The last few days have provided a new context for the economic impact of the response to the Covid-19 pandemic. I had kept warning that the optimistic forecasts for next year were mostly based on the fumes of hopium and now it is clear that it will be a rough first quarter at least. Just like wars pandemics are supposed to be over by Christmas but seldom are. That feeds into our subject of the day which is the UK public finances which will be on a different path to the one previously expected.
Indeed that theme we could say is a different path squared as we note the way that they have changed this year already.
Public sector net borrowing (PSNB ex) in the first eight months of this financial year (April to November 2020) is estimated to have been £240.9 billion, £188.6 billion more than in the same period last year and the highest public sector borrowing in any April to November period since records began in 1993.
There were times that such numbers would strike terror around financial markets and there has been some interest in this in Parliament.
It is the latter process that Mel Stride, a Conservative MP that chairs Parliament’s Treasury select committee, highlighted in a public letter earlier this month, questioning whether the pricing of over £300bn of gilts sold through syndications since 2009 had been “keen enough in favour of the taxpayer”. ( Financial Times)
That is curious line of attack now we borrow so cheaply and it continued with this.
Mr Stride had highlighted how the size of syndication order books corralled by banks often outstrips the amount of gilts being sold — at the latest one, investors placed orders of almost £50bn for £6.5bn of gilts — and queried whether this meant they could be sold at an even lower interest rate.
What that fails to acknowledge is that there is the London Whale in the room. For example the most recent sale of UK bonds was on the 9th when some £2.5 billion of a 2035 maturity Gilt was sold and some £7.4 billion was bid for. But the Bank of England is buying around £4.4 billion a week and sophisticated traders will be using it as both a benchmark and a put option. It will not buy a newly issued Gilt for 169 hours or if you prefer a Beatles style 8 day week. But it does buy other Gilts and on the same day it bought £1.1 billion of the 2030 and 31 maturities. The exact amounts which are spread trades are hard to be precise about but they will be happening and will be inflating demand.
So are there easy profits to be made? Yes. But the committee is barking up the wrong tree as it should be interviewing the Bank of England as well, a point the Financial Times curiously omits. The bit below is on warmer ground however and regular readers will have noted me referring to this type of game theory before and it covers pretty much everywhere.
Mr Stride had also questioned whether investors and banks might have an incentive to shun gilts which new government bond sales are priced off, artificially lowering their price ahead of the syndication and therefore lift the effective interest rate the government pays.
The National Debt
This has been rising but not as much as has been reported regularly by the media so let me explain. Here is this morning’s release.
Public sector net debt excluding public sector banks (PSND ex) rose by £301.6 billion in the first eight months of the financial year to reach £2,099.8 billion at the end of November 2020, or around 99.5% of GDP; this was the highest debt to GDP ratio since the financial year ending 1962.
The media will have to be hoping people forget they said it was over 100% of GDP and now that it has grown further it is now below it. Oops! A lot of this is the fact that GDP grew strongly in the third quarter although the party will start again when it falls this quarter.
If we stay with the just over £300 billion growth then we can get a perspective by comparing it to the Bank of England purchases. The new purchases in this pandemic period total some £290 billion. This is not quite like for like as they began on the 20th of March or around a fortnight before the start of the financial year, But I am sure you get the message.
There is however something out of Alice in Wonderland in the mathematics here.
The Bank of England’s (BoE’s) contribution to debt is largely a result of its quantitative easing activities via the BoE Asset Purchase Facility Fund (APF) and Term Funding Schemes (TFS).
Neither are in fact debt but get trapped in the rules meaning this happens.
If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of November 2020 would reduce by £233.9 billion (or 11.1 percentage points of GDP) to £1,865.9 billion (or 88.4% of GDP).
Actually there is a clue provided elsewhere because if you look at the size of our debt market it is rather curiously lower than what we report as a national debt.
What is driving the latest figures?
The first factor is that tax receipt have dropped.
In November 2020, central government receipts were estimated to have fallen by £3.5 billion compared with November 2019 to £53.9 billion, including £38.9 billion in tax receipts.
