What do the UK Public Finances tell us about the Autumn Statement?

Today brings the UK’s latest public finance data which allow us to see the state of play before tomorrow’s Autumn Statement by the Chancellor. The Financial Times could not wait and told us this at the end of last week.

Philip Hammond will admit to the largest deterioration in British public finances since 2011 in next week’s Autumn Statement when the official forecast will show the UK faces a £100bn bill for Brexit within five years.

Actually some of the changes are nothing to do with Brexit as we learn as we move on from the click bait style headlines.

The Office for National Statistics has changed the way it measures corporation tax receipts, leaving a hole of almost £5bn in borrowing in 2019-20…….Since the Budget, the government has announced less stringent work capability tests for the disabled and a slower introduction of universal credit, which jointly add almost £5bn to borrowing over five years.

But more fundamentally I note this.

The deterioration in the outlook — which is still a forecast and highly uncertain

Let me introduce to you the first rule of OBR club as it is mainly the forecasts of the Office for Budget Responsibility which are being used here.

The OBR is always wrong

The new member Professor Sir Charles Bean has already established his full credentials to join such a club. As you see our establishment grandee Charlie was brought in to sign off HM Treasury’s report that UK GDP would be in the range of -0.1% to -1% in the quarter after an EU leave vote. Instead our very own Mr.Bean saw it grow by 0.5%.

Also I have regularly written on here that I never believed George Osborne ever had any intention of achieving this.

Instead of a surplus in 2019-20, as his predecessor George Osborne had promised,

If we move to what we can actually predict then higher inflation from the lower value of the UK Pound poses a danger for UK economic growth in 2017. Although of course it may also boost tax revenues as for example VAT is collected in nominal and not real terms, or fiscal drag in action.

What will be announced?

One area that seems to have attracted the support of the Prime Minister is a cut in the tax on companies or Corporation Tax. The UK already has cut the rate in recent years to 17% and she hinted at a cut to match the rate indicated by President-Elect Trump of 15%. This seems to be an area where there has been something of a race to the bottom as I note that Hungary has announced a rate of 9%. I think we are likely to get more promises here rather than a cut to 15% but let’s see.

Already we have seen the Prime Minister announce this.

substantial real terms increases in government investment worth £2 billion per year by 2020 for research and development,

We have seen a steady stream of such announcements although I note the by 2020. Also I note that these days R&D spending goes straight into the GDP numbers without any regard for whether it actually produces anything.

As to the total I expect a few grand announcements but for the actual impact to be relatively small, that seems to have been the pattern so far anyway.

Gilt Market Problems

Care is needed here as the levels at which the UK can borrow remain historically very low. The relevant rate here is the 30 year yield which is just over 2% (2.03%) compared to the double-digits I have worked with. But it has risen recently as it tracks global yield changes and so may have calmed the fiscal easing plans of Theresa May’s government.

Also it has posed a problem for the “Sledgehammer” of Bank of England Chief Economist Andy Haldane as some yields have gone higher than before the EU leave vote. That never happened in his Ivory Tower forecasts where the extra over £30 billion of QE bond buying saw him emerge triumphant. Oh and the recent Bank of England claims that distributional effects of QE were nothing to do with it collide with this from Credit Suisse via the Guardian today.

Credit Suisse finds top 1% of richest Britons own 24% of nation’s assets

Today’s data

As you can see below the numbers were rather good.

Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £4.8 billion in October 2016, compared with October 2015.

If we drill down to the detail then the higher receipts (5% if you strip out receipts from Bank of England QE) exceeded higher spending (2.2%) but we could put it more simply as headline writers were trolled by this.

Corporation Tax increased by £1.7 billion, or 23.6%, to £9.0 billion

So if we look at the expenditure growth we see that the suspicion that the new government was deliberately spending more has faded a bit.

The trends

They were improved by the October numbers but we remain in a situation where progress has become rather slow.

In the financial year-to-date (April to October 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £48.6 billion; a decrease of £5.6 billion, or 10.3% compared with the same period in 2015.

