Is the government “fixing a hole” in the UK public finances?

Today sees or if you are reading this later has seen the Autumn Statement which is a spending planning and review set piece event for the UK government. This is always of particular interest in economic terms but these year it is especially so. After all if a government is going to put on a hair shirt or tighten its belt ( and by its really of course they mean ours) the logical time to do it is as far away from the next General Election as it can. Thus comes a major plank in what is sometimes called electoral cycle economics where there is a contractionary effort after an election replacing the expansionary one before it.

We also know that the current Chancellor George Osborne has set out his stall as someone who plans to cut the fiscal deficit and also promises to cut the national debt. In musical terms he sees this as described by the Beatles below.

I’m fixing a hole where the rain gets in

In this summer’s Budget he was in full flow on this subject.

That means more than just eliminating the deficit, it means running a surplus to get our dangerously high levels of debt down.

Some of you may already be thinking that he had veered into Alice Through The Looking Glass territory but wait for it as we were also told this.

this Charter commits us to keeping debt falling as a share of GDP each and every year– and to achieving that budget surplus by 2019-20.

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.

The Present Situation

A problem for the hype is that the UK public finances continue to misbehave. This was illustrated again only on Friday when we received the numbers for October.

Public sector net borrowing excluding public sector banks increased by £1.1 billion to £8.2 billion in October 2015 compared with October 2014.

Whilst the numbers can be erratic on a monthly basis a higher deficit in an economy which is recording solid economic growth figures poses a question as to what is happening? So let us look at the fiscal year so far for some perspective.

Public sector net borrowing excluding public sector banks decreased by £6.6 billion to £54.3 billion in the current financial year-to-date (April 2015 to October 2015) compared with the same period in 2014.

So disappointing progress especially if we note that revenues have been quite good.

Central government receipts for the financial year-to-date (April 2015 to October 2015) were £354.8 billion, an increase of £10.5 billion, or 3.0%, compared with the same period in 2014.

We get a confirmation of the improved position for wages by the fact that income-tax receipts have risen by 4.5% and against the theme of the times Corporation Tax has risen by 5.3%. I am pointing this out because quite a few places reported trouble with October revenues when in fact it was a change in payments from the Bank of England’s QE operations and “round-tripping” of the public finances.

interest & dividends decreased by £2.0 billion, or 40.5%, to £2.9 billion

So if revenues are solid and the deficit is struggling spending must have risen.

Central government expenditure (current and capital) for the financial year-to-date (April 2015 to October 2015) was £402.6 billion, an increase of £4.5 billion, or 1.1%,

Thus we return to what is austerity? After all the economic recovery with its falls in unemployment and consequent welfare benefits should be helping to reduce spending.  As we are told that in effect there is no or 0% inflation all of this is a real-terms spending increase. For newer readers the subject of what austerity actually means is a regular topic as we are told of “cuts,cuts,cuts” and do not misunderstand me I know that there have been losers but overall spending is up. In a way we return to the electoral cycle as a major factor in higher spending these days is the “triple-lock” guarantee for the basic state pension which if I recall correctly was supported by every major political party at the General Election. As we look forwards I note that next year’s figures will be affected by it too as we that a promised increase of 2.9% when inflation will begin the year at 0% looks likely to again be a solid real terms increase.

Putting it all together

At the summer Budget we were told this.

In March the OBR forecast we would borrow less than half that, or £75.3 billion, this year. In this Budget, they have revised borrowing down this year, to £69.5 billion.

Borrowing then falls to £43.1 billion next year, £24.3 billion in 2017/18 and down to just £6.4 billion the year after that.

There are various official bodies which compete for the job of worst forecasting organisation in the world but the OBR has an almost unparalleled record of success if it is aiming for this! Unless of course its original effort back in the summer of 2010 is actually true.

public sector net borrowing (PSNB) to fall from 11.0 per cent of GDP in
2009-10 to 1.1 per cent in 2015-16;

Along the way they have given us a lesson in applying conventional economic modelling to the credit crunch era as after a delay we were supposed to revert to mean.

