Today in a nice accident of timing has seen the publication of the latest UK fiscal deficit and national debt figures. The timing bit works because the state visit by the Chinese President is as I discussed yesterday is at least partly an effort to send offshore some of the UK’s future borrowing and national debt needs. It will help with this. From Sky News on the Fiscal Charter.
Quite simply, it compels the Government to achieve a surplus on their budget by 2019/20, and then keep the budget in surplus each year thereafter.
Actually the get-out is that the surplus rule only applies to “normal” times and that of course does not apply otherwise we would not have an emergency Bank Rate of 0.5% and £375 billion of QE (Quantitative Easing) would we? If we look back this sort of thing has been tried before as we recall the Golden Rule of Gordon Brown. From Fact Check.
the golden rule only says that borrowing has to be balanced over an economic cycle.
The get-out used then – there is invariably a get-out – is shown below.
The trouble is that there’s no strict definition of what a cycle is.
Gordon Brown used that in the way that I expect George Osborne to use his definition of normal. Oh and it is hard to escape the irony of Gordon Brown choosing to call it a golden rule.
We have also been given a promise from the Chancellor for this fiscal year.
At this pace the national debt is lower as a share of our national income in every future year than when I presented the Budget in March.
You may note that he has defined it so that a growing economy helps twice! Why? Well we are borrowing at an annual rate of over 4% of our GDP plus paying interest on the debt so claiming that debt would fall is a step too far. Also he plans to have a little help from his friends via the accelerated sale of taxpayer owned shares in UK banks,Royal Mail and Eurostar. Care is needed here,however as such sales only help some of the numbers as the fiscal deficit misses out.
For most share sales, the proceeds will reduce the central government net cash requirement (CGNCR) and public sector net debt (PSND) but have no impact on public sector net borrowing.
How is the UK economy doing?
Let me open with something we have decided on here is a good guide to the state of the UK economy which is the tax take or revenue number.
Central government receipts for the financial year-to-date (April 2015 to September 2015) were £300.5 billion, an increase of £11.7 billion, or 4.0%, compared with the same period in 2014.
The only issue is that the payments are a combination of reasonably up to date and lagged so we get confirmation that the UK economy has been doing well. The only caveat is that we would like to have a number for population growth so that the growth was per person.
If we look into the detail we see that the main categories (VAT,Income-Tax, National Insurance) grew by more than 4% and hearteningly it seems that far from every company is doing a Starbucks or Google.
corporation tax increased by £1.5 billion, or 7.9%, to £20.3 billion
You may have spotted that all of the individual numbers were more than 4%! I looked further and the contribution from Bank of England QE fell and taxes on production apart from VAT had to be weak but are not specified.
This has been problematic for the UK government but we advance on it emboldened by the positive revenue numbers.
Public sector net borrowing excluding public sector banks decreased by £1.6 billion to £9.4 billion in September 2015 compared with September 2014…….Public sector net borrowing excluding public sector banks decreased by £7.5 billion to £46.3 billion in the current financial year-to-date (April 2015 to September 2015) compared with the same period in 2014.
So we see that a better September has been accompanied by some favourable revisions. But the reduction of £7.5 billion is less than the £11.7 billion increase in the tax take and is caused by this.
Central government expenditure (current and capital) for the financial year-to-date (April 2015 to September 2015) was £343.7 billion, an increase of £3.0 billion, or 0.9%, compared with the same period in 2014.
This poses more than a few questions for the austerity theme of the times especially if we remind ourselves that inflation is zero. Thus it is a real terms increase or fiscal expansionism, well at least my financial lexicon was well ahead of its time! Actually if we recall the the triple lock for basic state pensions then we get an explanation for around half of it. Should inflation remain low then this years increase of 2.9% will be problematic too. The Government Actuary estimates that the total cost of the triple lock will be £6 billion this year.
So what we are really saying is that there are gains for some and austerity for others. Putting it another way the increases in the basic state pension and the cuts to tax credits are not direct transfers but over time they are two sides of the same fiscal coin.
Overall when we look at our economic growth spurt the borrowing numbers remain a disappointment.
This could be a number crunching section as the headline writers and many economists invariably highlight this one.
Public sector net debt excluding public sector banks at the end of September 2015 was £1,524.1 billion, equivalent to 80.6% of Gross Domestic Product; an increase of £70.5 billion compared with September 2014.
However if we want to compare ourselves to what is in effect the international standard then we need to look at this.
General Government Gross Debt at the end of September 2015 was £1,638.2 billion, equivalent to 86.3% of Gross Domestic Product; an increase of £78.8 billion compared with September 2014.
I have done my best on this front by persuading the Office for National Statistics to put the latter numbers on the front page of it Statistical Bulletin.
This is in the news today as the media discusses the proposed Chinese investment. Actually as I note that the start date always seems to be around the corner (rather like a Bank Rate rise) I do wonder if it will ever be built. The price of £92.5 per megawatt is so good for EdF that I suspect they are afraid it will never happen. You can have too good a deal! If the chart provided by Energy Solutions is accurate then the price seems to be trending to around £40 per megawatt. I know winter is on its way but the Hinkley Point deal faces a completely different oil price to when it was proposed. Rather an irony on Back to the Future 2 Day isn’t it.
I have seen some criticisms saying the whole plan is illiterate. I think that they mean innumerate.
Let me start with the good news which is that the UK economic growth spurt is benefiting the tax and revenue numbers. Sadly the deficit continues to disappoint as we see that austerity also seems to involve an increase in real terms expenditure especially to pensioners. Of course pensioners who rely on savings income have been hard hit as the credit crunch ball of unintended consequences – well apart from Professor Sir Charlie Bean – bounces around.
Another favourable factor is the cheap cost of borrowing right now as we can borrow for ten years at 1.8% and thirty years at 2.59%. However that poses its own question because if we cannot finance Hinkley Point at such yields and proposed prices what on earth is going on? After all the image of China is the Chinese Dragon as some Surrey golfers are finding out.
Wentworth golfers face missing the cut after the venerable club’s new Chinese management told them they must pay a £100,000 fee or lose their membership.