The credit crunch era has seen two opposing schools of thought on the public finances. One side labelled as austerity is where the deficits which appeared and rose are then cut back and the other side labelled as stimulus was happy to let deficits flow anticipating that they would create economic growth in the future to solve the problem. Actually these were mostly theories as practice remained different as for example the UK looked to restrain the growth of public expenditure rather than actually reduce it. The one place where austerity was clearly applied was on Greece and that went badly as it was already slipping into depression and received a further push downwards,
More recently fiscal stimulus came back en vogue. To some extent this began back in 2013 with this mea culpa of sorts from the IMF (International Monetary Fund).
We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis.
In 2016 we saw more and more calls for fiscal stimulus from the IMF and other global institutions with something of a U-Turn on Japan. From Reuters.
The International Monetary Fund said Tuesday Japan should coordinate fiscal stimulus with further central bank easing measures that could include rate cuts and more asset purchases.
Although maybe not quite a U-Turn.
Japan needs to show it will regain fiscal discipline with gradual increases in the consumption tax and an explicit cap on social security spending, he said.
So actually rather confused but the mood music did switch towards stimulus of a fiscal nature as we looked at the plans of both US Presidential candidates and the UK. But whilst it is still very early days for President Trump some of the pressure for a fiscal boost seems to have eased so bond markets have rallied. The UK has seen one or two small piecemeal schemes but these have seemed ad hoc political moves rather than any sort of coherent plan. Although yesterday’s industrial strategy did repeat a past promise of more spending. From the Financial Times.
A government promise made in November to increase infrastructure investment by 60 per cent from £14bn in 2016 to £22bn in 2021 was reiterated in the document.
But the hints of more fiscal expansionism seem otherwise to have faded somewhat.
We see a familiar marginal improvement in the monthly data.
Public sector net borrowing (excluding public sector banks) decreased by £0.4 billion to £6.9 billion in December 2016, compared with December 2015.
If we look into the detail of the numbers we see that there was a 2.2% increase in spending but that it was lower than this.
Central government receipts in December 2016 were £53.8 billion, an increase of £2.9 billion, or 5.6%, compared with December 2015.
The particular areas which were strong are shown below.
Social (National Insurance) contributions increased by £1.0 billion, or 10.1%, to £10.6 billion….. Income Tax-related payments increased by £0.7 billion, or 5.8%, to £13.3 billion……Corporation Tax increased by £0.4 billion, or 12.4%, to £4.0 billion.
It doesn’t seem that much of an improvement considering the strength of those receipts does it? Also it relies somewhat on the increase in some National Insurance rates.
We get a better idea of the trends if we look at the performance in the UK fiscal year to date.
In the financial year-to-date (April to December 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £63.8 billion; a decrease of £10.6 billion, or 14.3% compared with the same period in 2015.
So an improvement but along the lines of edging forwards especially as we note that the economy continued to growth through this period. We see some confirmation of the fact that the economy has been growing by the tax receipt figures.
Central government receipts for the financial year-to-date (April to December 2016) were £476.8 billion, an increase of £21.9 billion, or 4.8%, compared with the same period in the previous financial year.
As we look into the numbers we see that income tax receipts rose by 2.6% and Value Added Tax ( a consumption tax) rose by 3.2% broadly confirming the economic growth. There is also a ying and yang to the numbers as an area for which government’s are often criticised performed well.
Corporation Tax increased by £3.3 billion, or 9.9%, to £36.2 billion
I suppose there is an irony in such news coming on the day that we find out that less Corporation Tax will be paid by BT after its corruption problems in Italy which seem to have risen to £530 million from £145 million. But the real yang to the ying above is the sort of last hurrah we are seeing for Stamp Duty receipts.
Stamp Duty on land and property increased by £0.8 billion, or 9.4%, to £9.5 billion
With the prospects for UK house prices and activity the surge looks set to end. Actually Stamp Duty full stop has been in a boom.
Stamp Duty on shares increased by £0.5 billion, or 23.7%, to £2.8 billion
So not a bad set and I have put the 9.2% increase in National Insurance contributions at the end because they were also driven by a rise in contribution rates for some.
By contrast central government expenditure rose by 1.4% of which the fastest rising component was this.
debt interest increased by £2.4 billion, or 6.7%, to £38.1 billion; of this £38.1 billion,
That is too soon to be the rise in Gilt yields having an impact and is much more likely to be the impact of the rise in the cost of UK Index-Linked Gilts which pay out relative to the Retail Price Index.
The numbers continue to rise.
Public sector net debt (excluding public sector banks) was £1,698.1 billion at the end of December 2016, equivalent to 86.2% of gross domestic product (GDP); an increase of £91.5 billion, or an average of £251 million each day over the last year.
There was something new in the rise however as the Bank of England move in August helped push the national debt higher. Here is the impact of the Term Funding Scheme or TFS.
By the end of December 2016, the Bank of England had made £20.1 billion of loans through the Term Funding Scheme.
Thanks Mark Carney! Raising the national debt to subsidise the banks.
Also as we move forwards we need to note that the international standard for what is the size of the national debt is different so here are the UK numbers on that basis.
general government gross debt was £1,652.0 billion at the end of March 2016, equivalent to 87.6% of gross domestic product (GDP); an increase of £47.9 billion on March 2015.
It is easy to forget that we were supposed to be basking in a fiscal surplus now under the original plans of the coalition government back in the summer of 2010. The colder harder reality is that whilst we have made considerable progress in reducing the deficit it remains a substantial sum. As time passes the danger rises of us seeing another slow down and perhaps recession and upwards pressure going back on the numbers.A challenge will be posed at 2017 develops by the rise of consumer inflation.
Meanwhile the national debt continues to rise. In terms of debt costs that has not been much of an issue so far because of the extraordinary falls in UK Gilt yields. But they are now back to similar levels to when the Bank of England began its new QE operations and of course index-linked Gilts are becoming more expensive to finance due to the rise in inflation. It has been quite a while since government’s have felt a squeeze from this area as the QE era has brought them plenty of windfalls, and this of course just illustrates another area where QE is like a spider’s web.
Mind you compared to some forecasts we have ended 2016 in pretty good shape! So we should perhaps be grateful for that….