The General Election and its impact on the UK Public Finances

Firstly let me start today by expressing my deepest sympathies to those affected by last night’s dreadful attack at Manchester Arena. I do understand some of the feelings of those affected as I was just around the corner from the IRA Bishopgate bomb in the City many years ago. This time around though things are even worse with the apparent targeting of children at a music concert.

Today I wish to do a different form of travelling in time as it will be helpful to remind ourselves of the state of play some 7 years ago as we approached a General Election. From April 29th 2010.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

So is the standard of debate, manifesto and honesty any better this time around? In terms of scale maybe a little as we see the woeful efforts from back then.

The worst offender is the Liberal Democrats who have not explained where they will find £79 billion of spending cuts which is 5.4% of national income.The Conservatives plan spending cuts but have not explained where they will find £71 billion of them which is 4.8% of national income. Labour plan spending cuts but have not explained. Labour have £59 billion of spending cuts which they have not explained which is 4.1% of national income.

What about now?

We can permit ourselves an opening sigh of relief as the numbers are much lower now as this is what we thought was the situation back then.

Our fiscal deficit for the last year was £163 billion which is 11.6% of our economic output (Gross Domestic Product or GDP).

That compares with £48.7 billion last year. So we have in fact made quite a lot of progress although much more slowly than promised as we were supposed to be in surplus by now. Oh and in a sign of how reality changes over time we now think we borrowed £151 billion in the peak year.

As to the situation post election there is more smoke than clarity but I think whoever wins the Institute of Fiscal Studies have this right.

A balanced budget can apparently now wait until the middle of the next decade.

In political terms that is beyond the furthest star! As to the detail here is the IFS again.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

The “room for manoeuvre” has been at least partly used over the issue of social care and what has become called the Dementia Tax.Which is currently unchanged or very changed and was always intended to have a cap or has a new one depending on your point of view. Personally I think the official denials of any change are the clearest guide. As to Labour there are clear plans to spend more of which an example from its Manifesto is below.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.

This sounds rather like the Juncker Plan from the Euro area but we do not know how much public borrowing there will be or why private sector capital is not supporting such investment already? There are also plans for rail and water nationalisation which as the Guardian points out would work if the UK was/is a hedge fund.

At Severn Trent, for example, the dividend yield is 3.4% at the current share price. Borrowing at 1.5% to buy an asset yielding 3.4% is not the worst trade in the world. And the state, if it wanted to act like a supercharged private equity house, would be able to juice up returns by refinancing the companies’ debt at a lower rate.

In case some of you read the piece the author was somewhat confused about UK Gilt yields but somehow ended up near the right answer. We can presently borrow at 1.6% for fifty years ( for some reason they looked at 10 years) so the doubt in the issue is whether the public sector could get the same rate of return as the private sector. But the elephant in the room is the £60 billion or so required to buy the companies in the first place. They could of course just take them but that would presumably scupper the private capital for the National Investment Bank.

As to the NHS then there seems to be little variety about.

While precise comparisons are hard, there is strikingly little difference between Labour and the Conservatives in their funding promises for the NHS.

The Conservatives are promising a real increase of £8 billion over the next five years. That sounds like a lot but it won’t go far. Nor will Labour’s only slightly less modest offering.

Although the Liberal Democrats do offer something of an alternative.

Increasing spending on the NHS and social care, using the proceeds of a 1p rise in Income Tax.

Actually in a groundhog style way the latter part of that sentence does take us back our 7 years again as the musical theme for whoever is in government next comes from the Beatles.

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet

Today’s data

Let us open with the good news.

Since the previous bulletin, the provisional estimate of central government net borrowing for the full financial year ending March 2017 has been revised down by £3.5 billion

Much of this was from higher tax receipts which particularly in the case of VAT may hint we did a little better than previously thought.

current receipts were revised upwards by £2.4 billion; VAT receipts were revised up by £1.7 billion between January and March 2017, largely due to higher than forecast cash receipts in April 2017; and Income Tax and National insurance contributions received in March were revised upwards by £0.5 billion and £0.3 billion respectively

As to April itself it was not so good.

Public sector net borrowing (excluding public sector banks) increased by £1.2 billion to £10.4 billion in April 2017, compared with April 2016;

Tax receipts were higher but in a potentially worrying signal it was debt costs which moved the numbers as we spent an extra £2.1 billion in this area this April. We are not told why but I expect it to be the rise in inflation and in particular the rise in index or inflation linked Gilts driving this especially as they are linked to the Retail Price Index.

Comment

As we look back that is much that is familiar about the UK Public Finances in a General Election campaign. The reality is that our politicians do not think we are not capable of accepting or dealing with the truth so we get presented with what they think we will take rather than what they think might happen. There are more holes in the various manifestoes than in a Swiss cheese!

However since the 2010 election we have made a fair bit of progress in reducing the level of annual borrowing although the concept of balance or a surplus was a mirage at best. This means that you might like to sit down as you read the change in another set of numbers. First back then it was £1.03 trillion or 65.7% of GDP. And now.

The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of April 2017, which equates to 86.0% of the value of all the goods & services currently produced by the UK economy in a year (or gross domestic product (GDP)).

