Back just before Christmas I wrote how the claimed austerity of the UK government was in fact looking awfully like a fiscal boost. After all we have had a sustained period of economic growth now which has run for 3 years and yet the claimed Holy Grail of a balanced budget does not appear to be getting much closer. Indeed it is not here right now as it was supposed to be because we are now in the year that the original coalition forecasts from the summer of 2010 told us we would reach it. Actually we are supposed to be in surplus on both the cyclically adjusted current budget and cyclically adjusted net borrowing. However in spite of the get out clauses provided in those two definitions we are nowhere near.
The official review of the November numbers wants us to ignore the long-term issues described above and to concentrate on what it regards as temporary and one-off factors which the OBR ( Office for Budget Responsibility) defines as follows.
but receipts were also boosted last November by £1.1 billion of fines levied on banks by the Financial Conduct Authority related to failings in foreign exchange business practices. This month’s data include only £0.1 billion of FCA fines;
Were we planning on relying for our nations finances on bad behaviour in the finance industry? Whilst I agree that this is clearly a growth area it poses questions. Also if we move to the expenditure side of the ledger we see this.
central government spending relative to last November was boosted by a £1.0 billion rise in EU contributions and a £0.8 billion rise in DfID spending related to payments to the World Bank, with the effects of both expected to unwind next month.
The swirling around from the extra EU payments and the smaller repayment has created a land of confusion and I have to confess that such large payments to the World Bank are a new one on me.
If we are not doing so well in a period when we have solid economic growth then a question is begged as to what will happen if things slow. If we look at the latest figures we may be seeing something of that. The January Economic Review put it like this.
GDP grew by 0.4% in Q3 2015, revised down from the previously published estimate of 0.5%. Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014.
Whilst any quarterly figures are unreliable we seem to have a weakening trend and of course we saw this added to it.
by 2.1% when compared to the same quarter of the previous year……(partly due to) 0.2 percentage point downward revision for growth compared to the previous year.
Index Linked Gilts (Gilt-Edged Stock)
A factor often ignored is the impact of the lower inflation rate on the cost of UK debt. I have just quickly added up the amount of UK index-linked Gilts and come to £369 billion as the amount that is indexed. Now whilst the government would love to be paying CPI or pretty much nothing in 2015 they are linked to the Retail Price Index.But you would still rather be adding the 1% or so of 2015 than the 2%+ of most of 2014 and much more so than the 5%+ of much of 2011.
It is also true that the cost on normal Gilts is very low as in spite of all the interest-rate promises of Bank of England Governor Mark Carney we can borrow for ten years at only 1.68%.
Today’s retail sales figures
This morning’s numbers have thrown a little more unease into the mix. Let me open with what has been a familiar pattern as oil prices have driven inflation lower and real wages higher.
Year-on-year estimates of the quantity bought in the retail industry showed growth for the 32nd consecutive month in December 2015, increasing by 2.6% compared with December 2014.
So the year on year boom continues as does the disinflation which has helped to drive it.
Average store prices (including petrol stations) fell by 3.2% in December 2015 compared with December 2014, the 18th consecutive month of year-on-year price falls.
However the situation here also shows a possible sign of a turn downwards.
Compared with November 2015, the quantity bought in the retail industry is estimated to have decreased by 1.0%.
There was also an interesting little quirk which will impact on such things as VAT (Value Added Tax) revenues.
The amount spent in the retail industry decreased by 1.0% in December 2015 compared with December 2014 and decreased by 1.4% compared with November 2015.
Prices fell by more than volumes rose and is a type of deflation although only a nominal one.
Care is needed with any single month of retail sales data as it is an erratic series and the advent of Black Friday in the November figures seems only likely to exacerbate that. However wasn’t Black Friday supposed to have been a disappointment? The ONS (Office for National Statistics) believes it had a weaker impact than last year which on its own should have boosted the monthly change. If we look for some perspective the worries return.
Throughout most of 2015, the retail sales growth rate has fluctuated around the 4.0% to 5.0% range, which is higher than just before the downturn. However, the latest data shows an easing in retail sales growth to 3.7% in the 3 months to December 2015, the lowest rate for 2015, when compared with growth of 5.1% in the 3 months to November 2015.
Still there is always that standby scapegoat which is the weather!
Sales of clothing and footwear fell 4.2% due to mild weather in Dec 15
This month’s public finances
There was some better news in December from the headline borrowing figure.
Public sector net borrowing excluding public sector banks decreased by £4.3 billion to £7.5 billion in December 2015 compared with December 2014.
The revenue figures were as they have mostly been in 2015 pretty solid with taxes on income and sales (VAT) doing well and only slightly undermined by a dip in Corporation Tax. However the cut in expenditure was by UK standards pretty spectacular.
Central government expenditure (current and capital) in December 2015 was £58.5 billion, a decrease of £1.1 billion, or 1.8%, compared with December 2014.
It has otherwise been rising in this financial year ( 0.8% including December) but as we look into the detail some may wonder if the reduction was in the right area.
central government net investment (capital expenditure) decreased by £0.9 billion, or 24.5%
The picture regarding local authorities is rather opaque but was £1.4 billion better than December 2014.
If we move to the longer perspective we see this.
Public sector net borrowing excluding public sector banks decreased by £11.0 billion to £74.2 billion in the current financial year-to-date (April 2015 to December 2015) compared with the same period in 2014.
This is in spite of a better month and is progress at a snail’s pace.
We get plenty of protestations from politicians about “paying down the (national) debt” whereas it continues to rise.
£1,542.6 billion, equivalent to 81.0% of Gross Domestic Product; an increase of £53.2 billion compared with December 2014.
However the UK has reduced one debt burden according to the Bank of England
with the net debt stock of UK non-financial corporates falling by more than 20% of nominal GDP.
Of course it cannot be the banks fault so the companies themselves have to take the rap.
In this post, I argue that the root cause of this divergence was a fall in UK corporates’ demand for debt, rather than a hit to credit supply.
It is nice to see a better month for the UK Public Finances and in terms of good news a continuation of retail sales growth. However the picture for the public finances remains troubled and disappointing overall and worryingly for next week’s economic growth or GDP number retail sales have dipped. This has possible implications for future public finance numbers.Also if we were looking to reduce a debt burden we would not have wanted to reduce the corporate one especially after the over three years of the Funding for Lending Scheme which was supposed to boost it.