The UK has opened the fiscal taps and started a fiscal stimulus

The credit crunch era has seen some extraordinary changes in the establishment view of monetary policy. The latest is this from the Peterson Institute from earlier this month.

On October 1, Prime Minister Shinzo Abe’s government raised the consumption tax from 8 percent to 10 percent. Our preference would have been that he not do it. We believe that, given the current Japanese economic situation, there is a strong case for continuing to run potentially large budget deficits, even if this implies, for the time being, little or no reduction in the ratio of debt to GDP.

Indeed they move on to make a point that we have been making for a year or two now.

Very low interest rates, current and prospective, imply that both the fiscal and economic costs of debt are low.

The authors then go further.

When the interest rate is lower than the growth rate—the situation in Japan since 2013—this conclusion no longer follows. Primary deficits do not need to be offset by primary surpluses later, and the government can run primary deficits forever while still keeping the debt-to-GDP ratio constant.

As they mean the nominal rate of growth of GDP that logic also applies to the UK as I have just checked the 50 year Gilt yield. Whilst UK yields are higher than Japan we also have (much) higher inflation rates and in general we face the same situation. As it happens the UK 50 year Gilt yield is not far off the annual rate of growth of real GDP at 1.17%.

They also repeat my infrastructure point.

To the extent that higher public spending is needed to sustain demand in the short run, it should be used to strengthen the supply side in the long run.

However there are problems with this as it comes from people who told us that monetary policy would save us.

Monetary policy has done everything it could, from QE to negative rates, but it turns out it is not enough.

Actually in some areas it has made things worse.One issue I think is that the Ivory Towers love phrases like “supply side” but in practice it does not always turn out to be like that. Also there is a problem with below as otherwise Japan would have been doing better than it is.

And the benefits of public deficits, namely higher activity, are high…….The benefits of budget deficits, both in sustaining demand in the short run and improving supply in the long run are substantial.

Are they? There are arguments against this as otherwise we would not be where we are. In addition it would be remiss of me not to point out that one of the authors is Olivier Blanchard who got his fiscal multipliers so dreadfully wrong in the Greek crisis.

UK Policy

If we look at the latest data for the UK we see that in the last fiscal year the UK was not applying the logic above. Here is the Maastricht friendly version.

In the financial year ending March 2019, the UK general government deficit was £41.5 billion, equivalent to 1.9% of gross domestic product (GDP) ; this is the lowest since the financial year ending March 2002 when it was 0.4%. This represents a decrease of £14.7 billion compared with the financial year ending March 2018.

In fact we were applying the reverse.

Fiscal Rules

The Resolution Foundation seems to have developed something of an obsession with fiscal rules which leads to a laugh out loud moment in the bit I emphasise below.

Some of the strengths of the UK’s approach have been the coverage of the entire public sector, the use of established statistical definitions, clear targets, a medium term outlook, and a supportive institutional framework. But persistent weaknesses remain, including the disregard for the value of public sector assets, reliance on rules which are too backward or forward looking, setting aside too little headroom to cope with forecast errors and economic shocks, and spending too little time building a broad social consensus for the rules.

Actually the “clear targets” bit is weak too as we see them manipulated and bent. But my biggest critique of their obsession is that they do not acknowledge the enormous change by the fall in UK Gilt yields which make it so much cheaper to borrow.

Today’s Data

That was then but this is now is the new theme.

Borrowing (public sector net borrowing excluding public sector banks) in September 2019 was £9.4 billion, £0.6 billion more than in September 2018; this is the first September year-on-year borrowing increase for five years.

Actually there was rather a lot going on as you can see from the detail below.

Central government receipts in September 2019 increased by £4.0 billion (or 6.9%) to £61.2 billion, compared with September 2018, while total central government expenditure increased by £4.3 billion (or 6.8%) to £67.6 billion.

As to the additional expenditure we find out more here.

In the same period, departmental expenditure on goods and services increased by £2.6 billion, compared with September 2018, including a £0.9 billion increase in expenditure on staff costs and a £1.6 billion increase in the purchase of goods and services.

The numbers were rounded out by a £1.6 billion increase in net investment which shows the government seems to have an infrastructure plan as well.

It is noticeable too that the tax receipt numbers were strong too as we saw this take place.

Income-related revenue increased by £1.7 billion, with self-assessed Income Tax and National Insurance contributions increasing by £1.1 billion and £0.6 billion respectively, compared with September 2018.

VAT receipts were solid too being up £500 million or 4%. But the numbers were also flattered by this.

Over the same period, interest and dividends receipts increased by £1.6 billion, largely as a result of a £1.1 billion dividend payment from the Royal Bank of Scotland (RBS).

Stamp Duty

We get an insight into the UK housing market from the Stamp Duty position. September was slightly better than last year at £1.1 billion. But in the fiscal year so far ( since March) receipts are £200 million lower at £6.3 billion.


We find signs that of UK economic strength and extra government spending in September. They are unlikely to be related as the extra government spending will more likely be picked up in future months. If we step back for some perspective we see that the concept of the fiscal taps being released remains.

Over the same period, central government spent £392.4 billion, an increase of 4.5%.

The main shift has been in the goods and services section which has risen by £11.6 billion to £145.7 billion. Of this some £3.5 billion is extra staff costs. Some of this will no doubt be extra Brexit spending but we do not get a breakdown.

As to economic growth well the theme does continue but it also fades a bit.

In the latest financial year-to-date, central government received £366.5 billion in receipts, including £270.0 billion in taxes. This was 2.8% more than in the same period last year.

How strong you think that is depends on the inflation measure you use. It is curious that growth picked up in September. As to the total impact of the fiscal stimulus the Bank of England estimate is below.

