Today in a happy coincidence we get both the future plans of the current government in the Queen’s Speech as well as the latest public finances data. It looks as though the atmosphere is for this at least according to the Financial Times.
But he (the Chancellor) is coming under growing pressure from some Tory MPs — who are reeling from the loss of the party’s majority in the House of Commons at the June 8 election — to learn lessons and increase public spending.
Why? Well this happened.
The opposition Labour party pulled off surprise gains in the UK general election by offering voters a vision of higher public spending funded by increased taxes on companies and the rich.
So there is likely to be pressure on this front especially as we will have a government that at best will only have a small majority.
The Chancellor Phillip Hammond also spoke at Mansion House yesterday and told us this.
And higher discretionary borrowing to fund current consumption is simply asking the next generation to pay for something that we want to consume, but are not prepared to pay for ourselves, so we will remain committed to the fiscal rules set out at the Autumn Statement which will guide us, via interim targets in 2020, to a balanced budget by the middle of the next decade.
Is that an official denial? Because we know what to do with those! But in fact setting a target of the middle of the next decade (so 2025) gives enormous freedom of movement in practical terms. You could forecast pretty much anything for then and the Office for Budget Responsibility or OBR probably has. If we look back over its lifespan we see that one error which is that forecasting wage inflation now would be 5% per annum as opposed to the current 2% has had enormous implications. Also we only need to look back to the 3rd of October to see the Chancellor giving himself some freedom of manoeuvre.
“As we go into a period where inevitably there will be more uncertainty in the economy, we need the space to be able to support the economy through that period,” he said. “If we don’t do something, if we don’t intervene to counteract that effect, in time it would have an impact on jobs and growth.”
As later today the media will no doubt be using OBR forecasts as if they are some form of Holy Grail lets is remind ourselves of the first rule of OBR club. That is that the OBR is always wrong.
A 100 Year Gilt
You might think that with all the political uncertainty and weakness from the UK Pound that the Gilt market would be under pressure. My favourite comedy series Yes Minister invariably had the two falling together. But nothing is perfect as that relationship is not currently true. It raises a wry smile each time I type it but the UK 10 year Gilt yield is blow 1% ( 0.98%) as I type this. In terms of recent moves the market was boosted yesterday by the words of Bank of England Governor Mark Carney who with his £435 billion of holding’s is by far its largest investor. In essence the likelihood of more purchases of that sort nudged higher yesterday and thus the market rallied and yields fell.
Also we live in a world summarised by this from Lisa Abramowicz of Bloomberg.
Argentina has defaulted on its external debt seven times in the past 200 years. It just sold 100-year bonds.
Actually it was oversubscribed I believe and I will let readers decide if they think a yield of 7.9% was enough. The UK however could borrow much more cheaply than that as according to the Debt Management Office the yield on our longest Gilt (2068) is 1.52%. Actually as we move from the 2040s to the 2060s the yield gets lower but I will not extend that and simply suggest we might be able to borrow for 100 years at 1.5% which seems an opportunity.
Actually quite a historical opportunity and we could go further as this from the Economist from 2005 ( h/t @RSR108 ) hints.
In 1751 Henry Pelham’s Whig government pulled together the lessons learnt on bonds to create the security of the century: the 3% consol. This took its name from the fact that it paid 3% on a £100 par value and consolidated the terms of a variety of previous issues. The consols had no maturity; in theory they would keep paying £3 a year forever.
I have a friend who has always wanted to own a piece of Consols to put the certificate on his wall so he would be pleased. Assuming of course they still do certificates…..
It was almost a type of Groundhog Day.
Public sector net borrowing (excluding public sector banks) decreased by £0.1 billion to £16.1 billion in the current financial year-to-date (April 2017 to May 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2008.
So the financial year so far looks rather like its predecessor. Although below the surface there were some changes as for example it is hard to put a label of austerity on this.
Over the same period, central government spent £123.5 billion; around 4% more than in the same period in the previous financial year.
In case you were wondering on what? Here it is.
Of this amount, just below two-thirds was spent by central government departments (such as health, education and defence), around one-third on social benefits (such as pensions, unemployment payments, Child Benefit and Maternity Pay)
This meant that tax revenue had to be pretty good.
In the current financial year-to-date, central government received £110.2 billion in income; including £79.1 billion in taxes. This was around 5% more than in the same period in the previous financial year.
In case you are wondering about the gap some £20 billion or so is National Insurance which is not counted as a tax.
How much debt?
The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of May 2017, which equates to 86.5% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).
Actually some of this is due to the Bank of England something which we did not hear about yesterday from Governor Carney.
£86.8 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility. Of this £86.8 billion, £63.3 billion relates to the Term Funding Scheme (TFS).
There is much to consider about austerity UK style. Ironically in the circumstances we would qualify under one part of the Euro area rules as our deficit is less than 3% of GDP. But of course that is a long way short of the horizon of surpluses we were promised back in the day. Please remember that later today as all sorts of forecasts appear, as the George Osborne surplus remained 3/4 years away regardless of what point in time you were at. As we have run consistent deficits is that austerity? For quite a few people the answer is yes as some have lost jobs or seen very low pay rises as we note it represented a switch. The switch concept starts to get awkward if we look at the Triple Lock for the basic state pension for example.
Moving onto other matters it was only yesterday that Governor Carney was boasting about the credit boom and I pointed out the unsecured portion. Well already the news has not gone well for him.
Provident Financial said recent collections performance had “deteriorated”, particularly in May. ( New York Times)
Presumably they mean the month and not Theresa. Also there was this in the Agents Report about the car market.
Increases in the sterling cost of new cars and decreases in the expected future residual values of many used cars had put some upward pressure on monthly finance payments on Personal Contract Purchase (PCP) plans.
If there was a canary in this coal mine well look at this.
Car companies had sought to offset this in a
number of ways, including increasing the length of PCP
As the can gets solidly kicked yet again we wait to see if finance in this area is as “secured” as Governor Carney has assured us.
The Longest Day
The good news for us in the Northern Hemisphere is that this is the longest day although the sweltering heat in London it felt like a long night! So enjoy as for us it is all downhill now if not for those reading this Down Under. I gather it is also the Day of Rage apparently which may be evidenced when the Donald spots this.
Ford Motor Co (F.N) said on Tuesday it will move some production of its Focus small car to China and import the vehicles to the United States ( Reuters )