The UK economy gets a fiscal boost ahead of the Brexit referendum

The UK Public Finances have become something of a political football during the Brexit referendum campaign. The Chancellor of the Exchequer George Osborne has been quite vocal on the subject. From the Business Standard in India.

“I would have a responsibility to try to restore stability to the public finances and that would mean an emergency budget where we would have to increase taxes and cut spending.”

Osborne warned that leaving the EU would create a 30-billion pounds ($42.4-billion, 37.9-billion-euro) hole in national finances.

In response, the basic rate of income tax would be raised, inheritance tax would be hiked, and the budget for services including the National Health Service (NHS) would be cut, he said.

Wasn’t the 2010 Emergency Budget supposed to be one to end future emergency budgets? If we look back we were told this about now.. From the Office for Budget Responsibility which had back then just been created by Chancellor Osborne.

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;

If only! If only! Anyway today’s figures will allow me to see how badly we have done on that front but we can say the objective below is in tatters.

the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16.

The whole “cyclically-adjusted” game is mostly a political ruse and frankly is more like a cynically adjusted number. The cycle is adjusted again and again to find a convenient phase. But the silence on the subject these days is rather eloquent.

Favourable trends

There have been two major trends which have benefited the public finances which were not foreseen. Ironically the Chancellor has tried to take credit for the one which has very little to do with him and said much less about the one the UK establishment has driven. The latter is the boom in revenue from Stamp Duty and taxes around the boom in house prices which began after the Bank of England Funding for Lending Scheme lit the blue touch-paper for the housing market (my subject of yesterday). It went from £6.1 billion in 2011-12 to £10.7 billion in 2014-15 and the latest Buy To Let boom has given it another push higher in the two months of this financial year so far.

Stamp Duty on land & property increased by £0.4 billion, or 21.0%, to £2.1 billion

The other force has been the fall in debt costs. By this I mean the way that UK Gilt yields have fallen making it much cheaper for us to issue each unit of debt and also the fall in even RPI (Retail Price Index) inflation which means a lower annual cost for our index-linked debt as well. Back in June 2010 the UK OBR predicted that average Gilt yields would be 5.1% when in fact they are more like 1.5%. Hapless and it almost seems cruel to point it out, but what it does teach us is the lack of value in such forecasting in these times. However in spite of all the extra borrowing the UK has undertaken this is the state of play in the latest full financial year,

debt interest decreased by £0.3 billion, or 0.7%, to £44.9 billion;

More Disappointment

Whilst we had an improvement in the public finances in May it was nothing to write home about.

Public sector net borrowing (excluding public sector banks) decreased by £0.4 billion to £9.7 billion in May 2016, compared with May 2015.

When you consider that the economy has been growing those are thin pickings and even they disappear if we look at the financial year so far.

In the financial year-to-date (April to May 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £17.9 billion; an increase of £0.2 billion, or 0.8% compared with the same period in 2015.

We find ourselves mulling a theme of this blog which is that what people claim as austerity often turns out to be a fiscal boost.

Central government expenditure (current and capital) for the financial year-to-date (April to May 2016) was £119.7 billion, an increase of £2.4 billion, or 2.1%, compared with the same period in the previous financial year.

This is also a real terms boost of nearly the same size according to the UK establishment as of course they are the people who are so keen on the CPI inflation measure which tells us we have only a smidgen of inflation.  So we are in fact seeing something of a fiscal boost which is odd when we see people asking for a fiscal boost. What they mean is more of a fiscal boost! These days austerity for some means slowing the rate of growth of government spending rather than cuts.

If we move to the revenue side for the fiscal year so far we see something that has become familiar.

Stamp Duty on land & property increased by £0.4 billion, or 21.0%, to £2.1 billion

We will have to see how that goes as we look at the Buy to Let sector but there is a troubling number below.

Income Tax-related payments increased by £0.3 billion, or 1.4%, to £23.6 billion

Perhaps it has been affected by the rise in the tax-free Personal Allowance. If so we will find out in the months ahead.

Then and Now

If we look at the 2015/16 financial year we can compare it to what we were promised back in the day. So here we go.

In the financial year ending March 2016 (April 2015 to March 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £74.9 billion; a decrease of £16.7 billion, or 18.2% compared with the previous financial year.

So we made some progress but not a vast amount considering the economic growth and good luck to those who can turn that into a “cyclically-adjusted” surplus! Even Sir Frank and Sir Humphrey from Yes Prime Minister would be defeated by this.

The consequence is a much higher national debt than forecast.

Public sector net debt (excluding public sector banks) at the end of May 2016 was £1,606.9 billion, equivalent to 83.7% of gross domestic product (GDP); an increase of £49.6 billion compared with May 2015.

