How austerity morphed into a fiscal boost in the UK

Today gives us the first opportunity to take a look at how the UK Public Finances are doing after the Autumn Statement. That if you recall saw a change in policy which was summarised by the Office for Budget Responsibility thus.

to further loosen the impending squeeze on public services spending, to increase capital spending and to reverse the main tax credit cuts it announced in July, while still delivering a modestly stronger budget balance in most years on a like-for-like basis

This was rather like alchemy as who would not want to be able to spend more and borrow less? It is as if the hit from the group Pilot was on the airwaves again.

Ho, ho, ho
It’s magic, you know
Never believe it’s not so

If we look at the actual numbers we see this.

the Government has announced a net fiscal giveaway of £6.2 billion next year, more than half of which is the cost of reversing the tax credit cut…….The giveaway is similar in 2017-18, before declining steadily to £2.2 billion in 2019-20, by which point an £8.0 billion increase in total departmental spending is largely offset by a £7.2 billion net tax increase (mostly the new apprenticeship levy and larger rises in council tax).

So we see the impact of the tax credit U-Turn and note that we are supposed to believe that the Chancellor will be giving less away as we run up to a General Election which would be against political history. Also how did things improve so much as it was only last July that the previous forecasts were calculated?

The sofa at the OBR

When the OBR looked down the back of its sofa it found more tax revenues and in some cases a lot more.

This reflects higher expected receipts from income taxes, corporation tax and VAT – some of which result from modelling changes to our NICs and VAT deductions forecasts.

How convenient you may be thinking! Just as the government is loosening the fiscal reins it can now do so at no apparent cost. As I have pointed out many times before the concept of this institution being “independent” has had plenty of challenges and few more than this. More specifically we see that the UK establishment has a type of “institutional capture” in the same way as the “independent” Bank of England has been captured. In fact the facade of independence allows them to get away with things that the politicians could not as imagine the furore in George Osborne or any other Chancellor had himself forecast higher revenues just in time for a U-Turn!

Also they seem to have now spotted something which has been a theme of this blog for the past few years.

Spending on debt interest is also lower in all years, reflecting a further fall in market interest rates.

If we put all this together we see how the UK Public Finances can be “running up the hill backwards” as David Bowie put it and the emphasis is mine.

the Government’s decisions add a cumulative £18.7 billion to public sector net borrowing (significantly less than the £27.0 billion improvement in the underlying forecast).

Actually this poses a real question for this type of analysis because if we look back we see that so far when trying to look as far ahead as it has here the OBR has managed to always be wrong and sometimes spectacularly so. That is unless the UK Public Finances are right now just about to turn a surplus.

The song coming from HM Treasury and the OBR does at least have the benefit of having been written by the Fab Four.

It’s getting better all the time
Better, better, better
It’s getting better all the time
Better, better, better

Reality was once a friend of mine

Whilst the economy has been in a better phase sadly the fantasies discussed above do not relate to reality. Let me explain in relation to this mornings update on the Public Finances. We do see a confirmation of the economic improvement in the revenue numbers.

Central government receipts for the financial year-to-date (April 2015 to November 2015) were £402.4 billion, an increase of £12.0 billion, or 3.1%, compared with the same period in 2014.

Actually the underlying position is more in line with the 4.1% rise in VAT (a sales tax) because Bank of England QE payments have fallen and also bank fines have fallen as last November for example saw £1.1 billion of foreign exchange rigging fines.

Yet if we move to the situation overall we appear to be on something of a road to nowhere.

In the financial year-to-date (April 2015 to November 2015), public sector net borrowing excluding banking groups (PSNB ex) was £66.9 billion; a decrease of £6.6 billion, or 8.9% compared with the same period in 2014.

Such a small decrease is very odd when we see employment so strong and wages growing (think income tax and national insurance) and retail sales (think VAT) powering ahead too. It should be falling heavily so let us look at spending.

Central government expenditure (current and capital) for the financial year-to-date (April 2015 to November 2015) was £460.1 billion, an increase of £5.5 billion, or 1.2%, compared with the same period in 2014.

As you can see we have a very odd version of austerity although fortunately one covered in great detail by my financial lexicon for these times. Not only is spending rising but it is rising in real terms as inflation is officially recorded as zero. Please do not misunderstand me I know that some people are being affected by cutbacks. For example Battersea Park Millennium Arena including the running track is sneaking it in by only opening 10 am to 4 pm over the next fortnight. Apart from the issue of what about the Olympics Legacy? There is the rather bizarre move of refurbishing a gym to in effect close it again.

