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?