What is the state of the UK Public Finances?

This afternoon the UK Chancellor of the Exchequer will stand up and give what is now called the Spring Statement about the UK public finances. It looks set to be an example of what a difference a few short months can make. But before we get to that let me take us back to yesterday when we were looking at the issue of falling house prices in London. That would have an impact on the revenue side should it be prolonged and the reason for that is the house price boom in the UK which was engineered back the Bank of England back in the summer of 2012 led to this. From HM Parliament last month.

In 2016/17 stamp duty land tax (SDLT) receipts were roughly £11.8 billion, £8.6 billion from residential property and £3.2 billion from nonresidential property. Such receipts are forecast to rise to close to £16 billion in 2022/23, or around £14.5 billion after adjusting for inflation.

That is a far cry from the £4.8 billion of 2008/09 when the credit crunch hit and the £6.9 billion of 2012/13 when the Bank of England lit the blue touch-paper for house prices. Although of course some care is needed at the rates of the tax have been in a state of almost constant change. A bit like pensions policy Chancellors cannot stop meddling with Stamp Duty.

Indeed much of this is associated with London.

Around 2% of properties potentially liable for stamp
duty were sold for over £1 million – these properties
accounted for 30% of the SDLT yield on residential

In fact most of the tax comes from higher priced properties.

In 2016/17 the stamp duty yields on residential property
were split nearly 45:55 between those paying the tax for
purchases between £125,000 and £500,000, and those
paying for properties purchased at over £500,000.

So there you have it the London property boom has brought some riches to the UK Treasury as has the policy of the Bank of England.

The Bank of England part two

Yesterday brought something of a reminder of an often forgotten role on this front.

Operations to make these gilt purchases will commence in the week beginning 12 March 2018……..The Bank intends to purchase evenly across the three gilt maturity sectors.  The size of auctions will initially be £1,220mn for each maturity sector.

This is an Operation Twist style reinvestment of a part of the QE holdings that has matured.

As set out in the Minutes of the MPC’s meeting ending 7 February 2018, the MPC has agreed to make £18.3bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2018 of a gilt owned by the Asset Purchase Facility (APF)

So the Bank of England’s holdings which dropped to a bit over £416 billion will be returned to the target of £435 billion. So the new flow will help reduce the yields that the UK pays on its borrowings which has saved the government a lot of money. The combination of it and the existing holdings means that the UK can currently borrow for 50 years at an interest-rate of a mere 1.71%. Extraordinary when you think about it isn’t it?

The Office for Budget Responsibility ( OBR)

If we continue with the gain from the QE of the Bank of England then the OBR forecast that the average yield would be 5.1% and rising in 2015/16 back when it reviewed its first Budget. This gives us a measuring rod for the impact of QE on the public finances which is a steady drip,drip, drip gain which builds up over time.

If we bring in another major forecast from back then we get a reminder of my First Rule of OBR Club.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

For newer readers that rule is that the OBR is always wrong! I return regularly to the wages one as it has turned out of course to be the feature of modern economic life as the US labour market reminded us last Friday. If you take the conventional view as official forecasts find compulsory then at this stage of the cycle non-farm job creation of 313,000 cannot co-exist with annual hourly earnings growth fading from 2.9% to 2.6%. At this point HAL-9000 from the film 2001 A Space Odyssey would feel that he has been lied to again. Yet today and tomorrow will see a swathe of Phillips Curve style analysis from the OBR and others regardless of the continuing evidence of its failures.

The Bank of England has kindly pointed this out yesterday.

The accuracy of such forecasts has come under much scrutiny.

Here for a start! But ahem and the emphasis is mine…..

Gertjan Vlieghe explains how forecasting is an important tool that helps policymakers diagnose the state and outlook for the economy, and in turn assess – and communicate – the implications for current and future policy. So achieving accuracy is not always the sole aim of the forecast.

For best really in the circumstances I think. Oh and as Forward Guidance turned out to be at best something of a dog’s dinner as promised interest-rate rises suddenly became a cut I think Gertjan’s intervention makes things worse not better.


Embarrassingly for the Forward Guidance so beloved by Gertjan Vlieghe this has been an area of woe for the credibility of the Bank of England but good news for the UK economy and public finances. This is of course how the 6.5% unemployment rate target which was supposed to be “far,far away” to coin a phrase turned up almost immediately followed by further declines leading us to this.

There were 32.15 million people in work, 88,000 more than for July to September 2017 and 321,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.2%, higher than for a year earlier (74.6%).