The National Debt is supposed to be shrinking

Remember this claim? It was cunningly defined in relation to GDP (Gross Domestic Product) which by rising helps. But as you can see below there are still issues.

Public sector net debt excluding public sector banks at the end of November 2015 was £1,536.4 billion, equivalent to 80.5% of Gross Domestic Product; an increase of £71.9 billion compared with November 2014.

Also there is the technical issue provided by something of an own-goal in fiscal terms over housing associations.

This increases borrowing by between £1.4 and £4.6 billion a year and adds 3.1 to 3.4 per cent of GDP to public sector net debt.

Up is indeed the new down…….

Comment

The good news in all of this is that the UK economic improvement is being reflected in the revenue numbers for VAT and taxes on income. In addition there is a particularly welcome 6.4% rise in Corporation Tax to £29.3 billion in the fiscal year so far as even Starbucks pays some albeit only a relative pittance. So far so good. But the rub as Shakespeare would put it is that austerity apparently means a real terms increase in public expenditure which means that it is a fiscal boost. Let me add some nuance to this as there are cut backs in some areas. It is a type of redistribution in the main and a major factor has been this one below which is in the process of ballooning due to the arrival of low inflation.

A hastily buried official report has estimated that the government is spending an extra £6bn a year protecting pensioners’ incomes and warns that the cost of doing so in future years could spiral further.

That is from the Financial Times because the original report was redacted quickly. We did however have an addition to my financial lexicon for these times as we discovered that “error” means telling the truth. Not the full truth though as next April’s 2.9% increase for the Basic State Pension kicks in just as new pensioners get the new higher single payment.

So we have a fiscal boost via a redistribution towards pensioners. Of course there are always exceptions but whilst falling savings income made it look as if they would have a bad credit crunch other changes have meant that they have had a relatively good one. You would think that they are more likely to vote or something!

Anyway austerity morphing into a fiscal stimulus is something for you to consider whilst I sign off for 2015. Those of you who know my personal circumstances will know why my mother wanted to spend Christmas away this year and so I am off to Tenerife tomorrow so let me wish you all a very Merry Christmas and a Happy New Year.

As a final point the loosening of the fiscal purse strings is no doubt influenced by how cheap it is for the government to borrow. At that point the £375 billion of Bank of England QE becomes quite an influence on fiscal policy via its impact on bond yields and borrowing costs. Independence anyone?

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31 thoughts on “How austerity morphed into a fiscal boost in the UK

  1. Hi Shaun
    Thankyou for another year’s worth of
    information and dedication to the cause.
    Clearly the intentions of TPTB worldwide
    have been to intentionally continue to be over
    optimistic and suggest “Smaller Government,” when
    reality suggests the opposite.I hope you and your
    mum enjoy your break,as It’s Christmas here are two
    videos I think you will like, First the glorious Wilson
    sisters with quite an audience and then Luca Stricagnoli
    who is not of this world.

    Merry Christmas

    JRH

  2. Independence anyone?

    haha , “free market” anyone ?

    When will economists in MSM come clean on the rigged market place ?

    with rigged CPI/RPI and GDP

    as you rightly point out Shaun , rigged independance of BoE and OBR as well !

    I have a feeling this can carry on for quite sometime before the wheels come off

    and in the mean time , ie 6-9 months the next recession looms , will MSM notice ? or even admit it ?

    Forbin

  3. Hi Shaun
    Add to all that the increases in personal debt, increasing house prices and the UK is experiencing its usual ‘economic recovery’ built on debt. A never-ending cycle that need never end as its all make-believe anyway.
    Have a great Christmas and a prosperous new Year.

  4. Hi Shaun

    As you and many others have been aware for some time the “austerity” story is more PR than economics. Demographics and the collateral effects in such areas as the NHS mean that austerity means less and less as time goes on and this effect will take place regardless of any temporary (for that is what it will be) “redistributing” towards pensioners and will I suspect be much larger.

    With the coming economic slowdown we will get even more of a fiscal stimulus and the idea of a budget surplus by 2020 will reach its final resting place – the rubbish bin – where in fact it always belonged. Even if we had a redoubling of “austerity” Osborne would have to suspend the automatic stabilizers to get anywhere near his targets and this is neither practical nor anywhere near politically possible.

    I actually think you’re being a tad harsh on TPTB as I think most know that we’re in a box and there’s no easy way out. Given this it may be more rational to wait for the bust after which people are more ready to accept sacrifice than to alarm and anger people before as they see nothing wrong with the current situation; its much easier politically which is the main thing. Of course this is no way to run things but “twas ever thus” as someone once said.

