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.
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.
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.