to boost GDP . anything that gets above 2% ( because thats the real zero figure from Gerry Mandered figures we get ) must be welcomed but …

    Frankly I have always thought that the Banks should have been “let go” and we could have built from there , but we are here and the efforts to stop a 1930’s style asset bust continue

    So the Banks are still bust

    HMG finances are not helped either by tax cuts that were supposed to help demand but went into paying for bigger mortgages . Add to that spending commitments of GDP , not HMG income , and can anyone see if we do that we have to borrow !

    consumer debt levels are too high but as we discussed yesterday HMG are still trying for a housing recovery / boom

    Frankly this admits to the fact we cannot earn our way out , so we cheat and whilst the markets are happy to borrow from us it will work . As others have posted , theres worse out there !!

    And if we had to pay it back , like Greece, then we would end up like Greece !

    No party will have real austerity when in power , even Thatcher gave up on that !

    Forbin

    • ‘Frankly I have always thought that the Banks should have been “let go” and we could have built from there , but we are here and the efforts to stop a 1930’s style asset bust continue’

      Yep

      ‘So the Banks are still bust’

      Yep

      ‘HMG finances are not helped either by tax cuts that were supposed to help demand but went into paying for bigger mortgages . Add to that spending commitments of GDP , not HMG income , and can anyone see if we do that we have to borrow !’

      Yep

      ‘consumer debt levels are too high but as we discussed yesterday HMG are still trying for a housing recovery / boom’

      Yep

      ‘Frankly this admits to the fact we cannot earn our way out , so we cheat and whilst the markets are happy to borrow from us it will work . As others have posted , theres worse out there !!’

      Yep

      ‘And if we had to pay it back , like Greece, then we would end up like Greece ! ‘

      it’s not rocket science is it?

  5. Hi Shaun
    Every government is borrowing from itself via their CBs and then monetising the debt. ‘GDP growth’ is merely numbers of population increases times the extra central debt. Abolish cash so there can be no run on the banks, financial ‘feudalism’ by the click of a mouse.In this world QE never ends and 100% monetised debt is painless because all currencies move in tandem ( more or less). Who pays? Anybody with liquid funds who is not part of the ruling elite.
    ‘Dune’ is indeed getting closer by the day.
    By the way , did you read an AEP piece in the Telegraph today, quoting a LE guy writing for Stanley who forecasts the end of ‘capital’ increases and an increase of ‘labour’ value, apparently he postulates the world is going to run out of cheap labour from now on…..!! He’s obviously never been to MENA, Africa or the sub continent.

    • I saw the article.
      I’m seeing some skills shortages – including an approximate 50% pay increase for IT staff in Bulgaria. Even people with languages are in demand for everything from call centres upward. But there is high unemployment/low pay for the many unskilled workers.

      So it may be valid for skilled workers, and if he’s correct we’ll see wage increases over the next 5 years.

  6. Hi Shaun,

    We had real austerity post 1990, courtesy of Ken Clarke. The world didn’t end. This resulted in a very healthy financial position in May 1997.

    I’m convinced that the bank subsidies for failed businesses are harmful and misguided. Osborne is fiddling while Rome burns. Bank subsidies aren’t austerity – they are robbing the poor to give to the rich.

    • Hi ExpatInBG

      Yes I remember it well although it started in September 1992 with our ejection from the ERM which I suspect is a day I will never forget! So the UK establishment got it completely wrong one more time but I agree that Ken Clarke did grasp the nettle and improve things. In fact it sent quite a few things on a good trajectory as we ended the decade with “Prudence Brown” having 2/3 fiscal surpluses.

      Funny isn’t it how we could do it then and not now? I agree that it is the banks that are at the root of it.

  7. No.
    As I’ve been telling you for years, “Austerity is the neo-liberal justification for the upwards redistribution of wealth.”
    The cuts are all precisely where you’d expect neo-liberal scum to make them.

      • The BOOST provided to the state pension?
        As a carer, I get approx. £20 a week less than someone who is unemployed. My only real benefit was the pension credits I received, which “guaranteed” me the state second pension.
        It has, for decades, been the case that it is mainly working-class people who gained the second pension, as we did not earn enough for the best private pensions.
        Add the end of that second pension, with the delay in payment of the basic, and you have a bizarre idea of BOOST!

  8. That’s why I love this blog.An arena of sensible scepticism about the tractor production propaganda.

    Let’s also mention some other aspects of the fiscal deficit
    1) PFI-a neat balance sheet trick but a debt still the same

    2) demographics-aging population and yet do we account for future liabilities at all when discussing the national debt.Do we even adjust pension liabilites for recent nerw arrivals?Do we account for the increased health/welfare/education spending that population growth brings?

    3)bailing out failed banks-socializing the losses of a kleptocratic banking elite.Bump up the balance sheets via ZIRP/QE/FLS etc and then try and offload back to the pension funds and retail traders before anyone factors in the withdrawal of the facilities and the effect it will have on the asset side of their balance sheets

    4) let’s also consider the effect of the various tricks used to bump GDP that this blog does so much to educate about eg imputed rents.Let’s also remember the various mechanisms that are used to hide increases in the cost of living for the poor-again something this blog is a market leader in(I suppose it helps that virtually noone else either understands or cares).

    Rant over.

    On the verge of going long popcorn futures in honour of Forbin and the Chinese stock market.

    • Demographics is the ticking bomb under the table that no one in government mentions however they must be aware of it. The cynic in me sometimes wonders if the inaction over immigration is a tacit recognition of our demographic profile and the need to recruit a new younger workforce to keep the pension Ponzi scheme afloat. Greece, Italy and Portugal are sitting on even bigger bombs with little or no immigration (the current influx are transient) to offset a rapidly ageing population. Add to this the emigration of their talented young and the outlook is grim indeed.

    • Monday 4th Oct. sees another “boost” to GDP, as supermarkets are bound, by law, to selling plastic bags at 5p each instead of giving them away.

  9. Sorry Shaun,

    Today’s post/comments have got me thinking.

    Consider what these three share prices are saying about the world economy and the UK economy.

    Anglo Am 16 year low
    https://uk.finance.yahoo.com/echarts?s=AAL.L#symbol=AAL.L;range=my

    Next £75+ twenty year high
    https://uk.finance.yahoo.com/echarts?s=NXT.L#symbol=NXT.L;range=my

    Capita £11+ twenty year high
    https://uk.finance.yahoo.com/echarts?s=CPI.L#symbol=CPI.L;range=my

    They can’t all be right,can they?

    Have a great night all.

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