The UK Public Finances are looking strong ahead of the Spring Statement

Today brings one of the set piece events of the UK financial year as the Chancellor of the Exchequer presents his Spring Statement. Of course it was supposed to follow a success last night for the government’s proposed Brexit deal but that did not happen. Thus the rumours about providing financial sweeteners after such a deal are likely to remain just that. However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

There are quite a few issues here and let me open by illustrating with some recent tweets from Ben Chu of the Independent.

…Because there ISN’T a pot of money waiting to be spent, which is what that language from the Chancellor suggests……Instead there is, according to the @OBR_UK last October, projected to be a structural deficit of 1.3% of GDP in 2020-21. The Chancellor’s self-imposed ‘fiscal mandate’ requires a deficit of less than 2% of GDP in that year……so he’s set to undershoot that by 0.7% of GDP in that year, which works out as £15.4bn. (These figures will be updated next week at the Spring Statement BTW but Treasury leaks suggest they will be direction that’s beneficial for the Chancellor)……so it’s this £15.4bn (or more) which Hammond seems to be saying will be made available for public spending or tax cuts or whatever if MPs approve May’s deal…

Let us work our way through this. Is there a pot of money waiting to be spent? Not literally as in as having squirreled some away but the improvement in the public finances means that we could borrow more. The latest numbers for the public finances show this.

Borrowing in the current financial year-to-date (April 2018 to January 2019) (YTD) was £21.2 billion, £18.5 billion less than in the same period last year; the lowest YTD for 17 years (since 2001)……..Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear. Regular readers will recall there was a period when the numbers underperformed the economy well after a lag we got that back. So whilst there is not a literal pot of money there is a metaphorical one. For perspective the peak year for borrowing after the credit crunch was a bit over £150 billion.

Structural Deficit

If we address this next then let me point out that in reality it is pretty meaningless. At a time where by definition the credit crunch has brought enormous structural change there is a clear conceptual problem. Politician’s love this sort of number as it allows them to claim success after hitting an easier target. But as we have seen before a small tweak to the assumptions can lead to large ch-ch-changes.

Fiscal Mandate

These sort of things are really will o’ the wisp style developments which suit the political agenda but can disappear as quickly as they appeared. For example the deficit of 2% of GDP quoted is a self-imposed rule that could be changed overnight in either direction. It is simply a choice ( unless you hit a stage where the “bond vigilantes” impose things on you) presented as a fait accompli until it changes again.

State of Independence

We find ourselves wondering what establishment claims of independence mean in practice yet again? If you claim the Office for Budget Responsibility is independent the tweets above pose two clear challenges. Firstly if so. how is the Treasury leaking its figures? Next comes the way that it regularly manages to tweak its assumptions to suit the government of the day.

If we stay with the OBR then Ben Chu seems to be a believer.

What the lord of forecasting (in this case OBR director Robert Chote) giveth, he can also taketh away.

That was from the Independent last November and again as I have noted above there is an element of truth but the “lord of forecasting” ignores the simply woeful forecasting record of the OBR. The latest example of this is the way that the OBR has been forecasting rises in the UK fiscal deficit over the past 2/3 years whereas the deficit has been falling sharply.

Gilt Yields and Inflation

These are two big influences on the public finances as they determine the costs of our borrowing. They have declined in three main ways.

1. UK Gilt yields are very low in historical terms with the benchmark ten-year yield only 1.18% and even the thirty-year yield being only 1.71%
2. Inflation has fallen reducing the cost of index-linked debt which is indexed to the Retail Prices Index. That currently rising at an annual rate of 2.5%
3. As we are borrowing less this is a smaller influence as on our fixed-interest borrowing (~78%) the extra costs are on new debt only.

Thus the impact of matters such as the QE ( Quantitative Easing) era and the way that central banks have operated is positive for the public finances. A recent example of this was the response to the new policy announcement of the ECB which reduced UK debt costs as they followed European ones lower.

Tariffs

We do already have one announcement which may affect the public finances as this was announced this morning. From the Department for International Trade.

Today the government announces details of 12-month temporary tariff that will only be applied if we leave the EU with no deal: UK businesses will not pay tariffs on 87% of goods imports by value – helping to avoid price increases & supporting households.

They go on to give some examples.

There will be a mix of tariffs & quotas on products including: Finished vehicles Beef, lamb, pork & poultry Butter & some cheeses Bananas, raw cane sugar, and certain kinds of fish And in sectors where the UK is maintaining protection from unfair trading practices.

That is how we will treat other countries it is up to them how they treat our exports. But moving back to today;s theme there will be a loss of revenue from this should it take place.

Comment

In terms of the public finances alone then the UK has done well. If we widen the debate though there are consequences elsewhere. For example there is the issue of austerity which we have not seen in outright terms as government spending has risen and usually by more than inflation. However it has hit some for example the way that some benefits rises were capped at 1% per annum. Also the rise in knife crime has refocused attention on cuts to the policy budget.

Meanwhile the improvement will not be welcome in other areas as here is the Financial Times from November 2016.

Philip Hammond will admit to the largest deterioration in British public finances since 2011 in next week’s Autumn Statement when the official forecast will show the UK faces a £100bn bill for Brexit within five years.

As we are nearly half-way through that period it is safe to say that things could not be going much worse for that Chris Giles analysis. If I may offer him some help then my first rule of OBR club that it is always wrong worked yet again.

With bad income tax revenues so far this financial year, the OBR has already said it was “very unlikely” to hit the 2016-17 Budget forecast.

Actually time was not especially kind to this bit either.

Public sector debt will jump, Mr Hammond will be forced to admit, by £100bn this year, raising it from 83 per cent of national income to almost 90 per cent from higher borrowing and because the ONS has announced it will treat the Bank of England’s new term-funding scheme as additional debt.

Still at least one reply kept a sense of humour as we note we have not left the European Union yet so things could change.

The last time we left Europe was May 1940. It didn’t go very well. ( Three line flip )

Number Crunching

Last night Ronaldo scored a Champions League Hat-Trick. This morning the shares of Juventus are up by 16% meaning the club is in theory worth an extra amount more than they paid for him. Of course you would be unlikely to be able to sell all the shares at that price but as they have doubled since he arrived the number crunching goes on.

Even the bond market has got in on the game.

The new Juventus bond is back up again after Ronaldo’s hattrick last night, 3 points higher than it was post the lows following the 2-0 first leg Athletico defeat. They should get Ray Winstone to advertise the bond. #whenthefunstopsstop pic.twitter.com/myMjvirFGw

— Bond Vigilantes (@bondvigilantes) March 13, 2019