The ghosts of Budgets past will haunt George Osborne today

Today is Budget Day in the UK and if you think they are be coming more frequent you are right as it is the 4th financial statement in the last year. That is partly a reflection of it being election year in 2015 but under the bluster the Chancellor George Osborne would rather have avoided it if he could. We can reflect this by looking at what has become the UK’s most important economic statistic wage growth which by coincidence is released this morning. You see the July release for the post-election Budget told us this.

Comparing March to May 2015 with a year earlier, pay for employees in Great Britain increased by 3.2% including bonuses and by 2.8% excluding bonuses

This was also reported by the Office for National Statistics in this fashion.

regular pay for employees in Great Britain increased by 2.8%, the highest annual growth rate since the 3 months to February 2009

total pay for employees in Great Britain increased by 3.2%, the highest annual growth rate since February to April 2010

Actually if you take my argument that much of the UK economic improvement has been down to higher real pay (leading to higher retail sales and consumption) then this was something of a peak for that.

Comparing the three months to May 2015 with the same period in 2014, real AWE (total pay) grew by 3.2 per cent, the highest rate of increase since July to September 2007 when it rose by 3.3 per cent.

Such good news led the hapless Office for Budget Responsibility to do this.

We have revised borrowing down by £5.8 billion in 2015-16. That reflects: • stronger than expected receipts growth, particularly income tax, VAT and stamp duty on property transactions;

Accordingly they forecast a fiscal deficit for the UK of £69.5 billion in 2015/16 which allowed the Chancellor to come up with his new Fiscal Charter.

While we move from deficit to surplus, 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.


Ooops! As is the way with fiscal rules it has backfired although most at least get through the first year. Actually it always depended on asset sales (mostly bank shares) which have not happened on the scale predicted either.

If we move to borrowing so far this year we see the problem.

Public sector net borrowing excluding public sector banks decreased by £10.6 billion to £66.5 billion in the current financial year-to-date (April 2015 to January 2016) compared with the same period in the previous financial year.

So if we only borrow some £3 billion in February and March we will be fine!

What about today?

If we look at the average earnings figures we see this.

Between the 3 months to January 2015 and the 3 months to January 2016, in nominal terms, total pay increased by 2.1%.

This means that real wages rose by 2% compared to the official inflation measure or a bit over 1% if compared to the Retail Prices Index or RPI. These were a little better than last month’s but we get the full picture from the chart below.

It is the latter dip which concerns George Osborne as there were hopes of wage growth persisting especially from those who persist in believing in the “output gap” mirage. Added to this whilst it is welcome that hours worked has grown that too has disappointed in 2015/16.

13.6 million (1.4%) more than for a year earlier

Whilst the January earnings numbers were better at 2.5% the fact is that they have faded overall since the heady days of last summer and with hours worked only edging higher there are obvious implications for the growth of taxes on income. Also a high for taxes on expenditure such as VAT.

We remain unaware of what is happening to the wages of the self-employed as they are excluded and as I reported it to the Bean Review of UK economic statistics I wait to see if we get anything more than an admittal. Also it would be helpful if we got numbers for median wages as well as the numbers are skewed which poses a challenge for using an average. Those who read the Generation Rent article in the Guardian may have noticed a shameful and innumerate switching between the two concepts for effect.

Economic growth

The impression of UK economic growth slip-sliding away was reinforced by the latest NIESR (National Institute of Economic and Social Research) forecast for economic growth.

Our monthly estimates of GDP suggest that output grew by 0.3 per cent in the three months ending in February 2016 after growth of 0.4 per cent in the three months ending in January 2016.

It looks as though December was a particularly bad month for some reason but the general trend now seems to be for 0.4% growth per quarter.

The problem with Sofa Economics

The slowing of the UK economy poses various problems for the Office of Budget Responsibility. The first is that as ever it did not predict it! Indeed it is as poor on this front as the Bank of England almost as if the same group of people are responsible. Oh hang on! Anyway there is another problem shared with the Bank of England and it concerns the meaning of the word “independent”. You see last November the OBR conveniently found this down the back of its sofa.

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.

These totalled some £34 billion over time which beats the occasional pound coin I find down the back of my sofa. But as their fantasies boomed the economy slowed which gives the Chancellor and the OBR’s credibility a double=whammy effect.