We should be grateful that the cost of borrowing is so low as this has provided an enormous windfall over the period to our public finances. Odd that the Bank of England does not explicitly present that as a gain from its £435 billion of Gilt purchases is it not?

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15 thoughts on “The General Election and its impact on the UK Public Finances

  1. Hello Shaun,

    “A balanced budget can apparently now wait until the middle of the next decade.”

    which decade did they say they were starting from ?

    Forbin

  2. I love the way our political class believe overspending by 48 billion a year is some sort of vistory for common sense.

    Unfortunately,the British public are being lied to on an epic scale,not just in the way politicians are promising free money but also in the way they are flagrantly misrepresenting the economic reality.

    I’ve met enough politicians to realise a substantial number most likely aren’t even aware they’re doing it but there are also a hard core that are doing nicely out of the rotation from Westminster into the Boardrooms of the City’s finest financial institutions.

    ‘The reality is that our politicians do not think we are not capable of accepting or dealing with the truth so we get presented with what they think we will take rather than what they think might happen. There are more holes in the various manifestoes than in a Swiss cheese!’

    x2 that

    • The way people have got into meltdown over having to pay towards their own care when they reach old age shows much of the British public can’t handle the truth.

  3. I’m surprised anyone would want to target a surplus for many reasons, it would be insane to drain the private sector of funds to fund such a thing. The truth is we need a deficit (that helps fund the private sector) of £50 billion a year just to fund private sector saving demand. Futhermore any state running a surplus will have a recession as night follows day. The exception is Germany who are running a surplus on the back of exports.

    I am frankly sick of all this “where’s the money going to come” which is simply lazy journalism. What are the consequences of the extra spending is a good question as is should this money be spent. As for nationalising water there is no cost involved, it’s an asset swap. The question is once again should it be in private hands or not. The national “debt” is only debt as money deposited with a bank.

    Finally thank you for letting my link stand and to your readers kind enogh to drop in.

    • Hi bill40

      No problem as long as things are not abused I run a pretty laissez-faire policy on such matters. To be fair I am helped very much to so do by the quality of comments and responders on here.

      I suggest taking care with relationships that seen like they have to be true in the issue of private and public sector. This is because I remember the days where the mathematical relationship for the money supply based on £M3 had to be true until it was tried and turned out not to be so. The human element…..

      • Ah, the human element that will be with us always. i wish political parties would have the courage to “We’re going to try x” it’s an experiment that will be fantastic if it works but we will pull back if it doesn’t.

        So many new ideas out there, The Job Guarantee, Positive Money, Universal Basic Income and different economics cuch as MMT. The baby steps we are taking are quite pathetic.

  4. Nobody is willing to offer innovative policy, to try fix the deficit. 16Billion Housing benefit is ripe low hanging fruit, easily tackled by building affordable apartments co-operatively for owners. Hey, you might offend the buy-to let shysters. And govt should be building new apartments for social housing, not buying back historic council property at vastly inflated prices. Use covenants & tenants associations with eviction power to prevent antisocial behaviour.

    There are clear Brexit differences Tory = Brexit, Lib Dem = remain & Corbyn sits on the fence. I suspect voting will mostly be a referendum rerun – with economic policy ignored.

    • You cannot eliminate the deficit by targetting it, get the economics right and it will go away all on it’s own. For that to happen the private sector must be robust enough to run a deficit instead. Thanks to the banks it still can’t.

      • Trying to borrow and spend your way in to surplus does not work, it was tried in Greece. Zimbabwe and Venezuala are examples of crisis caused by out of control spending. If you want an example of successful recovery from a banking crisis – try looking at Iceland’s surplus. This excludes ‘the precious’ investment banking sector.

        • The exampoles you give simply aren’t true with the exception of Iceland. Greece is non-sovereign and all three had appalling governance.

        • Historically plenty of govt’s have been scuppered by rising bond interest, including several from the UK. In Britain, 90% debt and 9% interest means spending more on interest than the NHS.

          Should interest rates return to historical norms, things will get much tougher. Inflationary currency crisises are real unpleasant ….

      • Thanks for the correction. My prediction on housing is an eventual political correction as the younger generations mostly without houses increase their share of the vote.

  5. As long as the Bank of England keep interest rates at or close to zero, there is absolutely no incentive for politicians to behave responsibly with the countries finances, in fact just as it encourages reckless, irresponsible behaviour in the general population so it goes with the countries finances but on a much larger scale.

    HS2 at cost to the country of £65billion to shave half an hour off the journey from London to Birmingham? I have travelled this route and it takes just over an hour from Euston to Coventry, the last twenty miles takes nearly half an hour due to speed restrictions and a bottleneck just outside Birmingham centre, how easy or should I say cheaper would it have been to have ironed out these problems and make adjustments to the rest of the network than throw money at what will still be a slow (by international standards) railway?

    Foreign aid at £13billion per annum -just why??? at the same time as we have to accept cuts to essential services such as social care and the NHS, whilst at the same time as we justify taking the homes from old aged pensioners for their care after a lifetime of taxes and national insurance contributions?
    This isn’t a rant in favour of the Labour party but no party will act responsibly as long as the Bank of England keep rates this low.

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