The UK could borrow £25 billion or indeed more very cheaply if it wished

It would appear that one of the main features of the credit crunch era which has been turbo-charged in 2019 so far has escaped the chatting and think tank classes. This is the situation where the UK can borrow on extraordinarily cheap terms. As I type this the two-year and five-year Gilt yields are of the order of 0.46% and the benchmark ten-year is at 0.67%. The only other time we have ever seen yields down here is when Governor Mark Carney was cracking the whip over the Bank of England in late summer and autumn 2016 demanding that they buy Gilts at nearly any price. That kamikaze phase even pushed us briefly to negative yields as the market let him buy at eye watering prices.

This was on my mind as I read this from the Institute for Government which has written what it calls an explainer on whether the UK can do this.

During the election campaign, Johnson said that it “is certainly true is at the moment (that) there is cash available.  There’s headroom of about £22bn to £25bn at the moment.”

The whole concept is predicated on a complete fantasy.

This figure for headroom refers to the gap between the latest official forecast for borrowing in 2020/21 and the maximum amount that is consistent with meeting Philip Hammond’s fiscal mandate – that borrowing should be no more than 2% of GDP in 2020/21, after adjusting for the ups and downs of the economic cycle (which is typically referred to as “cyclically-adjusted” or “structural” borrowing).

Firstly no sniggering at the back please when you read “the latest official forecast for borrowing in 2020/21” as we recall that the first rule of OBR Club is that the OBR is always wrong! Next comes the “fiscal mandate” which in the ordinary course of events would have a half-life that would not reach 2021 which is of course even more likely now that the man called Spreadsheet Phil has fallen on his sword.

Oh and that is before we get to “structural” borrowing which means pretty much whatever you want it too. But finally we get a grain of truth.

Mr Hammond has bequeathed his successor a level of borrowing that is low by historical standards. The Office for Budget Responsibility’s March forecast suggested borrowing would be 0.9% of GDP (or £21bn) next year, virtually all of which would be structural.

The reliance on the number-crunching of the serially unreliable OBR is odd but there is a kernel of truth in there which is that we are currently not borrowing much. Last year it was 1.1% of GDP and the debt to GDP ratio has been falling as the economy has grown faster than the debt.

This brings me back to the piece de resistance which is that we can borrow incredibly cheaply and if we look at in terms of the infrastructure life cycle the thirty-year Gilt yield is a mere 1.33%. So we could if we chose borrow quite a large sum on very cheap terms. As to how much well into the tens of billions and maybe a hundred billion. Just in case readers think I am breaking my political neutrality I have made similar points to my friend Ann Pettifor who is an adviser to the Labour Party with the only difference being that markets would trust a Corbyn led government less. How much less is hard to say as we know that any yield ( the Greek ten-year is around 2%) tends to get hoovered up these days.

If we move to the other side of the coin which is how such funds would be spent the picture then sees some dark clouds. They are called Hinkley C, HS2 and the Smart Meter debacle although I think the latter was foisted onto out electricity bills.

Oh and before I move on real yields are much more complicated than often presented. After all none of us know what UK inflation will be over the next 30 years, but it seems more than likely that the yields above will not only be negative but significantly so.

Consumer Credit

We can continue our number crunching with this from the Bank of England this morning.

The annual growth rate of consumer credit continued to slow in June, falling to 5.5%. Annual growth has fallen steadily since its peak in late 2016, and particularly over the past year reflecting a fall in the average monthly net flow of consumer credit. Since July last year, the net flow has averaged £1.0 billion per month, compared with £1.5 billion per month in the year to June 2018.

Let me translate this a little. The annual rate of growth has fallen since they pumped it up with their “Sledgehammer QE” of August 2016. This was a change in claimed strategy as of course Governor Carney has regularly told us that “This is not a debt fueled recovery” ( BBC August 2015). Of course according to Governor Carney the August 2016 move saved around 250,000 jobs although even his biggest fans have to admit he has had a lot of problems in the area of unemployment forecasting.

Whilst 5.5% is slower than compares not only to an extraordinary surge but is for example nearly double wage growth, quadruple likely GDP growth and around five times real wage growth. Also the actual amount at £218.1 billion has grown considerably.

Mortgages

There seems to be a serious media effort going on to support the UK housing market. Here is @fastFT from earlier.

Rise in mortgage borrowing points to stabilisation in UK house market.

Does it? Here is the actual Bank of England data.

Net mortgage borrowing by households was £3.7 billion, close to the average of the previous three years. This followed a slightly weaker net flow of £2.9 billion in May. The annual growth rate of mortgage lending remained stable at 3.1%, around the level that it has been at since 2016.

The trouble for House price bulls is that those are the sort of levels which saw house price growth across the UK grind to a near halt. A similar situation exists for what seems to be coming down the chain.

Mortgage approvals for house purchase (an indicator of future lending) increased by around 800 in June to 66,400 and the number of approvals for remortgaging rose slightly to 47,000. Notwithstanding these small rises, mortgage approvals remained within the narrow ranges seen over the past three years.

Comment

I have looked at things in a different light today showing how numbers are twisted, manipulated and if that does not do the trick get simply ignored like the level of bond yields. Some of this sadly starts at the official level where we get what are in practice meaningless concepts like structural borrowing or this from Bank of England Governor Mark Carney in August 2015 via the BBC.

“The timing of a rise in interest rates is drawing nearer,” Bank of England governor Mark Carney says at the start of the Inflation Report press conference. He also says speculation about when interest rates begin to rise is a good thing and a sign of growing economic confidence.