    Shaun thank you for a most enlightening blog and for taking the time after a long day’s work to reply to the musings of such people as me who now, in retirement, have nothing better to do than annoy people. Have a Merry Christmas and an enlightening new year, for that I’m sure is what most of us hope for.

  5. The Beatles & the OBR,
    It requires us to “Turn off your mind, relax and float downstream…”
    Which, of course, comes from the aptly named (as far as the OBR’s record on predictions is concerned) Tomorrow Never Knows.

    • That’s rather good. 🙂
      I hope everybody here enjoy’s the festive period, and that Mark Carney gets a lump of coal. Maybe he’s a least seen THAT coming…

  6. Always enjoy your blog, Shaun, and all you followers comments and observations. To all of you Merry Christmas and a Happy New Year, and look forward to next year’s first blog. Meanwhile, l will be having “cold turkey” in more ways than one!

  7. Hi Shaun

    I’ll just add my thanks to those above … your blog has been a part of my daily “must-read” list for some years now and it’s never been time wasted.

    Enjoy your time in The Canaries and I wish you, your family and your regular readers a Merry Xmas and a Happy New Year.

    Onwards and upwards, troops!

  8. No doubt that George Osborn’s favourite Christmas song is:
    ”Well I wish it could be Christmas everyday”

    Such is the idiocy of the economic experiment that we are rapidly becoming victims of…

  9. Happy Christmas one and all.
    I’ve not had as much time for this blog in the last week because my wife has had pancreas and kidney transplant last Tuesday, and I’ve been busy, busy, busy since, but thank you for the blog Shaun, and I hope you and your mum have the best Christmas possible under the circumstances.

    • Hi. I hope Mrs thrrawbuzzin makes a quick recovery.
      Best wishes for Christmas and the New Year to Shaun and all his readers. I look forward to 2016’s blogs. I am sure there will be no shortage of enlightening subject matter.

    • My granddaughter has recently had
      her gallbladder removed following
      pancreatitis. I’m sure you will agree
      that the NHS ,with all it’s faults.is a
      wonderful thing. Good luck to you
      and your good lady.

      • Many thanks for all the kindly good wishes.
        The transplanted organs are both performing well and my wife’s recovery is ahead of schedule.
        There’s a long way to go, but so far, so good.

      • Manchester Royal Infirmary has totally lost focus.
        There are undoubtedly good people working there; some of them great, but the systems in place are sacrosanct, and the patients an irritation to be suffered as little as possible.
        On Saturday tea-time a lady in my wife’s ward was suffering a hypoglycaemic attack, and nurses refused, on three occasions, to treat her, because they were serving meals.
        My wife has missed a scan booked by doctors, simply because no-one would take her to have it.
        I have seen nothing but petulance since I complained to the ward manager.
        Commodes are left dirty around the clock.
        Important medical procedures left undone.
        Drug runs up to six hours late (if you get them at all).
        My wife, who has been unwell for a decade, and who declines as much pain relief as possible, so that it does not lose its efficacy, describes her experience as, “A living Hell.”

    • therawbuzzin

      Best wishes to you and your wife over the holidays and in the year ahead. I am happy that the operation went well and your wife is making a good recovery.

      Thank you for all your comments on Shaun’s website and I hope that we continue to hear from you in the new year.

  10. Shaun,just to add my own personal thanks,albeit late in the day.

    As per Jim M’s comment,this blog has become a must read for me and made all the better by the contributions in the comments bringing together people from all walks of life.

    This blog has become a place i come to for a dose of sanity in a world where sanity seems in short supply –particualrly at the Treasury/BoE/Fed/ONS/OBR etc etc.

    Enjoy your break.

    • Hi Guys; may I echo Jim & Dutch’s sentiments from the other side of the world down here in NZ. (I’m always late in the day with my comments).

      Thanks a million Shaun.

      A Happy Christmas to all.

  11. Hi Shaun,

    Merry Xmas & thanks for the great blog.

    It’s worth emphasizing that average UK wealth as measured by purchasing power (including housing costs) has reduced by 7% or 8% in 2015, except for the small minority with multiple residential properties and/or senior banksters receiving ever greater bonuses.

    Halifax house price index says +9.6% in June 2015, base rates are 0.5% and there is a deficit.

    A great theme (copied off linkedin) is “You are what you do, not what you say you will do”, aptly applies to Carney and those politicians telling us all is well while they avoid base rate rises and balanced budgets

    • Thanks for the quote Expat – “You are what you do, not what you say you will do”. Probably something we should all consider in our daily lives and include in New Years resolutions . It certainly made me sit up, take notice and start thinking about a few personal things when I read it.

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