Today sees the latest data on the UK Public Finances which so far have meandered on in the same not entirely merry way as before the EU leave vote. This is in stark contrast to the modeling provided by HM Treasury.
In the ‘shock scenario’ presented in the short-term analysis, in 2017-18, real GDP would be 2.9% lower than baseline, but potential GDP would have declined by 2.1% compared to the baseline.
Believe it or not this was the more moderate scenario and as we have not entered that fiscal year it could of course happen but so far we have seen nothing like that.Of course we should have done as the UK economy was supposed to immediately shrink by up to 1%. The consequence was that the fiscal or budget deficit would rise by £24 billion in 2017/18 and the more extreme “severe shock” would see it rise by £39 billion.
There is a particularly worrying postscript to this in that it was personally signed off by former Bank of England Deputy Governor Professor Sir Charles Bean who of course made a right charlie of himself. Well he is now at the Office of Budget Responsibility producing more growth and borrowing forecasts. There is a particular irony in the lack of responsibility and indeed the rewards for failure on display here.
The Financial Times brings up forecasts of a dire future almost as quickly as it has to offer mea culpae for the previous ones being wrong.
The EU’s Brexit negotiators expect to spend until Christmas solely discussing Britain’s divorce from the bloc, denying London any trade talks until progress is made on a €60bn exit bill and the rights of expatriate citizens.
The Bank of England
The Governor of the Bank of England Mark Carney is of course familiar with the concept of providing “alternative facts” and he was on that road at this month’s Inflation Report.
First, the Chancellor’s Autumn Statement eased fiscal policy over the coming years. This explains about half of our forecast upgrade.
Actually there was an announced change but of course that relies on you believing the forecasts of George Osborne. For example the UK budget was originally supposed to be in surplus right now which of course faded not to the grey of Visage but remained solidly in red ink. So it was the sort of claimed change which probably ends up at the same destination. The flight boards may say a diversion Helsinki but somehow the flight lands at the original destination Copenhagen. At the time of typing this Andrew Tyrie of the Treasury Select Committee is really skewering the Bank of England Chief Economist Andy Haldane on this subject by pointing out that this stimulus is apparently much more stimulative than others of the same size and asking why?
Of course Governor Carney is on the road to changing the UK public finances for the worse in two respects. As we move forwards the inflation he is so keen on “looking through” will raise the cost of financing index-linked bonds. As these are linked to the Retail Price Index which is rising at an annual rate of 2.6% the bill is on its way. Also part of the “Sledgehammer” of policy action last August was the Term Funding Scheme which has raised the national debt which shows a clear lack of forethought. You need to make your way to Appendix 9 but there it is some £31.37 billion of additional debt so that the Bank of England can subsidise the banks yet again.
We open with the traditional January surplus.
Public sector net borrowing (excluding public sector banks) was in surplus by £9.4 billion in January 2017, a £0.3 billion larger surplus than in January 2016; this is the highest January surplus since 2000.
There was some good news in the receipts column.
Self-assessed Income Tax and Capital Gains Tax receipts increased by £2.0 billion to £19.8 billion in January 2017 compared with January 2016; this is the highest January on record (monthly recording of self-assessed tax receipts began in April 1999).
Of course it should be the best on record as it is inflated by economic growth and of course inflation over time. However the rises in the tax-free Personal Allowance over the past 2 government’s will have dampened this somewhat.
This is the ongoing issue of ch-ch-changes to the methodology stirring up all the grit from the bottom of the pot so that the water goes from clear to murky.
In this month’s bulletin we have introduced a new methodology for the recording of Corporation Tax and Bank Corporation Tax Surcharge receipts.
It is hard not to groan a little although of course it is badged as an improvement.
Previously, we have used cash receipts for these taxes as a proxy for accrued revenue. An improved methodology derives accrued revenue figures by adjusting cash receipts to more accurately reflect the time at which the economic activity relating to the tax receipts took place.
It is in fact a type of seasonal adjustment.
The impact of introducing the new methodology is to distribute the tax revenue more evenly over individual months in the year.
Actually it also makes the amount in recent years higher. Do they not know how much was collected?
A deeper perspective
This is provided by the financial year so far.
Public sector net borrowing (excluding public sector banks) decreased by £13.6 billion to £49.3 billion in the current financial year-to-date (April 2016 to January 2017), compared with the same period in the previous financial year;
This is essentially because of a good performance on the revenue front.
In the current financial year-to-date, central government received £553.7 billion in income; including £416.8 billion in taxes. This was around 5% more than in the previous financial year-to-date.
Also contrary to the hints of a fiscal boost we received last autumn and still be trumpeted by the Bank of England this morning there has been some restraint in public expenditure.
Over the same period, central government spent £581.2 billion; around 2% more than in the previous financial year-to-date.
Care is needed here but this is quite close to the current official inflation measure ( CPI 1.8%), the same as what next month will be the new measure at the top of the release ( CPIH 2%), and below the number used for index-linking for that sector of the UK Gilt market ( RPI 2.6%). Of course much of the period here was where inflation was lower but its rise may well tighten policy in real terms. This would be consistent with what we are hearing from the NHS and councils although the former always needs more money.
The National Debt
If he was still Chancellor of the Exchequer George Osborne would be shouting this from the rooftops.
Public sector net debt (excluding both public sector banks and Bank of England) was £1,589.2 billion at the end of January 2017, equivalent to 80.5% of gross domestic product (GDP); an increase of £43.6 billion (or a decrease of 0.6 % points as a ratio of GDP) since January 2016.
He was so keen to be able to declare the latter part of that quote but sadly for him he was the past before it arrived. Poor George, although if we look at his fees for speeches maybe not so poor George. The more eagle-eyed amongst you will have spotted the “improvement” which helped.
Public sector net debt (excluding public sector banks) was £1,682.8 billion at the end of January 2017, equivalent to 85.3% of gross domestic product (GDP); an increase of £91.7 billion (or 1.9 % points as a ratio of GDP) since January 2016.
Actually the internationally comparable figure was 87.6% of GDP as of last March.
As ever much is going on. If we start with the Bank of England then it has not so much moved the goalposts as built its Ivory Tower on the wrong pitch. As the Ivory Tower is fixed in the ground then reality has to change so it has spent so much of this morning talking about a theoretical concept called U* unemployment which does some of the trick. They were discomfited trouble when Andrew Tyrie simply asked them when this had happened before? I did not expect Mark Carney to know as of course the UK did not exist before June 2013 but the blank embarrassed faces of the others were a sight to behold. Sadly nobody asked about why so many female members were leaving the Monetary Policy Committee this year?
The public finances continue to improve albeit more slowly than we would have hoped. There are dangers ahead from the cost of index-linked Gilts as inflation continues to rise and the impact of this inflation on the wider economy. But there are other issues as for example an area near to me in Battersea Park often becomes a trailer park in the search for more revenue, although sadly I understand that the benefit goes more to a private company ( Enable ) than the council itself.