Some of this is due to the fall in economic activity and some due to the VAT and Stamp Duty tax cuts. By contrast expenditure has ballooned.
Central government bodies spent £83.6 billion in November 2020, £24.6 billion more than in November 2019. Of this, £80.6 billion was spent on day-to-day activities (often referred to as current expenditure)…..The remaining £3.0 billion was spent on capital investment such as infrastructure.
Again some of the extra spending is deliberate government policy.
In November 2020, central government paid £7.2 billion more in subsidies to businesses and households than in November 2019. These additional payments included £5.9 billion as a part of the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS).
Comment
The numbers have got larger and are about to get larger still as I explained at the beginning of this piece. But we can still afford to be sanguine and let me explain why. The round-tripping between the UK debt office, the bond market and the Bank of England means that our debt costs ( interest or coupons) have fallen so far this financial year. Up until November 2019 then were £36 billion but this year they have fallen to £28.1 billion in spite of the fact the debt is much higher.
There is a catch as much of this will remain because conventional bonds have a fixed rate of interest. But index-linked bonds can get much expensive as the November data has shown today.
Interest payments on the government’s outstanding debt were £4.2 billion in November 2020, £2.1 billion more than in November 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.
That is why they plan to produce lower numbers for the RPI from 2030. But returning to now there is a risk from an episode of inflation. There is also a risk that we borrow so much that even at these yields it becomes an issue but that is still quite a way away. Also you can see that QE is forever now as the government cannot afford to let the Bank of England stop.
As a theme well these numbers do remind me of Lewis Carroll.
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where—” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“—so long as I get somewhere,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
Notayesmanseconomics's Blog 
The simple answer from my perspective is there is nothing wrong with how much you can borrow if you can eventually pay it back and also if the rate at which you borrow is affordable.
With interest rates so low it is in fact an ideal time to borrow and having said all that I maintain my views sooner or later we will see the UK follow most countries of late in a further reduction in interest rates to zero soon and then possibly negative thereafter.
Hi Peter
The subject of debt repayment is quite a hot potato. If we stay with the current situation then the Bank of England will own some £875 billion of the UK bond market in late summer next year at the current purchasing rate. As they have redeemed precisely £0 so far they are beginning to look effectively perpetual bonds paid for at Bank Rate.
If we go to 0% which I agree is likely then they will be free for as long as Bank Rate remains there.
all government debt is perpetual. Some of it pays Bank rate all the time (reserves). Some pays a fixed rate or a return linked to an index for a set period of time before reverting to paying Bank Rate in perpetuity (bonds and NS&I products) and a small amount pays a rate fixed of zero in perpetuity (notes and coins). The government lets holders choose between holding notes and coins or reserves, but it (acting through its MPC) gets to decide the split between bonds (including NS&I products) and reserves. The govt, again acting through its MPC, also gets to decide what return (if any) to pay to holders of the govt’s liabilities.
Government debt can be reduced, at the government’s discretion, by the government running a surplus, which drains reserves from the system. There is no other way of the government ‘repaying its debt’. It can only reduce its debt by collecting more in tax than it spends. This is rarely necessary or desirable.
“The simple answer from my perspective is there is nothing wrong with how much you can borrow if you can eventually pay it back”
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No-one knows the future, as this year should have taught anyone with an iq over 80.
As such, unless you have the actual funds to pay off your debt, & in such circumstances that precludes taking it on, you DO NOT KNOW THAT YOU CAN EVENTUALLY PAY IT BACK.
Shaun, please correct me if I am wrong but I argue, some of it we aren’t borrowing. I am forgetful but didn’t the new BoE guvnor say, we are starting to “monetize” in March? My assessement is that it matters not a jot how much the Government spends when we are all locked-up because those spendings are in the immediate and lockdown status effectively “sterilized”.
If you nudge you mates and give them £12Bn to spend on spurious track and trace, some of the prisoners are allowed to work and earn a salary, some tests are delivered and collected by couriers, some Mckinsey consultants are paid £7,000 per day but none, I mean none of those people who receive the money can meaningfully spend it.
