Of UK Austerity and the Queen’s Speech

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.

Mansion House

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…..

Today’s data

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 )


20 thoughts on “Of UK Austerity and the Queen’s Speech

  1. In 2011 the OBR forecast that in 2016-17 public sector net debt would be 66% of GDP. The actual number ended up being 86%. I am not sure why anyone listens to them anymore.
    The TaxPayers Alliance has worked out that in 2016-17 public spending was £1.3 billion lower than it was in 2009-10(real terms). A fall of 0.2%. Not really what I would call austerity!

    • Osbourne’s austerity always appeared to be keeping spending up,just not ramping any more.From what I can see,modern conservatives are clearly not that conservative any more.

      • Apart from privatising the utilities/trains & council housing by flogging them off on the cheap when were they?

  2. I was also initially amazed at the Argentinian bond issue but drilling into it it looks ok.
    It’s subject to New York legislation which means that they can’t get out of it as they found out with the vulture funds a while ago. 8% is high, the only people getting screwed will be the Argentinian taxpayer!

    • Hi Bez

      Well these days an 8% yield is very attractive to say the least although it is in US Dollars which is another risk for the Argentine taxpayer. Only this morning I was checking the exchange rates and noted that it had dropped some 2% against the UK Pound or ~3 months interest if repeated against the US Dollar.

  3. Hi Shaun

    Great article as always. To jump on the zeitgeist Austerity=fake news.

    Incredible that the population think the Austerity is happening, and yet ever year government spending increases (although less than inflation). I dread to think what would happen if we had real ‘greek style’ austerity.

  4. Hi Shaun,

    O/T but a subject that I know is dear to your heart.


    It seems that the regeneration of Battersea has taken something of a hit, particularly if one was hoping to find affordable housing in the area. The developers are claiming that, due to adverse economic conditions, they will only be able to provide a fraction of the affordable housing units that they claimed would be provided when they submitted their bid.

    I guess that there are similar rules in place for property developers as there are for the TBTF banks … overplay your hand and lie about things upfront and, if found out at a later date, don’t worry as we’ll just move the goalposts. All profit and no risk, and it’s surely the risk that keeps the whole shebang honest.

    Plus ça change and all that jazz.

    I know music usually waits until Fridays but heck, if they can change the rules to please themselves then so can I. 😉

  5. Correct me if I’m wrong but it seems to me that Hammond is not seeking to distinguish capital from current spending and perhaps the reason for this is that the long term idea is to still ( as under Osborne)shrink the size of the state rather than provide a structure of fiscal responsibility over the cycle which is based on the requirement to balance the budget in some rules based way.

    Both Gordon Brown and I believe John McDonnell have proposed frameworks which distinguish between capital and current spending. Capital spending should self liquidate over a term and fiscal spending for investment is especially cheap when we are at the ZLB; there is no better time to update and improve infrastructure. Current spending would be matched with taxation over the cycle and this would constitute the main fiscal rule; effectively capital spending would be ignored in fiscal management.

    As far as Hammond and all those who want to shrink the size of the state are concerned this is not a good idea and perhaps this is why they don’t adopt this view. Their interest is to see everything lumped in together in order to say that the state spends far too much overall and needs to be contained. The deficit under this way of looking at things will of course be much higher than otherwise.

    In my view the sensible approach is the one proposed by GB/JMcD, distinguishing between capital and current spending and laying the emphasis on current spending, a particularly apposite rule during the last few years when we have been at the ZLB.

    Of course what this approach does not give you as a fiscal rule is what many would regard as the critical element: what should the size and structure of the welfare state be like? The rule would only state what has to be financed by taxation in order to balance the budget and this rather begs the question and could be seen as a mechanism to increase taxes.

    The more you look at this the more you see it is 90% politics and 10% economics.

    • “Capital spending should self liquidate over a term”. Provided always that the state is capable of distinguishing between winners and losers! In evaluation they are probably back to ” 90% politics and 10% economics” don’t you think?

    • Hi Kevin

      Simply extraordinary isn’t it? Thanks for the link as I notice that Larry Elliot does not point out that a Bank Rate rise now would mean that last August’s cut was wrong. As I pointed out back then it was clear to me anyway.so why was it not to the Bank of England. Of course it is even worse for Andy Haldane because we had all his rhetoric about a “Sledgehammer” of QE being required.

      I have respect for someone who admits a mistake but as ever it is a fudge if it ever happens…

      • Hi Shaun,
        It also appears that the other dissenter was Kristen Forbes who was leaving anyway!, to an old cynic like me, it appears that from time to time they have decided to create the illusion of dissent to Mark Carney or should I say “independence”, to try and fool people into thinking there is a possibility of a rate hike when there is absolutely none.
        As I have said before, I just cannot understand why the forex market hasn’t realised this and crashed the pound already by calling Carney’s bluff, but as we saw following the BREXIT vote, Carney’s ego is so fragile that he just can never admit he is wrong, and worse than that, ignores the negative effects of his policies, and has the temerity to claim the success from his policies when it was his (unnecessary) devaluation of sterling that caused most of the subsequent boost to the economy.

  6. The strange thing about UK austerity is that many members of the public are suffering its effects, either directly or via reduced services, yet the government is still managing to spend more. Someone somewhere (probably a tax haven) is doing alright.

    • Hi arrbee

      We see signs of austerity for example in the cuts in police numbers. However few areas seem to own up to getting more yet some must have. I too worry about where it has gone although one area we do know which is the Triple Lock for the Basic State Pension.

  7. The austerity has mainly been felt by the working poor whose wages have been eroded in real terms.
    Retirees are virtually untouched.
    Meanwhile,GDP has been held up by bringing forward demand as per Hammond’s point.He clearly understands things but like any politician,just doesn’t want to deal with the long term problem.

  8. Government and Local Authorities will always have to spend more in certain areas – eg pension contributions, and this clouds the situation when trying to understand and clarify the seeming contradictions of budget increases whilst cuts to services are made.

    • Hi poppyred1

      Yes this is an issue. In fact one of the problems in any form of cutbacks is how much of the spending is something that cannot be changed. So the bits that can be cut often see relatively large changes.

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