It is way past time to scrap the OBR which is an example of a jobs for the boys ( the main 3 are men) Quango. A bit like the Money Advice Service. From the BBC.

The Money Advice Service (MAS), which has provided financial and debt advice to consumers since 2010, is to be abolished, the BBC understands……

One study commissioned by the Treasury found that few members of the public had even heard of it.

Some real austerity

This subject has one of the longest entries in my financial lexicon for these times and I note an addition from Ed Conway today.


Kind of amazing: there are more people working in central government today than before austerity.

This needs to also be cross referenced into the “Up is the new down” section as well. Also he goes on to point out that it is local authority employment that has been hit although care is needed as for example in Battersea Park the same jobs are now done by the same people as private company employees.

However there was an extraordinary number tucked away in this chart from RBS earlier, can you spot it?

They pretty much miss it but it is debt interest which has barely changed over the period. As our national debt has surged by around 27% of our annual GDP bond yields have plummeted giving governments quite a boost in terms of public finances. That presents them with a problem as whilst they want to take the credit if they keep it quiet they have some “free” spending!

We sometimes discuss households being unable to cope with a rise in interest-rates well what about governments?


Today the Chancellor finds himself between a rock and a hard place as a slowing economy combines with him and the OBR having joined in with Earth Wind and Fire.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true miles away

As he has announced some minor spending increases he needs to find more revenue. The UK’s establishments campaign for institutionalised inflation has already been boosted by the plan to increase insurance premium tax for the second time in only 8 months. Also along the same lines an increase in fuel duty must be tempting with oil prices where they are. Each 1 pence increase raises around £500 million. Speaking of inflation a friend of mine did the St.Moritz (ski) marathon at the weekend and found himself paying £80 for a pizza in a restaurant that in the picture looked distinctly average! Remember there is no inflation…..

Meanwhile we have for this series what is peak Shaun so far.

well done, you are ranked #18 on this week’s UK & Ireland economists top 100

Sylvia Anderson

Many of the programmes I watched as a child were the product of the imagination of her and Gerry Anderson. My particular favourites were Thunderbird and UFO. Should we require someone to fly one of the Interceptors from Moonbase I am always available. After all as the Bank of England only meets 8 times a year now I could potentially do both jobs. RIP Sylvia.






16 thoughts on “The ghosts of Budgets past will haunt George Osborne today

  1. There was an extra day in Feb, so does this not mean like-for-like contraction?

    Carney sings to Lagarde, with Yellen looking on:

    • Hi therrawbuzzin

      An interesting point which should be captured by the working day adjusted numbers if not the seasonally adjusted ones. I have just checked and there was an extra working day in 2016.

      The subject is on my mind as the US Consumer inflation numbers today had a rocket up in apparel inflation or clothing to us. The numbers are being questioned and it reminds me of the UK back in 2010 albeit in the opposite direction. So as ever much to consider….

  2. Hi Shaun

    At the end of the day GO presides over a low productivity ( and getting lower), low growth ( and getting lower) and high debt ( and getting higher) economy in the latter days of the economic cycle to which the Budget has virtually no relevance. Add to this the formidable secular challenges of demography, automation and globalization and you have a situation which is hardly conducive to achieving a surplus by 2020 or, for that matter 2030. The fiscal charter is a joke, indeed worse; an irrelevance, a distraction from these far more substantial issues. This is Economics 101.

    As Ambrose Evans- Pritchard reminds us in the DT today “sticky” inflation in the US is going up at a fair rate of knots and this may lead the Fed to tighten as per the programme, going against all the conventional wisdom for 2016. As the Fed goes would we be far behind? As discussed here last week the persistence of services inflation and the disappearance of the oil price effect may cause UK inflation to rise quite sharply and yet the BOE still sits on its hands. It may wait until it sees the “whites of the eyes of inflation” before it acts but it may be far more difficult to “look through” a high inflation this time than it was in 2011.

    If interest rates do go up then this will really put the proverbial cat amongst the proverbial pidgeons; we have become a debt based economy dependant on the price of debt; if this price goes up then the economy will tank. In this case it will not only be the budget and the fiscal charter that goes but GO himself. You will not find me shedding tears.

    • Yep Bob, the price for stopping the bust (Banks, Businesses, Households) from actually going bust will be high. Very high.

