The post EU leave vote UK Public Finances are pretty strong so far

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?

Today’s Data

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.





33 thoughts on “The post EU leave vote UK Public Finances are pretty strong so far

  1. Dear BoJ

    with regards to your price stability target of 2 percent . If you had included real things , like food, fuel and house prices , you would see you have already exceeded that target .

    Please desist in your current majckal thinking as you are looking like you’ve taken too much Prozac.


    • Forbin, maybe I should let Shaun reply to your comment as he has worked in Japan for years, unlike me, but I do know something about their statistics. Actually, the Japan core CPI is remarkable in only excluding fresh food from the all items index; all energy costs are included, including gasoline and fuel oil. Anyway, they are supposed to be targeting the overall CPI, not core CPI.
      For house prices, you definitely have a point. The Japanese CPI still uses a rental equivalence approach to measuring owner-occupied housing in the CPI, so there are no house prices in the index. The Japan Residential Property Price Index was up by 2.3% in May 2016, the most recent month available, so inclusion of house prices would bring the index up.

      • Hello Andrew

        thanks for the update – brief internet search showed no housing component but little on the way food and fuels ( as you point out this was because they are included)

        I’d like the BoE , ECB and FED to have more realistic indicators along the lines of RPI but ofcourse including housing costs tends to be a fudge.

        CPI frankly isnt fit for purpose


  2. Hi Shaun

    Why do people still work when money is free?
    (At least to governments and mega large corporations)
    Fron Japan it looks as though the population never catches on the money has no value.

    or even why do they have to pay for money when so many are given it for free

  3. Hello Shaun,

    Aren’t the BoE, BoJ and Fed magically thinking societies ?

    The spell doesn’t work but no one in the magically thinking society believes it’s because the spell-casting itself doesn’t work.
    It means that the spell wasn’t performed properly.

    Either the priest-economists said the words wrong or they didn’t think the right thoughts

    or there’s some other “thing” needed first…..


    1: priest-economists try harder by speaking louder,more convincingly, more stridently and also use more “majick”

    and it’s always “MOAR!”

    2: the priest-economists regroup and tweak the spell. Maybe instead of “targeting” (another word for “praying for”) a 2% inflation rate,
    we need to “target” a 4% inflation rate or change the magic word “inflation” to “nominal GDP growth” and see if that works any better…

    3: the priest-economists are challenged by a rogue priest in their midst or an alt-priest coming out of nowhere. By “nowhere” I mean
    that the alt-priest is an Other, whether that’s a foreign religion or a foreign geography or a foreign (i.e., non-priestly) caste.

    The alt-priest isn’t about tweaking the spell or casting it louder.

    He’s about doing an entirely different spell but its still a spell

    So what happens? It depends on reality, the bit they are not measuring or cannot bare to think about because its different from
    their “reality”

    Unfortunately reality will always assert itself in the end. even if its a bunch of Generals….


    ( note: I dont regard Shaun as the alt-priest, he’s more of reality check)

    • Hi Forbin

      In recent times our generals have not been doing so well either! Actually that may have been around for a while as I watched a BBC 4 documentary on Churchill’s strategy in the Mediterranean and even Monty had his bad days.

      Oh and later today saw a dose of reality as the Yen rose strengthened through 101.

  4. It strikes me that the BOJ is in a death spiral. Evidently by the end of 2017 it will be the biggest shareholder in 55 of the Nikkei 225 companies. It won’t matter in the end if the market crashes because it will all be owned by the BOJ! After decades of failed policies I am amazed that the ECB etc want to follow the same path!

  5. The Japanese population will fall on average by a million a year between now and the end of the century ( now 128 million – 2099 – 50 million). The aging also means that people spend less in aggregate.

    Why is this a surprise and why do people think that monetary policy can fix such a fundamental issue as a society apparently choosing to extinguish itself?

    • choosing to extinguish itself?

      but 126 million on those Islands is not a long term solution

      neither is 500 million in the SE of England ( as I’ve postulated before)

      growth on a finite planet will stop


        • Who, in the 16th Century, would have even dreamed about Skype?
          Ordinary people like me can talk, and see each other, without wiring, to people in Australia.
          Australia hadn’t even been discovered then.
          Every “Age” has its own technological advancement, whether it be Neolithic or information, which resets the possibilities for growth.

        • Not all innovation is wholely good, my granddad wrote stories about growing up in Battersea, Wandsworth, Westminister during WW1. The coal induced smog was a problem. The early cotton mills in Manchester were very dangerous.

          Good governance is another factor that helps innovation. Innovation stops dead when corruption, feudal over-taxation or banditry stops making innovation profitable for the innovaters. Good governance tries to strike a fair balance between innovators profits and workers wages.