Of course the first rule of OBR club told us that the UK was not going to borrow £55 billion but it is only October so we seem set to cruise by with some momentum. Overall receipts are doing well and the October surge meant that Corporation Tax is some 8.8% up. But some care is needed as higher employee national insurance contributed to it being up 8%. Also how long can this keep rising?

Stamp Duty on land and property increased by £0.5 billion, or 8.0%, to £7.1 billion

Slightly more surprisingly Stamp Duty receipts on shares rose strongly as well.

On the other side of the coin spending grows but more slowly and as I pointed out last month it is hard not to have a wry smile as this driving UK government spending higher.

along with subsidies and contributions to the EU,

Should current trends persist then the factor below will become a bigger issue.

debt interest increased by £1.6 billion, or 5.6%, to £30.7 billion;

So far the change will representing higher inflation from the Retail Price Index and its impact on index-linked Gilts.

The National Debt

There is also an irony here as George Osborne went to so much trouble ( including manipulating the numbers) to get this.

This month, debt as a percentage of GDP fell by 0.5 percentage point compared with October 2015. This is the fifth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than net debt excluding public sector banks.

Poor old George as all his planning provides a warm glow for his successor. Mind you I mean poor old George figuratively as of course at around £30,000 a speech ( BBC figures) he seems to be doing rather well.

Comment

If we look back we see that throughout the credit crunch the UK Public Finances have disappointed. So we should not be surprised that 2016 has set out in that pattern although October’s numbers have helped to improve the picture. If we look deeper then there is a hint of concern for the UK economy here.

Income Tax-related payments increased by £1.8 billion, or 2.0%, to £90.0 billion

Maybe the changes to Personal Allowance have held in back a bit but it looks a little weak to me. Of course as we move to the national debt it is the massive trend to lower bond (Gilt) yields which have made all of this affordable.

Moving to the Autumn Statement I am expecting more heat than action which is not of course that different from normal! But due to the change of government there will be something they consider to be eye-catching.

One Million Hits

It is always nice to cross such thresholds and I never dreamt of such numbers when I started. Actually it is the comments section which has been the real success here.I do not mean just the numbers although 13,700+ is something to be proud of, I also mean the quality which continues to be outstanding. It helps keep me going when I note many blogs falling by the wayside so as Jams ( Just About Managing) seems set to be the acronym of the Autumn Statement let me offer some Techtronic.

Pump up the jam, pump it up
While you feet are stompin’
And the jam is pumpin’
Look at here the crowd is jumpin’
Pump it up a little more
Get the party going on the dance floor
Seek us that’s where the party’s at
And you’ll find out if you’re too bad

 

 

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33 thoughts on “What do the UK Public Finances tell us about the Autumn Statement?

  1. Hi Shaun
    Congratulations on seven figures
    and rising.
    As for the accuracy of the MSM and
    the OBR I think that it will be the same as it
    ever was but although I am comfortably numb
    with it I will always look on the bright side of life☺

    JRH

  2. Yes congratulations on the seven figures and many thanks for your continuing efforts to raise awareness of many issues that the MSM ignore.

    On today’s subject it does seem as if the powers that be are lining up Brexit to take the rap for the fact that our first budget surplus is going to get pushed back….again.

    It’s little to do with Brexit, which may actually reduce some govt expenditures,more to do with a continuing belief that the way out of a debt bubble is a bigger debt bubble.

    We’ve had social spending that is way out of kilter with our ability to fund it for far too long.I’m all in favour of a welfare state and NHS but sustainability should be at it’s core.

    • Hi Dutch and thanks

      The mythical budget surplus was always 3/4 years away from where we were/are. We were supposed to have one now. Opponents of Brexit had something to bite on for once today with the income tax receipts I pointed out but they seem to have missed it.

      • As an opponent of Brexit I fail to see how a slow increase in income tax receipts would be attributable to Brexit. More likely attributable to newly created low paid/part time jobs but certainly nothing to do with Brexit. For Brexit created problems look to your impending energy price increases over the next couple of months.

