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
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.
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.
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