UK Public Finances see a fiscal stimulus for bond holders and the EU

Today we advance on the latest data for the UK Public Finances. This adds to a week where they have already been in the news. After all they will be affected by the HS2 railway project especially if its costs overrun as we looked at on Tuesday. It is tempting to suggest it will take place in a time way beyond how far ahead politicians think but of course the raising of the state pension age to 68 beginning in 2037 was badged as saving this according to BBC News.

The government said the new rules would save the taxpayer £74bn by 2045/46. While it had been due to spend 6.5% of GDP on the state pension by 2039/40, this change will reduce that figure to 6.1% of GDP.

If you look at the state pension system it appears that you can take away jam tomorrow but not jam today. Only yesterday I looked at this and the pension prospects for millennials who will ( rightly in my view) fear further rises in the state pension age.

The better economic news this week on inflation and retail sales will help a little in the short-term but the truth was that after the EU leave vote 2017 was always going to be more of an economic challenge due to a lower value for the UK Pound £ leading to higher inflation and lower real wages. We have some economic growth but not much.

Looking ahead

A week ago the Office for Budget Responsibility looked at the UK public finances and attempted to forecast years and indeed decades ahead. For perspective let me remind you that the first rule of OBR club is that the OBR is always wrong! However there are a few issues to look at and this summary of our current position is a start.

But the budget is still in deficit by 2 to 3 per cent of GDP – as it was on the eve of the crisis – and net debt is more than double its pre-crisis share of GDP and not yet falling. As a result, the public finances are much more sensitive to interest rate and inflation surprises than they were.

That latter sentence suggests they have been reading the discussions on here. I remember a comment pointing out that the UK would struggle if gilt yields rose above 3% and I have pointed out the impact of this year’s rise in inflation on the debt costs of index-linked Gilts. On that subject the economics editor of the Financial Times has written another piece of propaganda about the Retail Price Index saying it gives much to high a number. You may note he uses clothing prices as apparent proof but the vastly more important housing market somehow gets forgotten. Mind you if I had been a vocal supporter of putting imputed rents into the botched CPIH maybe I would suffer from selective amnesia as well.

 I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ it all ( Michael McDonald )

Still my rule that forecasts will tell us the public finances will be fine in four years time continues to be in play.

Our March forecast showed it on course to reduce the deficit to 0.7 per cent of GDP by 2021-22, but predicated on plans for a further significant cut in real public services spending per person.

Today’s data

Some of the cheer from this week’s UK economic data disappeared as these numbers were released.

Public sector net borrowing (excluding public sector banks) increased by £2.0 billion to £6.9 billion in June 2017, compared with June 2016………….Public sector net borrowing (excluding public sector banks) increased by £1.9 billion to £22.8 billion in the current financial year-to-date (April 2017 to June 2017), compared with the same period in 2016.

So we see that the financial year so far has deteriorated and the cause was June. If we drill into the detail we see that my point about the cost of inflation is in play as debt interest costs rose from £3.7 billion to £4.9 billion. This has to be the cost of our index linked Gilts rising as the RPI does ( currently 3.5% annually ). So far this financial year we have paid an extra £3.3 billion and whilst there may be a small cost from conventional Gilts the may player again will be higher inflation.

Also there was something which Britney Spears would describe as a combination of toxic and hit me baby one more time.

In June 2017, the UK paid £1,249 million to the EU budget through GNI and VAT based contributions, which are made net of the UK rebate. This payment consisted of our standard monthly VAT and GNI based contribution of £991 million, along with a £258 million payment adjustment covering earlier years.

That was some £700 million higher than last year.

If we switch to the broad picture then the revenue situation looks pretty good and makes us mull economic growth.

In the current financial year-to-date, central government received £164.2 billion in income; including £119.6 billion in taxes. This was around 5% more than in the same period in the previous financial year.

But we have spent more and it can hardly be called austerity can it?

Over the same period, central government spent £185.7 billion; around 5% more than in the same period in the previous financial year

Oh and rather curiously Stamp Duty receipts are up from £3 billion to £3.4 billion so far this financial year.

The Bank of England and the national debt

At first the rise of the UK national debt looks troubling.

This £1.8 trillion (or £1,753.5 billion) debt at the end of June 2017 represents an increase of £128.5 billion since the end of June 2016.

It has the feel of surging until we note the impact of the Bank of England’s Sledgehammer so beloved of Mark Carney and Andy Haldane.

Of this £128.5 billion, £86.6 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility. Of this £86.6 billion, £69.3 billion relates to the Term Funding Scheme (TFS).

So our national debt rises so they can subsidise the banks yet again!


Depending on your perspective you can argue that the UK has seen austerity in the credit crunch era as the annual deficits have shrunk or stimulus as each year has seen a deficit. Actually we have seen a hybrid where some have experienced austerity but others such as beneficiaries of the triple-lock on the basic state pension have gained. The “Forward Guidance” is that the deficit will be gone in around 4 years time but that remains true at whatever point in time you choose to pick.

Meanwhile June has seen a fiscal stimulus except there are two catches. Firstly the main component has gone to the holders of RPI linked Gilts which means their credit crunch has been a stormer. I wish I had continued to hold some as whilst it went very well I did not realise that even more was on its way. Let us hope they spend/invest the money in the UK. Of course it will be party time at the pension fund of the Bank of England. The other catch is more toxic as the fiscal stimulus goes to the European Union of which we will only get some back. Ouch!

Meanwhile do we have another potential signal for the state of play in the UK economy? From the BBC.

Air traffic controllers are warning that UK skies are running out of room amid a record number of flights.

