Today we move onto the UK Public Finances but before we do so it is time for some perspective and as so often these days it is Greece that provides it. Let me explain with this from the Financial Times.
Greece’s primary budget surplus – which measures the country’s public finances when excluding debt repayments – hit 4.2 per cent last year, swinging dramatically from a deficit and far outperforming a creditor target of 0.5 per cent for 2016.
This provides two issues of which the first is the way that such data is manipulated, all our finances would be in great shape if we could exclude major repayments and outgoings! If we move to the total numbers we see how misleading this is and on the way learn how much Greece pays on its debt.
Separate figures from Eurostat today showed Greece’s overall public finances were also in healthy shape, boasting a surplus of 0.7 per cent.
My point is that the number above poses a challenge to the view that surpluses on public finances are unreservedly a good thing. On their own they are often a good sign but we need to look at other signals such as the cost.
an economy which has shrunk more than 25 per cent since 2008.
The latest improvement in the public finances that the Institutions are so keen on has come at this price as the Greek statistics agency tells us.
The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016,
The basic lesson of Euro area austerity and the drive for a series of budget surpluses is that it led to a collapse of the economy that is ongoing. A sign of that is the way that the national debt to GDP ( Gross Domestic Product) ratio had risen to 179% at the end of 2016. Indeed if we return to the FT nothing appears to have been learnt.
As it stands, Greece is committed to hit a 3 per cent surplus target for a decade after the end of its rescue in 2018.
A perspective on the UK
A major difference in the UK experience has been that we have seen economic growth. Yes quarterly economic output was initially hit hard as quarterly GDP fell from a pre credit crunch peak of £433.7 billion to £406.3 billion but it has risen since to £470.5 billion. Whilst we saw out budget finances plunge into a substantial deficit the growth has helped us reduce that and in a type of timing irony we reduced it to the Maastricht Treaty maximum of 3% of GDP in 2016. This led to us finally having a smaller deficit than France which was driven by our better economic growth performance. Moving onto our national debt it was at 89.2% of GDP using the European measuring rod.
So the overall experience has been of an improvement except of course it has been much slower than that promised as we were supposed to have a budget surplus by now. Much of that was caused by the fact that the 2 UK governments back then ( Labour and then the Coalition) lived in a fantasy world where the UK economy would grow at 3% per annum whereas 2011 and 12 for example were well below that. Remember the phase when there were concerns about a “triple dip”? Added to that whilst there have been cuts and people affected overall UK austerity has meant more of a reduction in the rate of growth of government spending as opposed to outright cuts.
The fiscal year to 2017
This morning’s update confirms much of the above and let me jump to a signal which we look at as a measure of economic growth.
In the latest full financial year, central government received £674.1 billion in income; including £507.0 billion in taxes. This was around 6% more than in the previous financial year.
So we see that the situation here indicates economic growth although we need to subtract a bit over 1% for the pension related changes to some National Insurance contributions rates. So far so good.
If we move to expenditure then as we note that year started with very little inflation there were increases in real terms.
Over the same period, central government spent £698.6 billion; around 2% more than in the previous financial year.
The combination of the two led to better news for the UK as shown below.
This meant it had to borrow £52.0 billion; £20.0 billion less than in the previous financial year (April 2015 to March 2016).
Meaning that we are now comfortably within the Maastricht criteria for this.
Initial estimates indicate that in the financial year ending March 2017 (April 2016 to March 2017), the public sector borrowed £52.0 billion or 2.6% of gross domestic product (GDP).
Let me present the improvement in a way that is against one of the media themes of these times. The theme that we do not tax companies faces a reality that half of the annual improvement came from higher Corporation Tax revenue. Of course there are tax dodging companies around…….
What about March itself?
The latest monthly data was more of a disappointment.
Public sector net borrowing (excluding public sector banks) increased by £0.8 billion to £5.1 billion in March 2017, compared with March 2016;
There were several factors at play here and let me start with one which will be in the back ground as we see inflation rise. That is that debt costs in March rose by £700 million due presumably to higher RPI ( Retail Price Index) based repayments. In addition to this Income Tax revenues fell and VAT receipts only nudged higher.
Care is needed on the monthly data but we may be seeing another sign of UK economic growth fading a bit here. This is of course consistent with other data such as the way that annual retail sales growth fell to 1.7% in March.
The UK uses its own measure of this which in an episode of the television series, Surprise! Surprise! gives an answer lower than the international standard.
Public sector net debt (excluding public sector banks) was £1,729.5 billion at the end of March 2017, equivalent to 86.6% of gross domestic product (GDP); an increase of £123.5 billion (or 3.0 percentage points as a ratio of GDP) on March 2016.
On its measure the Bank of England with its bank friendly policies is responsible for a debt burden of some 5.9% of GDP.
This has been a long journey for the UK economy and we have already travelled beyond the promised end point which was a budget surplus. On this road we have seen economic growth but also rises in our national debt. Whilst the establishment talk has been of headwinds there is very little talk of the role played but the very low-level of government bond yields which have been reinforced by £435 billion of purchases by the Bank of England. This was reinforced in 2015/16 by the lower rate of inflation which kept our index/inflation linked debt costs low. The inflation gains are currently being reversed.
As to the position now we face the probability of growth fading a bit in 2017 as real incomes are hit by higher inflation. This will slow any further improvement in the public finances which is a shame after a relatively good year. Let me finish by putting our national debt in perspective because is we use the official number it is some 2.6 years of tax revenue.