These are the numbers for May which should of course benefit the official view as it is supposed to be shrinking now and that has been forecast on a variety of occasions.

Would it be rude to point out that we hope that people do not spot we use a convenient as in lower definition for the size of our national debt?

general government gross debt (Maastricht debt) at the end of March 2015 was £1,601.3 billion, equivalent to 87.4% of GDP; an increase of £79.9 billion compared with the end of the financial year ending March 2014


We find that the UK Public Finances continue to disappoint and the theme here sings along with the Whispers.

And the beat goes on
Just like my love everlasting
And the beat goes on
Still moving strong on and on

A surplus is in sight around 3/4 years ahead but when we get there it turns out to be a mirage in a desert. After 3 years of solid economic growth and a beneficial reduction in the cost of our debt to boot the excuses are thinning out to say the least. Even the rise in National Insurance has not turned the trend.

Social (National Insurance) Contributions increased by £1.5 billion, or 7.9%, to £19.9 billion (fiscal year so far )

Mind you as something’s stay the same others do change. Back in 1992 George Soros cleaned up from a fall in the UK Pound £ as we were ejected from the ERM. These days he does not seem to want to sing the same old song. From the Guardian.

The only winners will be speculators

Or of course he has placed his bets elsewhere.






25 thoughts on “The UK economy gets a fiscal boost ahead of the Brexit referendum

  1. Hi Shaun

    The chances are that it’ll get worse from here on in. Most of the indicators, both here and in the US, have been going south for some time and the slowdown in growth is already happening.

    If we Remain, which I think we will despite my own predilection, then the elite will not be able to blame Brexit and, in my view, things will begin to unravel. Remain is the absolute worst outcome imaginable for both our elite and the EU.

    The EZ is a ticking time bomb and the only unknown is where the trigger point for the blow up will be – probably as always with the banks with, as you have said, DB a prime candidate for poster boy in this respect.

    We’ll never get even a balance by 2020 let alone a surplus; the position will likely be much, much worse and the government will look very green at the gills. especially as house prices may well have fallen significantly be then (18% anyone?).

    • “Remain is the absolute worst outcome imaginable for both our elite and the EU.”

      I think you’ll find for the top pollies that is is the best as they get to do a Tony blair or Kinnock

      Thats why the three main parties are all in favour – to fill their rotten boots with euro gold ….

      eventually they will remember the saying ” all that glitters is not gold” but by then it will be too late

      Even a golden cage is still cage


      “You choose your leaders and place your trust
      As their lies wash you down and their promises rust”

      Going Underground – The Jam

    • “Most of the indicators, both here and in the US, have been going south for some time and the slowdown in growth is already happening.” – No they haven’t and they aren’t!! Happy to take a side bet with you on whether UK and US economies will grow (my position), go sideways or shrink this year , Brexit or no Brexit,(your, dare I say it, pessimistic without evidence to back it up position although I’m happy to look at any evidence you present to back your position).

      Feel free to post back but before you do check these out:

      UK Services turnover going up and up and up –

      UK M1 going up since Autumn 2015 –

      US industrial output improving since Spring 2016, albeit it is still shrinking. The leading indicators in the graph are compiled by the OECD –

      The leading indicators confirm the trend improvement outlined in narrow money here –

      The numbered points on the graph demonstrate the lag between narrow money growth and GDP growth.

      The soft patch in the US (which I predicted last year) is already over, the numbers will improve from June on to year end.

      It’s important to look at forward indicators in addition to past events like increasing unemployment claims and falling job vacancy rates and GDP. .

      and is confirmed

  2. Great blog as always, Shaun. Am I right in thinking that one of the Maastricht criteria for a new member joining the EU is that the general government gross debt to GDP ratio not exceed 60%? Isn’t the UK way north of where it should be if it were outside looking to get in instead of inside thinking about getting out?

    • The Maastricht criteria are for joining the Euro, not the EU. For example, neither Romania nor Bulgaria met those criteria when they joined the EU in 2007 and they still don’t. Same is true of the latest member, Croatia. However, joining the EU implies a political commitment to joining the Euro and some economic evidence of sustained progress towards meeting the criteria in the future.

    • Hi Andrew

      As I an says the rules are applied in the Euro area or perhaps we should say supposed to be applied.

      “The EU Treaty defines an excessive budget deficit as one greater than 3 % of GDP. Public debt is considered excessive under the Treaty if it exceeds 60 % of GDP without diminishing at an adequate rate (defined as a decrease of the excess debt by 5 % per year on average over three years).”

      As in some cases in the Euro area we say supposed to be applied it is then hard to find words for how it works for EU nations. Only in the minds of the European Commission.