  3. Love it!
    The change in proven-to-be-inaccurate predictions means a huge hole in our finances!
    You could not make it up…except…well…actually they have.
    The economy can be either boom or bust, at any given time, it just depends on the motivation of the establishment.

    • Hi therrawbuzzin

      The one real change so far has been the lower value of the UK Pound. The establishment forecast many other changes but the truth is that so far the UK economy has sailed on mostly regardless. Next year will be a problem because of higher inflation that is what we know and it gets you nowhere near a missing £100 billion.

  4. George gets around £30,000 a speech ?

    money for nothing and your checks for free !!

    God , who in their right mind would pay this bozo so much , eh , don’t tell me his running partner was a certain Mr Brown ……..

    Forbin

    PS: thats a lot of popcorn !

  5. Hello Shaun

    so ….debt interest increased by £1.6 billion, or 5.6%, to £30.7 billion;

    and thats with a base rate of 0.25% , ok do a nonminal 3% base rate and

    12 x 30.7 = £368.4 Billions

    2017 projection on HMG spending is £784 billion pa
    total UK public revenue is expected to be $716.5 billion,

    uh oh

    At Budget time in March 2017: The UK National Debt is estimated to be £1.64 trillion.

    The difference between spending (including capital expenditure) and revenue is estimated to be £67.6 billion. (2017)

    oh deary me !

    IR will not be rising anytime to normal levels in the next 10 years or we’re bust (!)

    Inflation ? 18 Oct 2011 – The rate of Consumer Prices Index inflation rose to 5.2% in September from 4.5% – CPI is much unloved now……

    nobody did in BoE anything then – remember that when “Brexit” is blamed , we didnt vote then you know.

    Forbin

    • Fortunately for the govt. it’s not like that.
      Most govt. bonds are sold with a set interest rate, set maturity date, like bank bonds.
      The rest, afaik, vary with inflation, rather than base rate.
      Interest rates may have implications for future debt issue, and rolling over, but no big effect on existing debt.

      • Yes, and I will be very disappointed if Hammond does not build Mways, housing, trains and planes. The streets are grid-locked productivity is plummeting whilst many “JAMs” are literally living in bushes.

        Assuming he stays all, lets not rock the leaky over-debt laden boat we then we are looking at a miserly continuum since I think pressure on IR’s will be upwards. If that does happen then Hammond will never have had a better opportunity to invest.

        I hear he has an accounts mind so grey and miserly it will be.

    • A 15% rate is reasonable, but the problem comes with deductions and exemptions. According to the NY press, the soon-to-be tax dodger in chief hasn’t paid federal tax in 15 years. Using lossses that his banks subsequently wrote down. That is quite a scam, to claim deductions on a loss your lenders made.

      The problem is that only the little companies are paying tax, the 0.1% are freeloading on deductions.

    • UK debt has an average maturity of 15 years, so back of an envelope calculation 1/15 x national debt excluding index linked gilts x increase in coupon annualized (coupon is interest payment(s)). For index linked, multiply sum of index linked issued * RPI as percenage will give approximate cost.

      Note that index linked costs jump once for a big rate increase, but the treasury has to roll over roughly 1/15th of the national debt every year -> rolling over at higher rates means incremental jumps in costs every year.

      The big nasty surprise of rising yields will be dramatic falls in the values of pension funds. This could quickly end in tears.

    • .The coming inflationary surge is linked to:

      1. Money supply last year.
      2. Growing inflationary pressure in services throughout 2016.
      3. Increasing costs of commodities like gas coal and oil due to a strengthening dollar AND a weakening £ directly due to Brexit as the £ collapsed the day after the result and then had a further downward push courtesy of the Carney cut to 0.25%.

      Brexit has it’s fair share of blame to take. It is naive to put it mildly to think that Brexit has nothing whatsoever to do with anything viewed as bad but must be the only factor causing anything good to happen.

      • On Brexit, May is on a hiding to nothing. Should have told Boris and Nigel to go negotiate a deal, which will be subject to a second referendum. Which Farage couldn’t do – he is all talk, to be blunt – all lies. Just look at the NHS 350 million…

        On inflationary surges – predicting the timing is difficult. An inflationary surge will probably accompany a sterling slide/collapse. When international lenders start losing confidence in your willingness/ability to repay they will sell off both causing both rising yields and depreciating currency. This is a nasty double whammy. The bond vigilantes are currently asleep at the wheel – this won’t last for ever.

