The “Sledgehammer” of Mark Carney raises the UK National Debt

Firstly welcome to the winter solstice and the realisation that the only way is up for the length of the day although the coldest day is not due for a month. Of course I should not forget my readers on the underside of the world who have the benefit of the longest day but not the light prospects! Although the weather should get warmer for a while. As today updates us on the UK Public Finances let us continue in an end of year reflective vein. We can gain some wry amusement from looking back and noting where we were supposed to be now.

It is entirely appropriate that we should on the darkest day of the year pull out the forecasts of the UK Office for Budget Responsibility. Let us go back to the summer of 2010 as it emerged blinking into the sunlight.

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;

There is more.

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;

Plus a coup de grace for this section.

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.

A surplus? Well even the OBR back then could only manage it by imposing an economic cycle. This is a politically inspired wheeze as you see by changing the cycle you can get pretty much any result you want whilst of course reality remains unchanged. As PM Dawn reminded us.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine
Reality used to be a friend of mine.
Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why,
but reality used to be a friend of mine.

Number Crunching

Taken independently, and on the basis of our central forecast, there is a greater than 50 per cent chance of this target being met in 2015- 16. There is also a greater than 50 per cent chance of it being met a year early, in 2014-15.

So that’s 100% +, do I have that right? Anyway let us move on from a world where wage growth is 5% and we are just about to eliminate the current account deficit, I kid you not.

Today’s data

Let us open with a cheery improvement.

Public sector net borrowing (excluding public sector banks) decreased by £0.6 billion to £12.6 billion in November 2016, compared with November 2015.

So we have an improvement showing that the public finances have not collapsed, at least so far, after the EU leave vote. That is of course awkward for the OBR new boy Professor Sir Charlie Bean who signed off an official forecast saying the UK economy would shrink by between 0.1% and 1% in the quarter following a leave vote. You could argue therefore that he was a perfect candidate to continue the past record of the OBR.

If we move to the more reliable quarterly numbers we see a familiar pattern.

Public sector net borrowing (excluding public sector banks) decreased by £7.7 billion to £59.5 billion in the current financial year-to-date (April to November 2016), compared with the same period in 2015.

We are a very long way from the surplus predicted by the OBR! That went to 2019/20 and now seems to have vanished in a puff of smoke. The real point here though is that whilst our deficit continues to decline it is doing so at a slower rate than you might expect as the official economic growth figures turned nearly four years ago.

You can compare the number above with what the OBR told us in March to see that it has retained its skill set.

In the Spring Budget (16 March 2016),OBR estimated that the public sector would borrow £55.5 billion during the financial year ending March 2017 (April 2016 to March 2017).

What is economic growth?

Not this time an existential style discussion what I intend to do is use the revenue and taxes numbers as a guide. After all tax receipts are an actual number as opposed to some of the imputations of GDP. On the face of it we seem to be doing reasonably well.

Central government receipts for the financial year-to-date (April to November 2016) were £421.8 billion, an increase of £17.8 billion, or 4.4%, compared with the same period in the previous financial year.

However we need to take care as the strongest numbers are from National Insurance where some rates were raised this year. But what we might consider the core numbers are not far off what we think economic growth is,especially if we recall that income tax receipts have been negatively influenced by the raising of the Personal Allowance.

VAT receipts increased by £2.5 billion, or 2.9%, to £89.1 billion…Income Tax-related payments increased by £2.1 billion, or 2.1%, to £101.9 billion

So a bit under 3% say as an estimate. Oh and there was a boost from an expected and an unexpected source.

Corporation Tax increased by £2.8 billion, or 9.7%, to £32.2 billion…….Stamp Duty on land and property increased by £0.7 billion, or 9.2%, to £8.2 billion

So we are collecting more Corporation Tax than many would like you to believe although we could do better. Also Stamp Duty per se has been on a bit of a tear.

Stamp Duty on shares increased by £0.5 billion, or 24.4%, to £2.5 billion.

National Debt

There is a little bit of statistical chicanery going on here as the improvement in the ratio compared to GDP has stopped.

At the end of November 2016, the provisional estimate of PSND (Public Sector Net Debt) ex as a percentage of GDP stood at 84.5%; an increase of 0.1 percentage points compared with November 2015.

But in the spirit of the OBR above we have apparently found a new “cycle” or something like that.

At the end of November 2016, the provisional estimate of PSND ex BoE as a percentage of GDP stood at 81.6%; a decrease of 0.5 percentage points compared with November 2015. This is the sixth 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 PSND ex BoE.

