Today gives us a little more insight into Britain’s economy post the EU leave vote as we get the chance to peruse the public finances for August. However already today we got an indication of how the world has changed. This is because in fiscally profligate Japan we saw the Bank of Japan promise this.
The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent).
So the Japanese government will be able to issue ten-year bonds for nothing and if there was anything to the accompanying rhetoric it will likely do very well.
an “inflation-overshooting commitment” in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2 percent and stays above the target in a stable manner.
Should the Bank of Japan manage anything like this then the bonds will be very poor value for ordinary investors meaning that Mrs. Watanabe should stay clear. That is of course assuming she believes all this as of course the Bank of Japan has promised rising inflation without much success for the last decade or two. Also she may note this.
With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline.
At this point it looks rather “same as it ever was” with added rhetoric! Especially if you believed that the Bank of Japan was on its way to infinity and beyond already.
Oh and there was as ever a present for the banks.
The remaining 2.7 trillion yen will be used for ETFs that track the TOPIX.
When I worked out in Japan some years ago banks were 32% of the TOPIX index but only 8% of the Nikkei 225 index. I am sure much has changed but you get the idea.
Perhaps the Bank of Japan was worried by the fall in the share price of Deutsche Bank yesterday.
Bank of England
It too is involved in an operation to reduce what its government pays on new or refinanced debt and only yesterday it spent some £1.17 billion on long and ultra-long Gilts. Due to the current “tantrum” in bond markets it was buying some of the ultra-longs some 8 points below where it has bought them in this phase of QE. But even so some £91 million was purchased of the UK’s longest conventional Gilt which runs to 2068 was purchased at a yield of a mere 1.35%.
The UK Government
The new Chancellor Phillip Hammond has already told us that he will not wear the same austerity hair shirt as his predecessor George Osborne. Although of course some caution is required there as Chancellor Osborne always seemed to be 3/4 years away from a public finances surplus wherever you started from!
However we were promised this in late July. From the BBC.
The new Chancellor of the Exchequer has said he may use the Autumn Statement to “reset” Britain’s economic policy.
At the start of a trip to China to strengthen post-Brexit business ties, Philip Hammond said he would review economic data over the coming months.
He added that the Treasury will act “if we deem it necessary to do so”.
We now know that the Autumn Statement will be on the 23rd of November but we have been told little more. My view is that if lower Gilt yields persist then any politician would find the urge to spend irresistible but as to how much we will have to wait and see. All we have so far are some guarantees for farmers and scientists and a promise of more spending on houses.
The Big Picture
This was of a disappointing performance towards a surplus in the UK public finances. After last month’s figures for July we were told this by the Office for Budget Responsibility.
Meeting our March EFO forecast for PSNB in 2016-17 would require it to fall by £19.8 billion over the full financial year. A third of the way through the financial year, PSNB was only £3.0 billion lower than last year.
This has been pretty much the pattern for the UK even in its better phase for economic growth which began back in 2013 where the improvement in the public finances has never quite matched the improvement in the economy as measured by GDP. I think we see yet another example where we should also look at GDP per capita or per person for a guide.
Also caution is required with the OBR as back in the days of the Coalition Agreement it told us that the average Gilt yield would be 5.1%. It is like the episode in Star Trek when Captain Kirk enters an alternative universe isn’t it?
The headline news was welcome.
Public sector net borrowing (excluding public sector banks) decreased by £0.9 billion to £10.5 billion in August 2016, compared with August 2015.
However in spite of the relatively good news for August we are behind forecasts still.
Public sector net borrowing (excluding public sector banks) decreased by £4.9 billion to £33.8 billion in the current financial year-to-date (April to August 2016), compared with the same period in 2015.
It shows how hard it is to make progress as central government spending in the fiscal year so far up 1.3% compared to last year’s and revenue is up 4.4%. The main player in the revenue rise has been the changes to the rules regarding National Insurance.
social (National Insurance) contributions increased by £3.6 billion, or 7.8%, to £49.7 billion
The numbers were boosted by a rise of 8.2% in August when all taxes on income were strong as Income Tax rose by 12%.
Interestingly in spite of the lower bond yields and indeed RPI inflation ( for index-linked Gilts) this happened in the fiscal year so far.
debt interest increased by £1.1 billion, or 5.1%, to £22.5 billion.
The National Debt
Here is the headline figure which favours the UK.
Public sector net debt (excluding public sector banks) at the end of August 2016 was £1,621.5 billion, equivalent to 83.6% of gross domestic product (GDP); an increase of £52.0 billion compared with August 2015.
Here is the more internationally comparable Euro area version.
Maastricht debt at the end of March 2016 has been revised upward by £2.7 billion to £1,651.9 billion (equivalent to 87.9% of GDP).
There are several things we cab draw from these numbers. Firstly we have another number suggesting that the initial post Leave vote economy was doing okay. Of course we have a long way to go but those who predicted a plummet face strong receipts for taxes on income in August. Next we have the familiar rendition that whilst these may be good monthly number we are not doing so well if we look at the fiscal year so far.
However in the new world of lower bond yields we are left with the question of hos much this matters now? At least to politicians who seem able to get “independent” central banks to bend to their will in the manner of Uri Geller and provide them with the ultra cheap funding of their dreams.