The mood music has discernably changed for fiscal policy. well apart from Greece which is being forced to run surpluses and to some extent Italy. Many establishments ( the European Central Bank and International Monetary Fund for example) have switched from pressing for austerity to almost begging for fiscal action. If we switch to the UK we see that the same forces at play with the addition of a government that looks like it wants to be fiscally active. Even the BBC has caught on although oddly the example on BBC Breakfast this morning showed the super sewer for London which was planned some years back. Although on the upside it does seem to be a positive example as it is progressing well and seems to be on budget.
UK Gilt Market
Developments here are a major factor in changing the consensus views above and can be taken as a guide to much of the word where Middle of the Road in the 1970s were prescient about future government borrowing.
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In terms of economic impact we look at the five-year yield which is 0.45% and the benchmark these days is the ten-year which is 0.57%.As you can see these are low levels and there is a hint in that they are below the Bank of England Bank Rate. Oh and for newer readers who are wondering why I pick out the five-year that is because it influences most of the mortgage market via its impact on foxed-rate ones. But for infrastructure projects for the long-term the relevant yield in my opinion is the fifty-year one which as I have been reporting for a while has been spending some time below 1% and is 0.9% as I type this.
As you can see it is not only historically low but outright low and this is confirmed if we subtract any likely level of inflation to get a real yield. Some of you may recall the economist Jonathan Portes came on here some years back to suggest we should borrow via index-linked Gilts whereas I argued for conventional ones. You know where you stand ( borrowing very cheaply) and do not run an inflation risk.
As you can see this does begin a case for infrastructure investment because the hurdle in terms of financing is low.
Last month I pointed out that the revenue figures for the UK economy were more positive than the GDP ones and that theme continues.
self-assessed Income Tax receipts in January 2020 were £16.2 billion, an increase of £1.5 billion compared with January 2019; this is the highest January on record (records began in January 2000)
Care is needed as some payments for the income tax season are delayed into February but so far so good. Although it is also true that VAT receipts were flat so we apparently had more income but did not spend it. Also the numbers were boosted by a 991 million Euro fine for Airbus even though it will not be fully paid until 2023 in another example of these numbers being if we are polite, somewhat bizarre.
Switching now to expenditure and continuing the fiscal boost theme there was this.
Departmental expenditure on goods and services in January 2020 increased by £2.1 billion compared with January 2019, including a £0.8 billion increase in expenditure on staff costs and a £1.2 billion increase in the purchase of goods and services.
Also there was this.
The UK contributions to the European Union (EU) in January 2020 were £2.1 billion, an increase of £1.1 billion on January 2019. This increase is largely because of the profile of 2020 payments made to the EU by all member states rather than a reflection of any budgetary increase.
As you can see it will wash out as time passes but for now makes the numbers worse and in total we saw this.
Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in January 2020 was in surplus by £9.8 billion, £2.1 billion less of a surplus than in January 2019.
If we now switch to the trend we see this.
Borrowing in the current financial year-to-date (April 2019 to January 2020) was £44.8 billion, £5.8 billion more than in the same period the previous year.
The number above gives us a flavour of the fiscal boost taking place in the UK but not the full flavour. This is because the improving economy will have meant that the number should be lower. Now we have not had much economic growth but we have seen employment and wages rise. Looking ahead that seems set to continue if this morning’s flash Markit PMI is any guide.
Flash UK Composite Output Index
Feb: 53.3, Unchanged (Jan final: 53.3)
Their view on this seems rather mean of 50 truly is the benchmark of no-growth.
“The recent return to growth signalled by the manufacturing and services PMIs provides a clear indication that the UK economy is no longer flat on its back, with our GDP nowcast pointing to 0.2% growth
through the first quarter of the year.
Also after what happened to the manufacturing PMI in Germany earlier ( a deterioration in supply times believe it or not boosted the index) we need to treat manufacturing PMIs with even more caution.
The economic growth situation comes in here too as we look at the numbers.
At the end of January 2020, the amount of money owed by the public sector to the private sector stood at approximately £1.8 trillion (or £1,798.7 billion), which equates to 79.6% of gross domestic product (GDP) (the value of all the goods and services currently produced by the UK economy in a year).
In absolute terms we owe more but in relative terms we owe less.
Though debt has increased by £41.4 billion on January 2019, the ratio of debt to GDP has decreased by 0.7 percentage points, implying that UK GDP is currently growing at a faster rate than debt.
Today has brought more evidence of the fiscal boost being seen by the UK which is more than the headlines suggest because the deficit would have continued to fall otherwise. In terms of scale the Bank of England has estimated the impact of the boost to be around 0.4% of GDP or around half that deployed by France last year.
There are various contexts of which the first is that it is the QE era and its effect on government bond yields that makes this all look so affordable. That is another reason to match any infrastructure spending with very long-dated Gilts, as otherwise there is a risk should yields rise. Rather curiously some commentators seem to be expecting the return of the “bond vigilantes” in the UK. This would be curious because as a species they seem to be nearly extinct. After all their return would no doubt see even more Bank of England QE purchases. Perhaps these commentators are trying to justify their own past forecasts.
Another context is that the debt continues to pile up and in terms of a capital issue that does matter. For example I think Greece has been an example of this where the size of the debt has weighted down the economy in addition to the austerity. So even though annual costs are low, that is not the only metric we should watch.