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.
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.
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.
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