Friday is likely to be the busiest day of the year, with air traffic controllers expecting to handle more than 8,800 flights – a record number.

Me on Core Finance




10 thoughts on “UK Public Finances see a fiscal stimulus for bond holders and the EU

  1. Great blog, Shaun. So, we borrowed £22.8 billion in the first quarter of the fiscal year. That is about £250 million added to the debt every day. Among all the faked figures (GDP, inflation etc), here we have a real number and yet, amazingly, it has been completely forgotten in the public debate. And, while you don’t do politics (wisely), the public debate seems to be going along the lines of:
    1. We have had a decade of austerity and cannot take any more;
    2. There is great capacity to spend and borrow more;
    3. Interest rates are never going up anyway.
    The elephant in the room is QE, of course, as it provides a magic money tree AND prevents interest rates going up.
    But, as discussed here many times, it keeps alive zombie firms, it pushes up asset prices and allows the government to spend without apparent consequences.
    I have really tried hard to think of a good way out of this, but have now sadly concluded that there isn’t.
    As it seems impossible to cut government expenditure and the government cannot afford an interest rate rise and the banks cannot cope with a property crash, I see QE being a permanent feature. That will lead to even greater disaffection among those under 40 and that will lead to some pretty ugly generational conflicts IMHO.

    • “Would you please tell me which way I should go from here”, said Alice. “That depends a good deal on where you want to get to”, said the cat. “I don’t much care where”, said Alice. “Then it doesn’t matter which way you go”, said the cat.

      I think the BoE is lost deep in the woods along with Alice.

    • James, I am with you on the summary position but I am negative on the outcome. QE to stay but poor prospects for the UK will be emphasised in the lower value of sterling, as prime property falls in London are exacerbated by the wealthy and banking set going offshore (maybe Brexit) the chances of the property bubble sustaining itself are quite low.

      It could be IR rises are forced, MC’s most hated course of action. Then there really is no hope to keep the property bubble afloat. I’m off to wath Dunkirk the movie tonight for some “inspiration” in these dark … dark days. 🙂

      Of course I will buy pop-corn.


      • Enjoy the film!
        You made me think of what would happen if there really is a property crash inspired by higher interest rates. I would guess that
        1. The banks will go bust again
        2. The government finances will be under incredible strain just as the banks need bailing out
        3. Those car loans will also prove to be a disaster
        4. The buy to let crowd will go bust
        5. Everyone over about fifty will feel broke in asset terms
        5. Everyone under fifty will be hit by higher mortgages
        6. Those in their twenties and thirties STILL won’t be able to buy a house as the banks won’t be lending and the mortgage costs will be prohibitive
        Government debt is so high that in these circumstances QE will be the only supplier of cash to fund things.
        That is why (as I said above), I cannot see a good outcome now. You either prop up assets and the under forties are screwed or you raise interest rates and watch the titanic hit the iceberg..,

        • James, the film was sold out on launch so back at home, I’ll gather some Duunkirk spirit and pop-corn on Sunday.

          Regarding your gory list, its right to worry about them all, my take is a little more contrived:

          1. The banks will go bust again:
          Yes but no but, Global econmic powers will “sub” UK system to protect themselves.
          2. The government finances will be under incredible strain just as the banks need bailing out:
          Govt finances may lead to real austerity – shock and awe, reduce salaries and pensions in the state sector!
          3. Those car loans will also prove to be a disaster:
          PCP deals will go sour but only at renewal, so ignorant masses will lose the £199 a month deal annd find themselves on £299 for a much lower spec vehicle, of course very degrading but also cringingly expensive for most with other ££ squeezes.
          4. The buy to let crowd will go bust: Yes, the really over-reached however the asset bubble will afford a significant proportion the relief of asset value cushions, however after 2 years of falls even those will be thin, a slow motion rectificaton.
          5. Everyone over about fifty will feel broke in asset terms: Now, that would be delicious if Baby Boomers and rich pensioners felt the squeeze and could not go on cruises in the Med!
          5. Everyone under fifty will be hit by higher mortgages: 4% mortagages on property at half former valuation aint too bad.
          6. Those in their twenties and thirties STILL won’t be able to buy a house as the banks won’t be lending and the mortgage costs will be prohibitive : 4% mortagages on property at half former valuation aint too bad.

          Anyway I am sure we will see by Xmas.


    • The Venezualan crisis shows that money cannot be printed indefinitely.

      UK imports food and pays for it with sterling. Continued borrowing and QE risks a sterling crisis. A sterling crisis means lots of hunger in Britain

      • Quite, I think IR’s will be forced. QE and currency debasement has its limits and only gets discovered in marginal terms, i.e. seemed already yesterday but another couple of drips and all hell lets loose. It seems that the UK will be the canary to me since the other larger or affiliate economies can run rough-shod bigger and longer. China, US and Europe have more staying power however ridiculous their positions. We shall see in coming months. Paul C.

    • Hi Ian

      It is not the conventional QE but other parts of the monetary easing portfolio. Of this a large component is the Term Funding Scheme which raises the National Debt because of this.

      “the loan assets are to be treated as illiquid assets as they are not tradeable and their value is not realisable by the Bank of England at short notice.”

  2. As part of that generous act that resulted in ‘Tony’ being praised as a “great European” by the wily old fox Jacques Chirac for making much larger contributions to the EU, he also agreed that the bill be set in Euro’s. I believe the £ was above $2 at the time. The financial crisis and Brexit inspired collapses in monetary policy by the Bank of England will have vastly inflated our bill to the EU over that time.

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