Yesterday saw some good news about the UK economy announced by the Chancellor of the Exchequer as he did his pre Budget tour of the television media. The Financial Times has put it like this.
Philip Hammond’s first and last spring Budget will be delivered against a backdrop of economic resilience since the EU referendum last summer.
Most people would welcome this although apparently not the economics editor of the FT Chris Giles.
Economy may be stronger than hoped
The details of this are shown below.
The economy has performed better than the Office for Budget Responsibility expected in the latter half of 2016 and started this year with significant momentum which will raise the growth numbers for this year. Headline growth forecasts for 2017 will be revised sharply higher from 1.4 per cent to close to 2 per cent.
These are of course concepts of which regular readers on here will be well aware and indeed prepared for. I pointed out after the UK leave vote that the fall in the value of the UK Pound would provide a powerful economic stimulus which as of the end of last week was equivalent to a 2.75% cut in the UK Bank Rate ( the official interest-rate). This of course is a bazooka compared to the 0.25% peashooter announced by the Bank of England which it called a “Sledgehammer”. Although of course the second part of the Sledgehammer was due last November but never arrived in another Forward Guidance failure.
Also of note here is the fact that the Office for Budget Responsibility was wrong yet again. So the first rule of OBR club “the OBR is always wrong” works again! In essence the economic growth it took away in November it will now be forced to (mostly) put back. Also whilst the UK has growth momentum for the first half of 2017 it is much less clear for the latter part as the other consequence of a lower exchange-rate arrives which is higher inflation.
The Public Finances
The FT reports on some good news for the UK public finances.
Tax receipts for 2016-17 have proved stronger than was expected at the time of the Autumn Statement and the deficit is likely to be around £12bn smaller than feared in November.
Good except as I look back I note that the OBR told us this only last November.
the budget deficit has been revised up by £12.7 billion this year, thanks primarily to weakness in income tax receipts that largely pre-dates the referendum. The weaker growth outlook means that our pre-policy-measures forecast revision rises to £18.1 billion by 2020-21. Again, weaker income tax receipts are the biggest factor, reflecting the downward revision we have made to productivity and earnings growth;
So has the OBR and our official forecasters run hard for us to stand still?! Yesterday I switched on the television and there on ITV was Robert Peston demonstrating an almost touching faith in the forecasts of the OBR in spite of the fact if anything it manages to be even more wrong than before. The addition of Professor Sir Charles Bean seems unlikely to improve this after the way he signed off the official post EU leave forecast for an immediate recession of between 0.1% and 1% in the next quarter. As to weaker income tax receipts forecast here are the January numbers.
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).
So the “improvement” that will be announced is giving back what was taken away in November whilst reality remains mostly unchanged. It is like the television program Soap which used to start with “Confused? You soon will be!”
Debt Interest and QE
I noted that the Chancellor Phillip Hammond pointed out that the UK is spending some £51 billion a year on debt interest. There are a lot of factors at play here so let us go through them. Firstly the government is in my view the main beneficiary of the QE ( Quantitative Easing) bond buying program of the Bank of England. as it pays interest on £432 billion of its debt and then gets it repaid by the Bank of England. This saves it quite a lot of money explicitly and also implicitly because there are regular buyers of UK debt ( insurance companies and pension funds etc.) and they have less to buy which pushes up the price and lowers the yield. For example the UK sold a ten-year Gilt at a yield of only 1.18% around a fortnight ago so for the next 10 years we have borrowed £2 billion cheaply.
However there is a problem from rising inflation and in particular the rise in the Retail Price Index. As it rises and the RPI was 2.6% in January then we will have to pay more in interest here and also find these more expensive to redeem when they are repaid. As they are a bit under a quarter of the market the sums here are not insubstantial.
If you think this through this may be why the new Deputy Governor of the Bank of England Charlotte Hogg was caught off guard by questions about rolling back QE in parliament last week. The UK establishment simply has no plan for this at all as it fears what would happen to debt costs in such a scenario.
For those unaware this is the grand scheme to improve the UK railways from London to the North first stopping at Birmingham and then going onto Manchester and Leeds. The catch is summarised by this. From the FT.
A law providing for the first phase of the £56bn line was enacted last month and enabling works should start within weeks. The first trains are expected to arrive in Birmingham in 2026.
It is very expensive and will take a long time leading to fears it may be out of date before it even starts. But how does that work with this from its chief Sir David Higgins?
“You look at EasyJet or Ryanair or Eurostar. These services are full all the time. People will want to know they can book in advance, they can always get a seat and it is reliable. It is everyday efficient low prices,”
High costs and low prices anyone? One rather relevant reply points out the over optimistic forecasts for the HS1 line ( to the Channel Tunnel) which have led to problems over time. Also in a scheme badged as a northern regeneration scheme it has not passed people’s attention that the first bit to be built is to London,or is that a “Northern Powerhouse” now?
No doubt Wednesday’s Budget will throw up a surprise or too. For example Chancellors who major on fiscal rectitude in the public relations spinning like to pull a rabbit from the hat as a “surprise”. Also I am curious as to how and indeed if he will address the fact that the self-employed pay a much lower rate of national insurance as they would reply that they get lower state benefits.
The good news is that the UK economy has performed as we expected on here to the embarrassment of the official forecasters such as the OBR and the Bank of England. So I suggest you have a bit more than a wry smile as the media take their forecasts seriously and perhaps take the advice of some of the replies on here and get some popcorn in.