Let me finish by referring to a campaign I have been running for seven years or so now which is over the impact of the Funding for Lending Scheme. Remember all the promises about small business lending?

and the growth of SME borrowing rose to 0.8%, its highest since August 2017.

Also as we note lending to SMEs at £167.8 billion has fallen far below unsecured credit is it rude to wonder how much of the £67.6 billion lent to the real estate sector ended up in the buy-to let bubble?

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13 thoughts on “The UK could borrow £25 billion or indeed more very cheaply if it wished

  1. Last time I looked at UK gilt yields the 2 and year yield 0.44% I don’t know whether its been lower ever perhaps Shaun knows. But this is a sigh of the markets predicting a cut in interest rates.

    Seems to me with limited knowledge of economics this is the way its going, long term low interest rates globally and becoming the norm, and possibly more negative rates like Japan.

    World growth is slowing and at some juncture it was bound to slow if it was built on too much debt sooner of later the house of cards would collapse.

    • Hi Peter

      Yes they did go lower as I recall the UK ten-year Gilt dipping below 0.5% in the Sledgehammer QE era. In fact the 2023 and 2024 Gilt so 6/7 year back then briefly traded at a negative yield in response to that operation. If I recall correctly it was only for a few days but it did happen.

  2. When does the system break, Shaun? Lets say £100bn is borrowed, and equivalent Euros/Dollars are as well . And lets say about half goes on ‘green new deal’ stuff in UK, EU and US ( so no run on currencies as no where to run to) and half on paying helicopter money to those with no jobs. I think GDP will look OK as so much has been invested , even if it replaces efficient stuff with inefficient stuff. Maybe productivity appears to increase because only half the population now works. No comment on the type of society, as it must be very controlled to withstand the changes and 50% unemployed. But ‘economically/financially’ it survives doesn’t it? Even superficially looks like it prospers?
    Forgive the diversion, but we have previously discussed France v UK economies and level of unemployment and productivity. The economies are about the same in size, have been for years. Yet France runs much higher unemployment and records higher productivity. The reason is the French social model. It makes it far harder to fire people and much more costly. So every company of every size has incentive to spend Capex rather than hire people. So across France you get companies with latest tech and fewer employees than UK. For simple example, just go into equivalent coffee shops.
    Extend this to the new world described above. The western world borrows $billions and spends it on new tech ( bad tech as well as good tech). Jobs are lost in their millions, but society and ‘the system’ survives with a lot of ‘control’.
    Over time of course ‘encouragement’ is applied to half populations by natural and unnatural means.
    A new green nirvana is born.
    Isn’t this what we are being softened up for?

    • Hi JimW

      The productivity argument has got complex and let me give examples from my part of London. A few weeks ago I cycled through the Battersea Power Station site at lunchtime on a Sunday and people were working on the construction sites. Also supermarket deliveries carry on until quite late on a Sunday evening. Yet somehow something which is better economically seems to head us to lower productivity maybe because it is labour productivity which is measured. Also labour productivity may well have been driven lower by the problems with real wages in the UK. But of course it keeps being officially denied that this has anything to do with the migration.

      As to a green Nirvana that rather clashes with pumping up the economy with more debt doesn’t it? The brutal truth is that there are already too many humans around and we seem set on growing the population. What could go wrong?

  3. Shaun,
    Who decides on the type of investment under these conditions given HMG’ s track record with major projects? Unfortunately the Treasury know the cost s involved but not the value!

    • Hi Chris

      In general terms it is set by the Chancellor and HM Treasury. That I find worrying as the people I meet from HM Treasury usually have similar characteristics but not in a good way, Individual ministers have some power but there seems to be quite a merry-go-round in some areas. I think I read last week that the new UK housing minister was the 17th this century, so they have a lifespan similar to a Chelsea FC manager.

  4. The UK, like any other sovereign currency nation, does not tax or borrow to spend, it spends first and offsets later, this is a hill I’m prepared to die on! The only question we need to ask is should this money be spent, how much is irrelevant. I find it ludicrous that monopoly provider of GBP would ever need to borrow.All spend has consequences of course and yes the amount does matter. Bond issuance controls the interest rates and taxation controls inflation. Neither of them ever funds anything.

    • Bah just contradicted myself there. This bit is very nuanced the amount is both irrelevant in that the amount of money we can spend is infinity minus one penny but it does matter in that that would be a monumentally stupid idea. Inflation and real resources available are the spending, not borrowing, constraints.

  5. Why stop at £25billion? As we are now operating under MMT borrowing doesn’t matter as rates can never go up and as they go negative the amount borrowed can in theory go to infinity.

    Free money and debt equals wealth, but if you can get rich by just borrowing money or investing in the stockmarket that always goes up and never ever is allowed to go down, why would anyone bother to go to work or start and run a business?Well that’s where UBI comes in for those who are smart enough to have realised that the mugs who go to work are the ones who pay for everyone else, so the only sensible thing to do is to join them.

    Taken to its insane conclusion, eventually there will be no stockmarket as most large comapaines will have been taken private by the endless share buybacks of directors until they are de-listed, they will have bought the company back with borrowed money, borrowed from the central bank at close to zero cost.

    There are only two options for central banks, continue with this insanity and face their currencies failing(£ way ahead of the field on that one as usual) or raise rates and burst the bubbles and destroy the financialisation process of their economies.

    I think it’s pretty obvious which option they are taking.

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