          I see good governance as very important for both social justice and for beneficial technology improvement. (This includes more safety, less pollution, more wealth etc)

  6. I think that our great leaders have pulled off the almost impossible trick of fooling (nearly) all of the people all of the time. This seems to have been pulled off by:
    1. Somehow getting central banks to act as free providers of cash to prop up government spending without the inconvenience of taxing anyone;
    2. Somehow getting central banks to prop up stock markets as well as bond markets, just in case financial experts rumbled point 1 above;
    3. Dealing in trillions, rather than the pathetic billions of the past. I can relate to a million (it buys a house in parts of London), a billion is a bit harder (buys a bit of an aircraft carrier), but a trillion, well who knows?;
    4. Somehow pretending that banks are not bust. Combining point 3 above and this one, did anyone see that Deutsche Bank has $42 trillion of gross derivatives?
    5. Fiddling the GDP figures (imputed rents, anyone?)

    It isn’t going to end well IMHO.

    • Millions billions and trillions…
      Question: How long ago was one thousand seconds?
      Answer: One thousand seconds was 16 minutes, forty seconds ago.

      Question: How long ago was one million seconds?
      Answer: One million seconds would take up 11 days, 13 hours 46 minutes and 40 seconds

      Question: How long ago was one billion seconds?
      Answer: One billion seconds is a bit over 31 and one-half years.

      Question: How long ago was one trillion seconds?
      Answer: One trillion seconds is slightly over 31,688 years. That would have been around 29,679 B.C., which is
      roughly 24,000 years before the earliest civilizations began to take shape.

      • So, if Deutsche Bank offloaded $1 a second of its gross derivative liabilities, it would finally be clear of toxic rubbish in a mere 1.3 million years.
        So, no problem there, then

    • Hi DoubtingDick

      It has occured to me that this may be the Bank of Japans way of supporting the 2020 rhetoric of Prime Minster Abe. He promised an economy much larger by then (20% I think) which can only be nominal GDP via inflation. Japanese worked and consumers should rightly be afraid of that.

  7. An interesting conundrum will arise for the BOJ if it succeeds in driving inflation up (which it probably will given it’s tight labour market, improving global narrow money supply and rocketing Japanese narrow money since early 2016) which is that given it’s new target for the 10 year bond is 0% then it’s monetary policy will become more expansionary as inflation takes hold, presumably this is to ensure that higher inflation is maintained “in a stable manner” as the BOJ puts it.

    I’m fascinated to see if it does a U turn on this policy when the inflation genie escapes from the bottle, which I think it probably will in 2017/2018.

    • Hi Noo2

      it will indeed be interesting if they manage to pop the inflation genie out of his/her bottle. Japan has been very resistant to that in the lost decade era. Also via real wages it is likely to have a contractionary effect.

  8. What tired old thinking from Hammond. Farm subsidies are not necessary, New Zealand stopped farm subsidies in 1984 yet farming businesses still prosper. Iceland has survived over 6 years without bank subsidies. I’ve suggested apartment cooperatives to provide unsubsidised affordable accomodation. If the UK stopped wasting tax money away on stupid subsidy – a balanced budget should be possible. Tax money should go to hospitals, schools, police, soldiers and other necessary public services. Tax money should not be wasted on rentier land owners, banksters or BTL barons.

    • Hi Expat

      You make a good point. The truth is that after all those years of the Common Agricultural Policy many farms have become subsidy junkies. That is completely different to them being necessary.

      I would spend the money on getting us to grow more. The UK has plenty of good produce and yet we import so much food. Some things are of course necesssary as we could hardly grow oranges outside of a heated greenhouse but we could do more.

      • The CAP was, in my recollection, about preserving a way of farming, non-intensive, wholesome (but inefficient) peasant farming, mostly in France. It was not supposed to be a way of subsidising hedge funds, insurance companies and other big business, which bought into farming solely because of the CAP subsidies available.
        It’s the EU in microcosm; even when intentions are good, the aims laudable, it’s a bloated financial failure open to corruption.

    • I did tell you a while ago this would happen as EU vehicles which most disagree with are replaced with very similar UK vehicles, and so the first of my predictions start to be fulfilled and that’s even before Article 50 has been invoked!

  9. Why do we need an inflation target anyway? Has anyone ever achieved it and kept it there for a period? Did it do any good having got there?

    • Hi Foxy

      It was something for central bankers to hang their hats on when money supply targeting failed and for a while it worked. But frankly are we any better off?

      The UK did it for a year or so a while back and I remember Jean Claude Trichet of the ECB boasting that Euro area CPI had averaged 1.97%in his valedictory speech.

  10. We have not done anything yet wait till we trigger Article 50 and we start to cut ourselves adrift,but by then the central bank game will probably be up,the Fed did what they always do …..not this time…maybe next time…….how much longer can their credibility survive?

    Where is Joey Tempest ?…… It’s the final countdown

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