Today we open with some good news as the UK Office for National Statistics has been burning the midnight oil and has come up with this.
The total package of current price GDP improvements increases the size of the economy in 2016 by approximately £26.0 billion, around 1.3% of GDP……Average growth of volume GDP over the period from 1998 to 2016 has been revised up 0.1 percentage point to 2.1% per year.
Actually they have also decided the credit crunch impact was not quite as bad as previously thought.
The peak-to-trough fall of the 2008 economic downturn in GDP has been revised from 6.3% to 6.0% and the UK economy is now estimated to have returned to its pre-downturn levels one quarter earlier in Quarter 1 2013.
Those who can remember back then will recall that it was a period when the labour market data signalled an upturn in the economy a year or so before the output or GDP data. You may recall there were fears of a “triple-dip” back then and from back then ( January 2013) here is Howard Archer in The Guardian.
While we believe the economy is essentially flat at the moment, it is worrying to note that GDP in the fourth quarter of 2012 was 3.3% below the peak level seen in the first quarter of 2008. We suspect that GDP will not return to the level seen in the first quarter of 2008 until the first half of 2015 – a gap of seven years.
As you can the perception is very different now. This takes us back to all of yesterday when we noted that the opening of 2018 in Germany is now thought to be very different to what we think now.
Also there was something to make supporters of nominal GDP targeting follow the advice of Iron Maiden and run for the hills.
In the decade leading up to the financial crisis, average nominal GDP growth remains unchanged at 5.0%, while there has been a slight upward revision from 3.6% to 3.7% in the period following the financial crisis.
For those unaware there are more than a few around who argue that targeting a nominal GDP growth rate of 5% would produce something of an economic nirvana. The theory is that if we then get the inflation target of 2% per annum then economic growth would be 3%. Or if you prefer Hallelujah we are saved! Meanwhile they got it and the economy then collapsed. You could not make it up. The more subtle point is to wonder if the Bank of England was actually targeting this? This seems unlikely as let’s face it they so rarely hit any target on a consistent basis. Oh and I do not expect this to deter supporters of nominal GDP targeting as there are other problems as you may have already spotted which they choose to look away from.
Also I note that these revisions support my view that the service sector is larger than our statisticians have told us.
Service industries has been revised upwards in both the pre- and post-crisis periods, and accounts for 90% and 85% of total GVA growth in these periods respectively.
If we now move onto today’s news then we see that the consequence of the UK economy being recorded as larger is that our national debt to GDP ratio has been lower than we thought it was. We will have to wait for the full chained volume data set to discover exactly how much.
Also I can specify now something I mentioned before which was the boost to UK GDP by switching from using the RPI to the CPI as it was in the 2011 Blue Book which had average upwards revisions to GDP of 0.23%.
Let me get straight to the crucial point which is that the spending taps have been opened by the UK government.
Central government receipts in July 2019 decreased by £0.4 billion (or 0.5%) compared with July 2018, to £67.9 billion, while total central government expenditure increased by £4.1 billion (or 6.5%) to £67.6 billion.
Please ignore the receipts numbers for now as I will explain later. But as you can see expenditure has risen again as we saw this in June. Here is some further detail on this.
In the same period, departmental expenditure on goods and services increased by £1.6 billion, compared with July 2018, including a £0.7 billion increase in expenditure on staff.
We need a deeper perspective and it is provided by this.
In the latest financial year-to-date, central government received £246.5 billion in income, including £182.5 billion in taxes. This was 2.3% more than in the same period last year.
Over the same period, central government spent £260.3 billion, an increase of 5.3%.
As you can see in the fiscal year so far the UK government has opened the spending taps. Whilst the report does not explicitly point this out much of the extra spending has been in the areas mentioned above, as we see expenditure on goods and services up by £7.2 billion and staff costs up by £2.4 billion.
This has had a consequence for the deficit as we look at the July and then the fiscal year to date numbers.
Borrowing (public sector net borrowing excluding public sector banks) in July 2019 was in surplus by £1.3 billion, a £2.2 billion smaller surplus than in July 2018; July 2018 remains the highest July surplus since 2000………….Borrowing in the current financial year-to-date (April 2019 to July 2019) was £16.0 billion, £6.0 billion more than in the same period last year; the financial year-to-date April 2018 to July 2018 remains the lowest borrowing for that period since 2002.
Care is needed here because this is much lower than we saw in the past crisis but none the less after a lot of false dawns the UK government seems to be actually fulfiling its promises to spend more.
I did promise to address this as they were heavily affected this July by the QE programme of the Bank of England.
This month interest and dividend recipts were down £1.5 billion compared to July 2018. This fall was largely because of a £2.0 billion reduction in dividend transfer from the Bank of England Asset Purchase Facility Fund (BEAPFF) to HM Treasury.
So if we are looking for the impact of the UK economy on the numbers it showed some growth not a fall.
If we were to exclude these transfers, then central government receipts would decrease by £0.6 billion to £67.3 billion in July 2019 and decrease by £2.6 billion to £65.7 billion in July 2018.
Actually there has been an issue this fiscal year as well.
So far in this financial year-to-date (April to July 2019), £3.5 billion in dividends have transferred from the BEAPFF to HM Treasury, compared with £5.9 billion in the same period last year.
So as you can see without this receipts were positive in July and growth in the fiscal year so far was better than the 2.3% quoted. It is curious that the Bank of England numbers are ebbing and flowing because they have the same £435 billion holdings so I will investigate later.
We see that the UK government has indeed opened the spending taps. How much of it is Brexit driven is hard to say but at least some of it must be. Can we afford it? With a thirty-year Gilt yield just above 1% ( 1.03%) then we certainly can in terms of repayments. The catch is in terms of the national debt and the amount of capital borrowed but in relative terms that has been falling recently.
Debt (public sector net debt excluding public sector banks) at the end of July 2019 was £1,807.2 billion (or 82.4% of gross domestic product, GDP), an increase of £29.6 billion (or a decrease of 1.3 percentage points of GDP) on July 2018.
Whether any extra spending would be well spent is an entirely different matter. But we find ourselves in a position where this time around it is cheap to borrow.
Meanwhile of course these numbers are for a government that has now been mostly removed…..