As we look at that we can almost count the surge into the coffers directly via taxes on income and also indirectly via excise duties and VAT ( Value Added Tax). According to The Times more may be on its way.

Hiring confidence among British companies has reached its highest level in more than a year and recruitment is set to pick up as businesses shrug off downbeat economic projections, according to a closely watched study.

Manpower’s quarterly survey recorded that net optimism had climbed to +6 per cent in the latest quarter.


If we look for the situation I pointed out on the 2nd of this month that we are being led into a land of politics rather than economics. From the IEA ( Institute of Economic Affairs ).

New data shows that the Conservative government has finally hit its original target to eliminate the £100bn day-to-day budget deficit they inherited in 2010.

We get all sorts of definitions to make the numbers lower but whether they are cyclical or day-to day they are open to “interpretation” which of course is always one-way. But we have made progress.

the UK’s achievement of sustained deficit reduction over eight years should not be taken for granted.

This has been a fair bit slower than promised which leaves us with this.

The problem is the financial crisis and its aftermath saw public debt balloon from 35.4 per cent of GDP in 2008 to 86.5 per cent today – far higher than the 35 per cent average since 1975.

The consequences of that have been ameliorated by Bank of England QE and to some extent by QE elsewhere. Also it is time for the First Rule of OBR Club again.

The Office for Budget Responsibility projects that public debt will shoot up to 178 per cent of GDP in the next 40 years on unchanged policies, as demands on the state pension, social care, and healthcare rise.

The state of play is that public borrowing has finally benefited from economic growth and particularly employment growth. We are still borrowing but we can see a horizon where that might end as opposed to the mirages promised so often. There are two main catches. The first is that we need the view of The Times on employment to be more accurate that the official data. The second is that for debt costs not to be a problem then QE will need to be a permanent part of the economic landscape.

The certainty today is that the OBR forecasts will be wrong again. The question is why we have been pointed towards better numbers by the mainstream media? The choice is between more spending and looking fiscally hard-line ( which also usually means more spending only later….).





32 thoughts on “What is the state of the UK Public Finances?

  1. Hi Shaun
    So metaphorically we are heading towards the
    cross roads bumping over invisible potholes and when we
    get there we’re not sure that we are going straight ahead.

    He is the late Gary’s brother


  2. With tax credits and housing benefits, can you be sure that a surge of employment (of perhaps in low value added employment) guarantees a surge in income tax receipts? Maybe so on one side….but on a total picture view?

    • I’ve just got a contract related to the Oil and Gas industry that is local to me, pay is the best ever for onshore work. However in 2018/2019 thanks to the gift that is tax credits, my limited company will be paying me £11,850 PA (tax threshold), then £40K will go into my pension.

      Thus meaning i pay nothing in income tax on all this money earned, and still get the £7000 or so that i get for being a single parent handed via the tax credits /family allowance.

      Still, id prefer to get sweet FA off the state and see a return to capitalism so 3 times salary could buy a house. What a way to run an economy.

      • Still, id prefer to get sweet FA off the state and see a return to capitalism so 3 times salary could buy a house.

        Ou sont les neiges d’antan?

        The King is dead. Long live the King.

  3. Shaun, as you say the Spring Statement will be based on old and inaccurate data, with any forecasts, in time, being proved wrong. So the whole thing is irrelevant really, except politicians think they know whats best for us and will try to micro manage our lives with silly initiatives.
    They should be looking at the simplifying the tax system, encouraging business, supporting R & D, getting rid of overburdening regulation and bureaucracy and eliminating the skill shortage. But, that would require original thought and skills politicians don’t have.
    Instead we will get a few trendy headline grabbing proposals which won’t work and will be forgotten about in a few days time.

  4. Hi Shaun

    I’ve always thought that one of the most useful figures that one could calculate would be the structural deficit at full employment, excluding capital spending or at least one that is cyclically adjusted. In this way we can at least get a notion of the real gap that may need closing either by spending adjustments or taxes

    The recent crowing of George Osborne that we are now in surplus is nonsense because my understanding is that it was not struck on a cyclical or full employment basis and therefore would call for offsets of the automatic stabilisers at just the wrong time and make things substantially worse – which is what happened in 2012 when GO had to abandon what is called austerity.

    Will Hammond try to look at the numbers in this way and thereby indicate whether there is a true structural deficit? I doubt that because if the numbers did indeed show a structural deficit then the next question is: what will you do about it? And the true answer is that he doesn’t want to do anything if it indicates that taxes would have to go up or that spending needs to be cut significantly.