Wages and salaries growth rises gradually throughout the forecast,
reaching 5½ percent in 2014

This preference of theory over reality is something which has afflicted the Bank of England too as it too makes forecasting error after error but then has the bare faced cheek to offer us Forward Guidance.

It is often forgotten but the world of low interest-rates and yields has provided the UK with quite a windfall each year as we issue debt at such prices and yields.

Four years away

I remember the days when De La Soul informed us that ” 3 That’s the Magic Number” but in the world of UK public finances they were on shy I think. If you look at the original forecasts of the coalition government the land of milk and honey (surpluses) was four years or so away and four years later it was four years or so away! To maintain that theme the can is likely to be kicked forwards a year or so today.

Current Problems

We have seen recently several areas where there is upwards pressure on spending. For example we do not know how much of the defence spending promises will happen but we do know that extra fighter squadrons are not free and that ISIS and Putin seem unlikely to disappear. There are hints of changes to the plans for tax credits. Also for those of us who wondered if at this stage of the electoral cycle plans like Help To Buy for the housing market might fade away then others seem less sure. From Steve Hawkes on Twitter.

And shares in Britain’s biggest housing developers go through the roof – Persimmon up 5%, Barratt 4%, Bovis 4.5%, Taylor Wimpey 4%

Of course there are hints about us building more houses but they have been true for over a decade now and governments of various hues but the common theme has been inaction.

Comment

As you can see it is possible to make a case for austerity ( we know that areas of public spending are being squeezed and a fiscal stimulus as we have a real terms increase in spending at the same time! We are also perpetually on the cusp of a surplus and reducing the national debt. Perhaps the establishment are fans of the Beatles.

And it really doesn’t matter if
I’m wrong I’m right
Where I belong I’m right
Where I belong
Silly people run around
They worry me and never ask me
Why they don’t get past my door

Meanwhile as the plans and forecasts rush around please remember the wise words of Alice In Wonderland.

Why, sometimes I’ve believed as many as six impossible things before breakfast.

He even provided a theme for OBR forecasts.

It’s no use going back to yesterday, because I was a different person then.

For those who prefer a verbal exposition of what is happening I will be on Share Radio from 1:30 pm offering analysis of today’s events.

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22 thoughts on “Is the government “fixing a hole” in the UK public finances?

  1. Shaun,

    Is it true that public spending hasn’t gone down at all and all that’s happened is that tax receipts have increased which makes everything look a little rosier?

    And on the OBR, I was fascinated, many years ago at its creation, that Robert Chote, formerly of the Institute of Fiscal Studies (IFS), would become its chairman. He and the IFS appeared to produce good, respectable work, so I was hoping that the OBR would benefit from his experience. However, as you say, the OBR is constantly producing forecasts which are laughable. As a Government quango, do you think the OBR are being forced to produce such stupid forecasts or are their employees just lamentable?

    Robert S

    • Hi Robert S and welcome

      It was not a good day I am afraid for Robert Chote as he rode on his white charger to the Chancellor’s rescue. The Guardian put it thus.

      “Based on the OBR’s latest analysis, Chote’s team expect extra revenue for the exchequer of £2.5bn this year, £4.1bn next year, £6.3bn in 2017-18 and £5.4bn in the year after that”

      ““The outlook for the economy has not changed a great deal since our last forecast in July. But there have been somewhat bigger changes to the outlook for the public finances,” said OBR chairman Robert Chote. “The underlying fiscal position looks somewhat stronger over the medium term than it did in July.”

      Do you think it will be arise Sir Robert or perhaps Lord Chote?

  2. Great article as always Shaun.

    Incredible that the chancellor still does not know the difference between debt and deficit. Taken from the beeb:

    ‘George Osborne says the four-year public spending plans are forecast to deliver a budget surplus. “We promised to bring our debt down,” he says, adding today’s forecast shows it will be falling and continue to fall in every year that follows.’

