One of the features of the UK economy since the credit crunch has been the change in the Public Finances. The initial decision to bail out the banks made the national debt shoot so high that the establishment introduced plan A which is to produce figures without that. Problem solved! However as well as the explicit change there were more implicit ones such as the consequences of the 6.3% contraction in the UK economy which boosted government spending and cut revenues. Fiscal deficits were run and the national debt rose, actually the latter is still ongoing in spite of efforts by Chancellor Osborne to manipulate and adjust the data via sales of bank shares.
In a way the problems of the latter effort, highlighted in a sense by the downgrade of Deutsche Bank to Baa2 by Moodys last night, show a link with the banks one more time. As they have failed to recover ( more bad figures from RBS and Co-op Bank this year) so have the public finances. An odd link in some ways although of course there are direct links such as the continuing staff cuts and deleveraging that is going on. But if we look at the period of recovery in UK economic growth and GDP levels the truth is that the change in the public finances has under performed and been disappointing. Indeed there is one number which provides quite a critique of the progress made.
The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.2%, the highest since comparable records began in 1971……There were 31.58 million people in work, 44,000 more than for October to December 2015 and 409,000 more than for a year earlier.
Under the economic models of the establishment we would now be surging into a land of milk and honey for the public finances. We have been hearing a lot from these same models over the past week or so and there seems to be a lack of humble pie there and instead a lot of certainty.
The Office of Budget Responsibility
Back in June 2010 they made some forecasts about the UK public finances.
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;
public sector net debt (PSND) to increase from 53.5 per cent of GDP in 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;
Actually the new OBR went further.
there is a greater than 50 per cent chance of this target being met in 2015- 16. There is also a greater than 50 per cent chance of it being met a year early, in 2014-15.
If we now leave the TARDIS of Doctor Who we can go to the front page of its website and see what happened in those years.
Today’s release provides the first provisional outturn estimate for the full 2015-16 financial year. Public sector net borrowing (PSNB) was £74.0 billion,
So if we show some mercy and cast a veil over 2014-15 we see that the last fiscal year bore no resemblance at all to what they thought. Indeed they were wrong only a month before.
The provisional estimate for net borrowing in 2015-16 is slightly higher than our March forecast,
This is all in spite of the employment situation being extremely favourable as described above. But the OBR did make a fatal error via the flawed “output gap” theory the establishment loves so much they ignore that it has had something of its own lost decade.
Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.
An extraordinary windfall
This is something that gets very little exposure and if it was a piece of music it would get very little airplay. Indeed the UK has seen two large windfalls and a readjustment. The main one has been the fall in bond or Gilt yields which has made debt so much cheaper to issue. The OBR thought they would average 5.1% now whereas they are below 2%. As this has come at a time when we have not only a lot of debt to issue but also even more maturities to refinance this has given the numbers quite a boost.
Added to this has come the fall in inflation as measured by the RPI which means that index-linked Gilts which are around 22% of UK bonds have been cheaper to finance as well. Between the two an extraordinary windfall has been provided which is mostly silent because of course credit is only for politicians!
Oh and there is the financial reshuffle in the way that the Bank of England still holds some £375 billion of UK Gilts. We pay it debt interest and it gives it back saving politicians a small fortune and in that concept alone meaning it will be with us for a very long time.
What about now?
The problem we currently face is that there have been more than a few signs that the economic recovery phase is mature and may be fading. Not every signal has gone this way as for example last week’s retail sales numbers were refreshing and better. But after economic growth in the first quarter of 2016 we see the NIESR suggesting this has dipped to 0.3% and the Purchasing Manager’s Indices hinting at a further fall to 0.1%.
It is hard not to smile at the UK establishment forecasting a 12 month recession for maybe the first time ever. There were a few replies about 2008 on Twitter until I pointed out that this was post changes not ahead of events. Any such scenario would put a hole in the public finances and let me give you another thought which is a theme of these times. There are many calls for fiscal action around with the most public recently being from Japan at the G7. Well with a fiscal deficit of £76 billion in the last fiscal year – yes the OBR was even more wrong – we see that we have continued to have a fiscal stimulus and if you think that you have to face the troubling issue that it may not be working. Of course the easier approach is simply to cry “More! More” like Agent Smith in the Matrix series of films.
Oh and yes fiscal stimulus is in my financial lexicon for these times.
The headline is both good and bad.
Public sector net borrowing excluding public sector banks decreased by £0.3 billion to £7.2 billion in April 2016 compared with April 2015.
Good that it is lower but bad when you note that in spite of the economic growth we apparently have the progress on the deficit is yet again only minor. If we look back over a longer period we see the revenue growth has been solid.
In the financial year ending March 2016 (April 2015 to March 2016), central government received £633.6 billion in income. This was around 3% higher than in the previous financial year, largely due to receiving more Income Tax, and National Insurance contributions,
In April itself there was a boost from one area presumably due to the changes made to rates there.
social (National Insurance) contributions increased by £0.9 billion, or 9.4%, to £10.0 billion
As well as a consequence of the Buy To Let boom just seen.
Stamp Duty on land and property increased by £0.4 billion, or 46.6%, to £1.3 billion
But this reminds us that the story continues to disappoint as revenue growth seems to affect the overall position by less than we would hope as spending which we might hope would fall in fact has been pretty much constant.
Central government expenditure (current and capital) for the financial year ending March 2016 (April 2015 to March 2016) was £685.6 billion, an increase of £0.4 billion, or 0.1%, compared with the previous financial year.
It would be possible to write a book as to whether that is austerity or not. But perhaps that is as good a performance as we can put up. At the moment the figures are also real figures at least according to the official measure of Consumer inflation called CPI.
The saga of the UK public finances has seen a lot of misrepresentation over the credit crunch era. For example the way that the net debt of the Royal Mail pension fund was booked as a credit and there is the ongoing issue of Bank of England QE. That theme is ongoing and in a way that is perhaps the biggest critique of all as it happens because the UK establishment needs it to. If we were doing well such manipulations and misrepresentations would not be necessary.
Also the forecasts have been hopeless. As the physicist Niles Bohr reminded us.
Prediction is very difficult, especially if it’s about the future.
Let me serve myself a slice of humble pie as back in 2010 I certainly would not have forecast Gilt yields to be here. Except unlike the establishment I take such things with a fair splash of salt whereas they plough on before exclaiming “surprise” later on. Meanwhile the public finances are struggling in spite of the windfalls I have described earlier.
Here is another example of the attempted manipulations as I provide the headline and what you might call world standard for the national debt.
Public sector net debt excluding public sector banks at the end of April 2016 was £1,596.0 billion, equivalent to 83.3% of gross domestic product (GDP)
general government gross debt (Maastricht debt) at the end of March 2015 was £1,601.3 billion, equivalent to 87.4% of GDP
I note you have to look a long way down the release to see the latter larger number! That resonates with me because you see it was put on the front page around a couple of years ago on my advice. So it would appear that someone did not approve of that…..