    To provide a succinct answer to your question: “What is the state of the UK Public Finances”? is that we don’t know and are most unlikely to get a sensible answer any time soon because the answer would be “wrong”!

    • Hi Bob J

      As to your opening point we return to the travails of the concept of full employment. Japan has an unemployment rate of 2.4% which is some 2% below past natural or full employment estimates and yet has no real wage growth to speak of.

      Moving onto today’s speech we did get some crowing about a surplus or day to day spending but yet again we are left wondering how that is calculated? I fear in the era of HS2 and Smart Meters how investment is defined. I know we will be paying for Smart Meters in our bills ( the new definition of free…) but it seems a very poor investment as it provides little gain (unless we move to smart pricing).

  5. It is very simple as I said a few days ago – it is just Enronomics: Inflate your income “forecast” and capitalise some of and bingo, you are running at a profit – except several people at the top of Enron were jailed (in contrast to the banks and politics, where nobody was).

    The OECD is saying (BBC News) “1.3% in 2018 amid a strengthening global recovery…. the weakest in the G20 ….the world economy was on course to expand at an annual pace of 3.9% over the next two years.” The key issues it sees in the UK are inflation and poor productivity. Phil has gone for 1.4% this year and 1.3% over the next two and says the UK has grown every year since 2010 (conveniently forgetting to tell the Brexit headbangers that this is mostly down to immigration and population growth). While chucking another £1.7bn into the London property market, his skills plans amount to “A plan to make the least productive businesses learn from the most productive!. How about letting them go bust?

    Then we come to the Enronomics – all of us have to keep income back for capital expenditure – especially mortgages and house maintenance plus savings – but it seems the Government can max out the credit card by conveniently ignoring this. It can borrow and assume that “growth” will pay it back (reminds me of the US banker i mentioned yesterday) and there will be an additional return on the expenditure itself (much like most Governemnt IT projects ….). That way, you can put all Government income (including taxes on capital like Stamp Duty) into daily expenditure – and finish up like Brown putting 90% of NHS expenditure into pay for no productivity response.

    The Stamp Duty take is interesting – the headbangers were demanding its abolition recently to help homebuyers (or inflate prices), so what would they do? Step forward, the headbanger in chief, Deadwood, who says we should be thinking about how we will spend the EU contribution – somebody wrote something about that on the side of a bus and said it was all going on the NHS….


    • Sorry but I do not appreciate your derogatory description of Brexit voters / supporters as ‘headbangers’. Many had very rational reasons for voting for Brexit and if you do not agree then that is your opinion however let’s keep it civilised.

      • I did say as was widely reported in October last year that the headbangers were demanding the repeal of SD led by the likes of Deadwood – in Parliament where this epithet is applied. Most Brexit voters were taken in by the claim on the bus, but the irony as Shaun points out is that SD will be about the same as the EU contribution by 2022.

        It is worth noting that most exports thought last November’s move to abolish SD for first-time buyers would actually inflate prices! Perhaps Brexit voters should try to follow the advice of The Who: Won’t get fooled again.

        • I must have discussed Brexit with well in excess of a hundred different folk who are both leavers and remainers and I have yet to meet anyone who believed the rubbish spouted by either the leave or remain camps! They were not fooled the first time and will not be fooled again.

        • ‘Most Brexit voters were taken in by the claim on the bus,’

          Most pundits were taken in by the claim on the bus being significant.Reality is that on the streets of UK towns and cities outside London, it was about rents and wages and also about schooling for kids.

          Worth noting that even in Midlands cities like Leicester and Coventry the vote was either marginally Remain or heavy Leave.

          • You should perhaps read up on Lord Ashcroft’s surveys on the subject then – not that the EU has any control over rents, pay or education.

            Of course, silly me, it was an earlier observation that was accurate – “The more economic difficulties increase, the more immigration will be seen as a burden” (look it up)

            It has of course largely been immigration, which has increased GDP, which Phil said has consistently grown since 2010. That is GDP growth, which has led to a fall in the deficit from higher revenues.

          • ‘You should perhaps read up on Lord Ashcroft’s surveys on the subject then ‘..

            Then I’d be reading the views of a sample of people who agreed to be interviewed by Ashcroft.I’m going off the people I know socially and at work that voted out.