The Government has announced a significant increase in departmental spending for 2020-21, which could raise GDP by around 0.4% over the MPC’s forecast period, all else equal.

If we move to accounting for the activities of the Bank of England then things get messy.

If we were to exclude the Bank of England from our calculation of PSND ex, it would reduce by £179.8 billion, from £1,790.9 billion to £1,611.1 billion, or from 80.3% of GDP to 72.2%.

Also it is time for a reminder that my £2 billion challenge to the impact of QE on the UK Public Finances in July has yet to be answered by the Office for National Statistics. Apparently other things are more of a priority.



7 thoughts on “The UK has opened the fiscal taps and started a fiscal stimulus

  1. I don’t hold by the “debt is cheap so let’s borrow” meme. It is a mindset that the Irish other PIIG nations had when they went on the private and public debt binges on joining the Euro. You’ll note that the Germans never fell into the trap as they were coming out of the Mark. What they understood is that when inflation is low, debts don’t devalue and that it is really hard to pay back those debts.

    I have said several times before and mark my words, it will one time become accepted wisdom: that because the “monetary policy transmission mechanism” is Bank Rate, it makes sense that the larger debts are, the lower Bank rate has to be and for changes to be in smaller increments to have the same effect. Increasing debts therefore, in the long run, is likely to have the opposite effect to trying to encourage credit induced economic activity so that supply side shortages appear and price inflation returns (an effect one may witness in the short run). The effect I’m referring to is the fall in rates that has occurred over the last 4 decades with periodic spikes that never reach their prior highs.

    And my other mantra is quite simply, by its very definition, “capitalism” requires an interest rate, a pricing mechanism for money that helps us and the accountant’s spreadsheet to point us in the right direction to undertaking the ‘best’, most fruitful projects. It also requires healthy banks intermediating the process which without an interest rate they wilt. Capitalism has served us well and we ditch it at our peril. What we have is what I call “moneyism”. Right now, we have vast amounts of malinvestment due to cheap money. It is ‘activity’, but it also has a bill in the post.

    • It is, however, a good time to rollover debt, and if you’re going to borrow at fixed rates, far better borrowing when the interest rate is low.

  2. According to our masters, we do not need capitalism(or capital for that matter) anymore, we now have Modern Monetary Theory, where the amount of debt doesn’t matter(as long as central banks keep rates zero or negative), banks do not need capital or deposits to lend, they can just increase their loan book to infinity, if the loans go bad, the central bank will bail them out with freshly printed money, government projects, and yes that term loved by Gordon Brown “Investment” can only be limited by their imagination, there need not be any limit on government debt either as interest rates will never go up, personal borrowing likewise, debt is the new wealth, the more you borrow- the more you profit, yes,yes,yes!!! everyone can have their own buy to let portfolio!.Worrying you won’t be able to afford the payments?Forget it! Your payments will be structured to ensure you can never lose the properties as you will be paying back less than the original loan amount AND receive the rental income!!!

    Stocks can never go down -yes the friendly central bank will step in and keep buying until those foolish enough to sell or stupid enough to short learn their lesson, the government and the central bank will keep everything rosy….I’m sure you can all see where this is going…..until you happen to maybe vote for the wrong party, or say the wrong thing on social media about the government or its policies, then on an individual level you will find out that perhaps they are not so benevolent after all, should the whole country decide it wants to change the system and revert, the lever would be pulled, the trap door will open and all that “wealth” and security will disappear a lot faster than it was created, I wonder which country will be the first to make that brave choice and reject Nirvana for the old system with risk, interest payments on loans, assets prices going down as well as up?
    We are about to enter the next phase of this monetary insanity, whereby central banks go into overdrive and now in the UK government spending is to be ramped up as well(general election coming by any small coincidence?), we have had ten years of insane zero rates, QE and stock market manipulation, here comes the next phase- just BTFD!!!

    Still confused?Here are some videos that make it simple:

    • Exactly MMT is on its way, the people (and some politicians) will be falling over themselves to see where this money can be spent, more signage to reduce speed limits to 15mph, more speed bumps. We need warnings for the overweight people to do more exercise, more lables on glasses which serve pints of beer that Alcohol can be bad for you. I can see no end of inventive uses for this free money.

  3. A great post Shaun and an excellent response from Kevin.

    I think Carnage could become stuck between a rock and a hard place. He’s dying to cut rates and fire up the printing presses. but what if brexit is sorted and three years of delayed investment hit the economy?

    GDP could start to recover and QE part 25 would not be needed. Also inflation is low and wage inflation is taking off. We know that Carnage loves inflation and is desperate to target wage inflation, but raising rates will destroy the housing market, which is already on a knife edge.

    As an aside, Rightmove was YoY negative yesterday, so obviously they concentrated on the monthly figures 😉

    Click to access Rightmove-House-Price-Index-21-October-2019.pdf

    Interesting times ahead, maybe Carnage will jump ship before he has to make a decision that does not involve keeping interest rates on hold?

    • Hi Anteos,
      See my post yesterday regards Carney and the bind he is in if BREXIT goes ahead in its current form – great minds and all that!
      Shaun also pointed out he is due to leave at the end of January anyway so whoever follows him will have to deal with it, then it will be choruses of “I agree with XXXX” come rate decision meetings no doubt.

    • Hi Anteos

      If he is to go early Mark Carney would have to go quickly as he only has to the end of January. Also jobs that he would consider suitable do not seem to be around. The IMF job has gone and it looks like Justin Trudeau will continue as PM and head of the Liberal party.

      Same old Rightmove then!

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