They cannot go on holiday, they cannot got to restaurants, they cannot make conspicuous consumption… and increasingly the shelves will be empty, no more Mclaren sports cars to buy. What they can do is “bid-up” house prices and stream movies, whilst ordering just eat pizzas.
Teh big problem comes when we leave lock-down and people try to spend it…. that is when the sh#t hits the fan. I don’t expect we will be leaving lockdown for a while though. Enjoy your festive break everyone.
Meery Christmas Paul C.
“when we leave lock-down and people try to spend it”
one good reason not to leave lock down ?
ah but lockdown affects the housing market and that affects the TBTF Banks…. that will never do .
interesting times
Forbin
PS: I think its obvious by now that we’re going to be locked up until March. Peak flu season combined with Brexit ….
To Paul and Peter re the above and the assumption that there is no problem with the government continuing to borrow unbelievable sums of money as interest rates are zero and anyway, it is money “we owe to ourselves” to quote the great Paul Krugman(not).The Fed and the BofE are now openly monetising government debt, so what you say! This means the supply of money has gone up by that much without it being earned or as a result of a trade surplus, thus the existing money in circulation has its buying power reduced by the proportion this new money represents of the total, thus savers and pensioners and anyone trying to buy something finds the price keeps going up for no apparent reason, it is called inflation, that is why the government and the Bank of England are so keen on trying to find new ways not to measure it – to hide their theft of purchasing power.
reminder: the UK government, as the issuer of the UK’s currency, the British Pound, never borrows that currency. It issues it.
Bond sales by the UK govt are not borrowing operations. Nor are they in any way necessary.
Paying interest on the liabilities the UK govt issues (net £ financial assets for everyone that isn’t the UK govt) is a policy decision. Again, it is in no way necessary. Those that tell you that the govt needs to pay money to holders of the money it has issued are probably those that hold that money. They will probably also try to convince you that the government not paying money to those with money is in some way unfair on those that don’t have any money!
The public sector debt (or “national debt” as it is often called) we are told is £2trn. Sounds a big number.
If you add up all the deficits run by the UK govt (less the odd surplus) since the £ came into existence, the answer you will get will also be a big number. It will be £2trn.
If you add up all the £ surpluses and take away all the £ deficits run by everybody else in the non-govt sector over the same period, the answer you will get will be £2trn.
If you add up all the net £ savings of everybody else in the non-govt sector – all the Gilts, Bills, NS&I savings, reserve balances of commercial banks, banknotes and coins, you will get a total of £2trn.
These are not coincidences.
What we call “the national debt” is the £ net financial assets, or net £ savings, of everybody else who isn’t the UK govt. You rarely hear anyone arguing that the total net £ savings of us all is too large and needs to be reduced. This is why the “national debt” is never “paid back”. Doing so just drains our net £ savings.
“ou rarely hear anyone arguing that the total net £ savings of us all is too large and needs to be reduced.”
I’d like to point out many do , as much of these “assets” are actually housing stock. …. hence the high prices . The stirling “pool” has been expanded to cater for this , or caused it, depending on your point of view.
Forbin
Forbin, a good challenge and arguably the paper valuation of property is just that, just like the bundles of promises at the Bank of England… now where did that gold go..?
bundles of promises at the Treasury, sometimes I get confused.
houses are physical, not financial assets.
Financial instruments always have two sides – the liability or obligation of the issuer, who has to provide something or do something at some point in the future, and the financial asset of the holder, who has the claim for that something at some point in the future, over the issuer.
The net value of all financial instruments in the World is always zero. The net wealth in the World is always the value we ascribe to things like houses, that are physical assets or goods or just ‘things’ (we can put a value on health and happiness if we want and that adds to the World’s net wealth)
What we think of as savings are mainly financial assets (because we save by having an income higher than our expenditure and we tend to get paid and we spend financial instruments, not physical things). In order to save by having an income higher than our spending, somebody else has to be spending more than their income. If we in the private sector, on balance, prefer to save, by spending less than our incomes, rather than create liabilities and obligations by spending more than our income, then this is only possible if the public sector spends more than its income (its “income” is what it drains from the economy by taxation), which it does by issuing its own financial liabilities (money or bonds, doesn’t really matter), which are the net financial assets of the private sector, that savers want, but others in the private sector don’t wish to create by issuing their own liabilities and obligations.