            ‘It has of course largely been immigration, which has increased GDP,’
            But GDP per capita has gone down,which is my point

        • Most us swivel eyed, head banging Brexit voters had made our minds up long before you remainers decided to reinterpret what was actually written on the side of a bus.

          You seem to have forgotten the entire UK establishment was dishing out absurd propaganda on behalf of remain, not to mention globalists from around the world telling us the sky would fall in if we left, “back of the queue and all that”.

    • As a headbanger, I’d like to point out that I remember that bus and that only remainiacs suggest their was a promise to use our whole contribution for the NHS, and it’s absolutely dishonest to suggest there was.

      What that bus said was nothing like that:

      If I said, “It costs three hundred and fifty grand for a three-bed-semi, let’s rent instead,” would you call me a liar if I didn’t want to spend three hundred and fifty grand on rent?

      • I would invite you to read the OED definition of “instead” and bear in mind that no other substitute is mentioned on the bus, like abolishing stamp duty.

        Brexit doublespeak is on a scale equivalent to the Treasury definition of deficit and debt.

        • Having read the OED definition of “instead,” I invite you to read my analogy and find fault with my use of, “instead”.

          It was, if memory serves, the “Remain” campaign which was aptly described as “Project Fear,” for the scaremongering nonsense it postulated in the case of a vote for Brexit, never mind its actual implementation.

          So I see your Brexit doublespeak and raise you scaremongering lies.

          • Yes, very simple – you are substituting renting for buying. If you were to rent instead of buy, you would spend that money on rent, not the asset, over the lifetime of the usual mortgage.

            As for scaremongering lies, some of it was pretty daft, but nothing more than you would expect from Cameron and Gideon “look the deficit is gone” Osborne. WW3 was however an invention of Boris Johnson and you might like to consider a) the GBP:Euro rate and b) the OECD projections.

            I will see your scaremongering lies and raise you a Nazi-inspired poster plus Nige’s two best mates, Vlad and the Donald.

          • If you were to rent instead of buy, you would spend that money on rent, not the asset, over the lifetime of the usual mortgage.
            If I live that long; if my circumstances don’t change, etc.
            The point is that I’m not COMMITTING to spending £350k on rent.
            Vlad is the best hope for Russian democracy and has been since the August putsch of 1991.
            Trump is the US reaction to the establishments despised all over the World, and is your side’s making, not mine.
            I call with MSM bias.

        • What is disappointing about remain arguments is that it is always about about money or the economy and never about democracy and accountability. Up until the Lisbon treaty ( read it – it will frighten you) I was basically pro EU because checks and balances existed that kept power in the hands of even the smallest countries by way of a veto. Unfortunately that didn’t suit the EU who found the concerns of ‘peripheral’ countries a hindrance and slowed up ‘the project’. Had Tony Blair stuck to his promise (made three times) to give us a referendum on the Lisbon treaty, we wouldn’t be having this conversation as it would have been chucked out – which is of course why we didn’t get a vote! I witnessed first hand the EU in action in Ireland and Greece when things didn’t go their way and that changed my mind completely. I have also always felt very uncomfortable with the 1972 economic union act that gives supreme power to the ECJ. I didn’t vote for them – did you? Having a friend who is an MEP, and hearing the reality of how the EU works only confirms my view and why I voted out. But it always comes back to theoretical economic projections about what it will be like outside the EU. As a keen amateur historian, I do not recall ever reading about an Independence struggle that ever put the effect on their GDP top of the agenda!
          Before you say – easy for you to take this view, I have personally lost tens of thousands of pounds as a result of the Brexit vote. And you know what? I would vote the same way again. Some things are more important than money.

          • Apologies Shaun, I have let politics get into this discussion – i will end it now.

          • Yes, you remind me of the other reasons I voted to leave. Although somewhat regret it now. They were pretty bad on Greece. Also as was recently highlighted to me, the MEPs get voted in but the ruling bureacracy is self appointed, no real democracy there.

          • I am fascinated by this “democracy/ECJ” issue- when did you vote for a judge or a position in the Cabinet? Anyway, enough politics!

          • Where is the “democracy and accountability” in the UK? How wil voting out achieve democracy and accountability in the UK when you see the shambles Carney has created aided and abetted by his unaccountable mates May and Hammond and thats before i get on about the bankers .

            This is serious question – just how do think you will achieve these things simply by voting out? The rest of the undemocratic and non accountable British Establishment apparatus remains (excuse the pun) in place

  6. What breaks me is how they’re crowing about 2% growth and overlooking the fact that they’re borrowing £50bn to achieve it.

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