    And no-one (except you) in the media will ever notice.

    • Typical political sleight of hand – he’s referring to debt as a proportion of GDP. I think it’s dishonest really but that’s politicians for you.

      • Personnally,I think he confuses the two.Actions speak louader than words and generally he does come across as rather unworldly and only in the position because he’s played a good game from Eton,Oxford,Central Office and then his safe seat.

        Bright guy?Yes.Understanding of real world economics?Not so sure.

  3. Hello Shaun ,

    I think of the HMG babble is to quieten the markets as make ’em feel good .

    Thats the way to keep your interest payments down 🙂

    as for the economy I did say look to tax returns and they are looking better , not as good as perhaps Ozzy (mandias) would like but non the less improvement

    took their time of course

    And why follow Greece ? yeah right as if the greeks had any choice , poor sods . Ozzy and Camelson’s pulled a trick here

    Still we’ll see what happens next year as thing soften up elsewhere in the world

    Forbin,

    PS: and also see if events happen – A right Turkey shoot could follow 🙂

    • Hi Forbin

      Well one of the events could be that the higher tax revenues discovered over the past 4 months by the OBR are seen to be a computer glitch. You know HAL 9000 that sort of thing. Presumably Robert Chote will not allow this to be discovered until he has received his title.

      As to going forwards well any slow down in 2016 will make the public finances even more troubled and will finish the “fixing the roof whilst the sun is shining” analogies.

  4. Hi Shaun

    No politician ever forecasts a recession or even a growth slowdown of any significance but this is where we are headed. The business cycle still exists and this recovery, such that it is, is very long in the tooth,

    Even a mild slowdown would blow a huge hole in the PSBR and make the projection of a surplus by 2020 little more than fantasy PR, which it is. The Fiscal Charter is nothing more than a political stunt and quite risible.

    Meanwhile debt continues to build, both public and private, taking us that much nearer to the Minsky Moment, which I think is bound to come during this Parliament.

    • ‘Meanwhile debt continues to build, both public and private, taking us that much nearer to the Minsky Moment, which I think is bound to come during this Parliament.’

      Too true Bob.Austerity has been nothing of the sort.Billions have spent subsidising the loss making activities of RBS and a host of other banks.Now more back door support by extending HTB in London,after a long line of QE,ZIRP, etc….

      His borrowing projections are a joke and we’re walking headlong into a currency crisis from what I can see as we’re heading for 100% debt to GDP ratio probably by 2020.How we used to laugh at the Greeks.

  5. Help to Buy now extended to shared-ownership, and Help to Buy London to offer 40% deposits through interest free loans for buyers in the capital. The resulting house price boosts will more than offset the ‘landlord tax’. No wonder Taylor Wimpy shares are soaring again!

    • I haven’t seen anyone yet comment in the media on how someone will be able to move from their box, sorry ‘starter home’ to a proper house if they go on to have children. Financially, this seems impossibility to me.

      Malcolm

      • Hi Malcolm and welcome to my corner of the online world.

        It will be even worse if the individual concerned is a Nurse and they have the “opportunity” to start working life with a student loan as opposed to receiving a grant. It was very Alice Through The Looking Glass to suggest it would make more people apply! From the BBC.

        “Grants for student nurses to be scrapped and replaced by loans
        Cap on training places for nurses scrapped, with goal of increasing numbers by 10,000”

        However it looks like many and maybe most student loans will never be repaid so perhaps in the end it will be okay. But too late for a mortgage as the affordability calculations of the modern era will include repayments.

  6. So the OBR thinks there’s no chance interest rates will rise until 2017 and the government act to fix the finances of the nation accordingly. Wonder how Carney will bat that one aside?

  7. To date official forecasts have, by and large, been wrong, so the Chancellors proposed changes are based on incorrect data. So the OBR have “found” another £18b over the next few years, so let’s spend it now! Would you run a business like this? Bankruptcy here we come!

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