There has been a huge increase in demand for savings over the past few decades, which has a lot to do with increases in productivity making it very easy for workers to produce and sell more than they purchase and consume (have an income higher than their spending). The supply of financial liabilities and obligations hasn’t kept up. We tried to get what are called sub-prime borrowers to issue their own liabilities in order to meet the demand for savings, but that didn’t end well! As you allude to, the demand for savings, which could not be met by the supply of financial liabilities has spilt over into things like houses, land, art, fine wine, classic cars etc. I would argue that the demand for these physical assets has been driven by a shortage of financial assets (including plain old money), not an excess of them.
I would argue, Robert, that the demand for physical assets has been driven by the consistent rise in prices of those assets, whereas very low interest rates has virtually destroyed money as a means of saving. Couple that with the low cost of servicing debt to purchase some assets and Boom! Bubbles. If the cost of servicing the debt should accidentally rise, or the value of the asset should accidentally fall. Boom! Burst Bubbles.
As always, I could be wrong.
I hear, “Don’t save!” every time I look at interest rates.
and that’s why they are where they are – too many people are saving, not enough (creditworthy) people creating their own liabilities and obligations.
Unfortunately, low interest rates don’t seem to be either dissuading people from saving (if you need to save for your retirement, you’re going to save, whatever) and nor do they seem to be spurring (creditworthy) people on to create liabilities (which is why the govt is having to do so much).
Anecdotally, I have many savers tell me that the low rates they are receiving on their savings is actually leading them to save more, spend less, in order to accumulate what they think they’re going to need in the future.
It really does seem that the two big monetary policy levers we have given the central bank – the ability to set the rate that the government pays on its money-liabilities (which heavily influences other rates) and determining the split between bond-liabilities and money-liabilities of the total liabilities of the govt…..don’t actually do much at all!
The one big policy lever that is available – fiscal policy- remains with the Treasury, which doesn’t seem to understand how it works or is too scared to use it.
Yes Robert, the Bank Rate lever seems ineffective when it’s set below 2%; one wonders why the experts in Threadneedle Street haven’t appeared to notice; it’s been more than 10 years now.
When the rate is near, or at, zero the principle of the Time-Value of money no longer exists.
ONS says there have been over 80,000 excess deaths during the pandemic which is equivalent to town, what would they have been if the UK had not put restrictions in place?
https://www.bbc.co.uk/news/health-55411323
Hello Peter,
I have my own chart and it depends on what start dates and comparison dates you use. I use 2018 and 2019 to compare with 2020 from ONS own data – you can check the data yourselves , folks , no secrets here ( unless the ONS Gerry Mandered the published figures !! ) .
My preferred year is 2018 because it was slated as a bad flu year with reports of NHS being overloaded .
to date I see 58,459 excess deaths . this does not mean deaths with or without SARS2-cv19 being present, just excess . compares with 2019 its over 72,000 excess deaths.
I note before the current lock down for the SE and London that actually the excess death rate had already started to fall, I do not know why .
Our actual CMR is falling too , no really it is . This should not be a surprise to anyone to has ever looked how infections spread. The UK CMR is 3.24 and is still falling as few people per infected are actually dying. It wasn’t long ago at 10% . No body will know the true IFR until the pandemic is over , or atleast re-attributed as endemic.
The world CMR is closer to 3% and hopefully next January will drop below that figure.
Remember for all the hype we have 55 million recovered to date – do you hear MSM mention that at all ? nope , me neither.
Still I wish everyone to stay safe and be alert but above all , DON’T PANIC
Forbin
Where would we be without Lewis Carroll, Shaun ?
We would have difficulty making sense of anything if it were not for his wise words and clear thinking.
Down the QE rabbit hole.
“Either it was a very deep well or Alice was falling very slowly for she had plenty of time to look about her and wonder what was going to happen next.”