    • Hi Anteos and thanks for the link.

      I spotted this bit “Funds for the loan would be limited, so it was unlikely to be around for a long time, he added.” or in other words they had taken advantage of lower bond yields. As to the UK Gilt 10 year yield it has risen to 1.28% so some of the opportunity has gone although before this month we would be discussing being in the zone of record low yields.

      As to negative mortgage rates it is a game of two halves as the pattern as official rates go negative is for banks to take larger margins.

      • Banks taking wider margins would actually be no bad thing (albeit the populist press would accuse them of profiteering). It was the tightening of margins post-2001, which was a key driver in banks getting involved in more risky lending and derivatives, simply to recover that margin.

  3. I love “cynically adjusted” and it’s a far better description of the state of the nation’s finances than its cyclic cousin.

    • Two problems with cyclical adjustment:

      a) How long is the cycle and what is its start point

      b) By how much do you adjust?

      Both are only judged in retrospect – as in Gordo’s Golden rule extending the cycle by 2 years.

  4. hello shaun

    seems every trick in the book ins being thrown at the Brexit campaign . As yoy point out our budget forcasts have been woeful inaccurate to date so to make such a statement as Ozzy did is just crass.

    Look for more male bovine excrement / cotton wool over the next day or so.

    Frankly I wouldnt put it past them to delay the poll for another week or so, then finding an excuse to cancel it !

    economic wise I see the reason to stay in the United States of Europe/ Franko-German Empire as the same as the one for joining the United States of America – with one addition for the USA in that we share a common language and culture………

    Think of Greece , they tried austerity and its lead to more austerity. No way were we going to follow that route so more deficits are baked in

    As for the latter day LMU as the Euro is , well the LMU is history as will be the Euro , But it will take longer to die if we stay with the Empire.


    • Hi Forbin

      Actually there always was more of a case for union with the US and us taking the Dollar as our currency rather than the Euro. As you say common language and currency both also more similar economic positions and behaviour. But it has always been about politics.

      Meanwhile some good news for you on the corn futures front as they have taken a bit of a dive this week. Nearly 8% to below US $4 as I type this. Although all big moves in the agricultural commodities remind me of Trading Places.

  5. Looks like Gideon is a fan of Simple Minds: Promised you a miracle

    “Promised you a miracle
    Belief is a beauty thing
    Promises promises
    As golden days break wondering
    Everything is possible
    With promises
    Everything is possible
    Oh no”

    • Hi David

      Ah yes Simple Minds I recall them which means that his miracle is also a Glittering Prize. Although he will not be keen on this happening to his mathematics and numbers.

      “Shine On, Shine the Light on me,”

  6. UK net contributions to the EU are 10.3 billion. Stopping this should reduce the UK deficit. Does anybody care to explain how +10.3 billion quid equals -30 billion quid ?

    • Yes, the economy contracts, so the revenues to the Exchequer, which are lost exceed the “gain” of the payments not made by £40bn, which is about 6% of total Govt spending.

      • Given the inaccuracy of OBR, BOE and politicians predictions on the deficit, the base rate etc -> it is hard to believe their “contraction predictions” will happen.

        UK has a trade deficit with EU – any contraction hurts the EU more than the UK.

        I’d also expect a Brexit food price reduction caused the the breaking of the evil CAP monopoly. This is good for consumers and good for a food importing country.

        • The failures of forecasting are not relevant – net immigration, Brexiteers’ favourite topic, saw a 20K rise last year, but that was entirely due to 20K fewer leaving the UK.

          Trade would be affected by a contraction, but there is no direct relationship to the trade balance – people will still buy VWs, but not go to the pub/restaurant so often. While there won’t be many tariffs, the mere fact that a lorry has to stop for 5 minutes at a border adds costs – all these costs then contribute to a downturn.

          The CAP doesn’t have much effect these days – and agricultural support is one area where the £350m pw will have to be maintained. We import a lot of foodstuffs not produced in the EU and especially out of season. Bringing goods in from further afield only adds to costs anyway.

        • “– any contraction hurts the EU more than the UK. ”

          Hardly, the value of UK exports to the EU is 13% of UK GDP whilst the value of EU exports to the UK is 3% of EU GDP .

          Admittedly, some countries will be hard hit like Ireland, Cyprus, Belgium and the Netherlands – .

          I would also draw your attention to to the fact that the first 2 on my list of countries hard hit by a contraction are countries with close links to the UK as the uK would be embarking upon a “let’s hurt our friends” mission.

        • …and on the CAP as I’ve discussed with you before. in the event of Brexit I am certain the UK will replace the EU CAP with it’s own CAP which will likely look very similar to the EU CAP.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s