One day perhaps we will have PSND excluding debt.

Mark Carney

You may wonder what he is doing here. Well two of his “Sledgehammer” policy decisions from August have increased the UK National Debt.

any private sector corporate bonds purchased will lead to an increase in public sector net debt equal to the total purchase price of the bonds as the bonds are not liabilities of the public sector.

Also this.

By the end of November 2016, the Bank of England had made £5.8 billion of loans through the Term Funding Scheme. These transactions have been financed by the creation of central bank reserves and so will increase public sector net debt accordingly.

Comment

So we find ourselves in a familiar position where the UK fiscal deficit is falling but more slowly than we would have hoped and expected in the circumstances. If we step back there were two decisions which have contributed to this. The largest influence was the so-called triple lock for increases to the basic state pension which has been especially expensive in real terms in recent times due to the low rate of the official consumer inflation number. Also on the revenue side there was the decision to push the Personal ( tax-free) Allowance substantially higher which has held income tax revenues back.

Meanwhile as we review the way that the Bank of England cut Bank Rate into a currency fall we see yet another side-effect. This is that the Term Funding Scheme and Corporate Bond purchases increase the National Debt. This is particularly ill-fated for the purchases of foreign companies like Maersk where they benefit but the UK taxpayer pays.

 

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18 thoughts on “The “Sledgehammer” of Mark Carney raises the UK National Debt

  1. Hi Shaun
    Corporation Tax numbers are encouraging.
    Re ‘number crunching’ ; as we are in the land of casino economics, probabilities are not additive, each role of the dice one year after the next has equal probability. But I think rather than the odds of them being right at 50% each year, a more realistic figure is 0%.

  2. Great article as always Shaun.

    A quick question, do the algols pay stamp duty in their millions of transactions? I know I do, and curse Brown everytime.

    • I’m pretty sure that they don’t trade onshore so no they don’t.
      Surely you wouldn’t expect the elite to pay taxes like us plebs?

  3. Taken independently, and on the basis of our central forecast, there is a greater than 50 per cent chance of this target being met in 2015- 16. There is also a greater than 50 per cent chance of it being met a year early, in 2014-15.
    So that’s 100% +, do I have that right?
    ______________________________________________________________________
    I’m afraid not. If the target was met by 2014-15, it would have been met by 2015-16.

  4. “This is that the Term Funding Scheme and Corporate Bond purchases increase the National Debt. This is particularly ill-fated for the purchases of foreign companies like Maersk where they benefit but the UK taxpayer pays…..”

    And he still keeps his job!

    anyone else would have been fired by now

    Forbin

    • May I offer a slight correction? Not “anyone else” would have been fired should perhaps read ” anyone outside the banking/establishment/elite” would have been fired.
      Would “Sir” Hector Sants? I think not

  5. Great blog as usual.
    In some ways, it is disturbing that the deficit can only be cut by getting in extra tax not by cuts in expenditure.
    I don’t mean this as a political point but an economic one as, if interest rates rise, the deficit could quickly become unmanageable. In turn, this means that QE will go on for years just to avoid meltdown in the government finances

    • Hi James

      In terms of expenditure we seem merely able to reduce the rate of growth but not to actually reduce it. In fact the modern definition of of austerity should say reduction in the growth rate of expenditure.

      In UK terms some of that was the commitment to the triple-lock on the Basic State Pension which was generous in terms of its impact on the public finances. Just for the avoidance of doubt I know that pensioners will not think of it as generous but on a national level it has become so.

  6. Completely off topic, but has anyone calculated the impact of government fines on banks in terms of
    1. Government debt
    2. The banks’ capital ratios
    I was just wondering whether this is all part of a Faustian pact between our great leaders and the banksters. Along the lines of
    1. We will pay massive fines (of course using other people’s money
    2. You don’t put us in gaol
    Just a thought.

  7. Thanks for another informative and interesting posting.
    It does not matter if you are a household,company,football club or a Government if your spending consistently exceeds your income by an average 8% per annum over a sustained period you will eventually become insolvent.
    The only difference between Governments and the others is you can expand the money supply and manipulate interest rates and other factors to extend your survival period.
    Saw an interesting stat on SRSrocco site posted on Dec 9 ,in the period Q3 1980-Q3 2016
    The Dow Jones has risen 23 fold from 865 to 19615 the US national debt has also risen 23 fold from $863B to $19891B

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