        PS. Japan is insulated, because much of their bonds are held domestically.

        • We kind of disagree, inflation was coming anyway because of money supply changes last Autumn and through this year. The money markets would see this coming and automatically start asking for more yield. Commodity price collapses are due to start falling out of the inflation index too and there has been some upward pressure on commodities but I don’t expect them to go very high in the next year.
          This would all happen independently of Brexit.

          Brexit is another big problem that has really helped the devaluation and caused mass uncertainty which leads into your international lenders losing confidence comment. My worry is that the EU politicians don’t care how much it costs them to force a hard Brexit and hurt the UK to serve as a lesson to any other EU countries thinking of leaving.

          Noticed how Boris and Trump could be brothers?

  6. Hi Shaun,

    Many congratulations on reaching your 7-figure milestone and long may your upward trajectory continue.

    As for the economy, its state and our understanding of it I can do no better than quote therawbuzzin above …

    The change in proven-to-be-inaccurate predictions means a huge hole in our finances!
    You could not make it up…except…well…actually they have.

  7. Congratulations from me too! Always look forward to reading your latest blog
    TPTB can only tinker at the edges to reduce this level debt and interest payable. All they can do is try to create an impression that something is being done, when in fact it’s all out of control.

  8. Congrats indeed.
    Can’t think that Mr Bean should be taken seriously or any other of the Treasury forecasters. But Hammond is stuck with them and will probably listen to them and makes his budget based on their recommended figures.

    • Hi deanshangercalling

      They could go for tax increases but I think would be more likely to raise National Insurance than Income Tax. Of course it is semantics but it would be badged as paying for the NHS when of course it is not specifically paid for. As to Council Tax then could redo the bands to raise money although of course that would be very unpopular in London and the South-East.

  9. Hi Shaun congratulations on your first million but the quality of his blog means it should be many multiples of that figure,thank you.
    In 1971 the national debt was around £33B it is now £1.6T so 48 times what it was 45 years ago.
    The average wage in 1971 was £2000 in 2016 it is £27600 so just under 14 times what it was 45 years ago.
    That is a significant disparity add in the fact that household debt is now £1.5T and it is clear why the economy is in a downward trajectory,
    This need not have happened this is a failure of Governance by those we have elected to run the economy.
    There is much worse to come,forget the GDP figures of the past we had low household debt and a large manufacturing base then.
    The only doubt is what happens if everyone turns a Japanese and creates money to buy up all their debt,this should be disastrous but amazingly has not actually caused an economic collapse in Japan thus far.
    They will try to eliminate cash this means totalitarianism and should be resisted by all legal means..unfortunately to many people have already been brainwashed by contactless cards,so will fail to see the danger of a cashless society until it is too late.

  10. Regarding corporation tax rates. The headline rate may make for sexy copy in the financial press, but the savvy know that x% of nothing (a business’s taxable profit after adjustments including tax avoidance measures) is the same as y% or z%. It’s near enough zero. Very few corporations really pay much corporation tax, so offering ‘concessions’ is meaningless. However, that does not apply to SME’s who of course have their own tax regime.

    I assume our PM knows this, the absence of taxable profit in our big corporations, or our branches of those from elsewhere, having been thoroughly aired in recent months.

    • Hi Carys

      You are right, we need to look closely at the tax base before we pronounce too much on the impact of any % changes. The Corporation Tax base has changed a lot as the banks who used to be big payers are no longer and often have plenty of losses to use in the future especially RBS.

  11. “Of course the first rule of OBR club told us that the UK was not going to borrow £55 billion but it is only October so we seem set to cruise by with some momentum”

    Then again the treasury forecast year end PSBR as about £70.4 billion so yer pays yer money and makes yer choice. If the public finance numbers continue improving at the current pace end year PSBR will be circa £66 billion.

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