  3. Hi Shaun
    Still writing from the ‘the land , indeed state, of the Donald’, you will have to excuse me from being more interested in the Fed’s decision today than George’s fiddling. I previously thought the next rise would be in June, but latest numbers could give figleaf for another rise today. In any event its likely the rises will happen quicker than most commentators still expect.
    If oil prices hold up , the Fed’s actions and inflationary effects will force BoE’s hand. And just in the nick of time!

    • Hi JW

      I was interviewed on Share Radio yesterday and said that there was a small chance today but that Janet Yellen was very risk averse so it was much more likely to come later. I would have posted the link but I haven’t got it yet. also there were a lot of questions on Japan which I thought marked a change of emphasis.

      Today’s CPI in the US has seen the headline garnering “deflation” tweets and media comment but underlying it had services inflation of 3.1%. Now as the goods disinflation wears off as is on the cards the headline will start to head higher and if you wait you will be too late.

  4. Great blog Shaun, as usual.
    Justin Trudeau and the federal Liberals also promised during the 2015 election campaign to keep the debt-to-GDP ratio falling every year that they were in office, and to bring the budget back into balance by 2019-20, just like George Osborne. They also promised that their deficits would never exceed CAN$10B. (For the first nine months of 2015-16, the Harper government left them with a CAN$3B surplus.) In advance of his budget Finance Minister Bill Morneau has already announced that the 2016-17 deficit will greatly exceed CAN$10B. Now TD Economics has forecast that the debt-to-GDP ratio, which was 31.0% in 2014-15, will exceed 36% by 2020-21.
    All debt-to-GDP ratio forecasts are critically dependent on forecasts for nominal GDP. Optimistic forecasts of NGDP growth will see the debt-to-GDP ratio exceed the target if there isn’t enough growth in the GDP deflator even if real GDP growth is as forecast.

    • Hi Andrew and thanks

      I have a few thoughts for you.

      1. When debt to GDP ratios start slipping they have a tendency to go further than people think. This is a danger for Canada should the commodity boom continue to be replaced by more of a bust.

      2. Actually total debt and liabilities are more of an issue. It was Ireland which rammed this home as it came into the credit crunch with a very low debt to GDP ratio ( low 20%s) but private debt was high. So you need to look at private debt and the banks as well for a fuller risk profile.

      3. Bond yields are low now but Mr. Summers and his ilk seem to forget that they are unlikely to be this low for ever as cycles change or as a posted put on here a week or two ago “Spinning wheels” by Blood,Sweat and Tears.

  5. Hi Shaun,

    May I take a bullish position and say that I hope we have yet to reach “Peak Shaun”?

    Therawbuzzin has already spoken up for Stingray so I’ll content myself with a mention of Captain Scarlet, and further content myself with reminiscences of the Angels.

    • Hi Jim M

      Thanks for the good wishes and also the reminder of the Angels. Also as a child I had a dinky toy model of an SPV which my grandfather bought me.Little did I know that a different form of SPV was on the cards for my attention!

  6. hello Shaun,

    a sugar tax – oh not again – thought the bowl of pentunias

    well what ever figures MSM print from HMG we know on thing for sure – they’re wrong !

    Ang GO is more of a muppet than Supermarionation ! like that futristic UFO series intro with of all things, a glofball typewriter ! about sums it up – all flash and futurelooking but in reality just old tech ……

    in the mean time we have more give-a-ways for company tax , atleast he resisted petrol – gonna go up anyways 😉

    and a nod to the fact incomes needed a boost as companies hold onto wages – PA goes up
    but then , we’re still in the debt mire

    how about cancelling Uni tax ?


    PS: so its a corn tax next ? oooh-err bettery watch out for popcorn prices

    glass tax
    phone tax
    clock tax
    so lets have a poll tax again !!

    • Hi Forbin

      I expected more taxing news so I guess the Brexit issue has got him worried and trying to sugar coat everything. As to corn can’t they make sugar from it?

      Unless they can get a lot more tax from companies it all seems like Wishful Thinking to me. So everything is worse yet we still have a surplus in 2020?

  7. Ken Clarke was the last chancellor to impose cuts adequate to create a surplus. Gordon merely inherited this and rode a massive real estate boom – which raised stamp duty in the short term andcreated generation rent over the longer term.

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