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
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.
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?