The UK government spends rather a lot for its austere claims

As we approach the end of the calendar year it is time to be a little more reflective. If one does that with this morning’s release on the UK Public Finances it is hard to avoid the view that the present government is somewhat spendthrift.

Borrowing in the financial year-to-November 2023 was £116.4 billion, £24.4 billion more than in the same eight-month period last year and the second highest financial year-to-November borrowing on record.

Another way of putting it is that it is fiscally expansionary which contrasts with the way that the word austerity is often bandied around as a description of it. One can argue that inflation is a factor here via its impact on cost of living payments and inflation linking. But that is a little awkward for the Prime Minister as the inflation fires were lit by perhaps the most expansionary UK fiscal policy ever via one Chancellor Sunak. Perhaps the Prime Minister could have a word with him.

November Borrowing

That general theme continues as I look at these numbers.

In November 2023, the public sector spent more than it received in taxes and other income, requiring it to borrow £14.3 billion. This was £0.9 billion less than was borrowed in November 2022 and is the fourth highest November borrowing since monthly records began in 1993, behind those of the 2020 coronavirus (COVID-19) pandemic period, the energy support schemes period of 2022, and in 2010 following the global financial crisis.

We are now supposed to be fully recovered from Covid in economic terms as we spent enough to achieve that. But we still seem to be borrowing a substantial sum. If we look back a year this was a government that was presented by the establishment as having what they considered to be sensible policies  as in getting borrowing back under control. Whereas we now know they in theory tightened policy but we are still borrowing large sums. This November might be considered to be a month where we would borrow less than last year due to the cost of the energy support schemes, but the reality is that we have borrowed very little less.

If you look at the total expenditure it does not look too bad and you might return to some sort of austerity theme.

In November 2023, central government’s total expenditure was £87.6 billion, £0.7 billion more than in November 2022 and the highest November total since monthly records began in 1993.

But the end of the energy support schemes changes that.

Subsidies paid by central government were £2.2 billion in November 2023, £3.1 billion less than in November 2022. This is largely because of the cost of the Energy Price Guarantee (for households) and Energy Bill Relief Scheme (for businesses) affecting this month last year.

There was another bit of that in the other category.

Payments recorded under central government “other current grants” were £1.7 billion in November 2023, £2.0 billion less than in November 2022, largely because of the cost of last year’s Energy Bills Support Scheme.

So a change of the order of £5 billion.

On the other side of the coin Receipts were higher.

Central government’s receipts were £77.6 billion, £3.6 billion more than in November 2022 and the highest November since monthly records began in 1993.

You may have spotted that these numbers should have led to a bigger fall in November borrowing. But there are other factors in there such as the Bank of England adding an extra £1.3 billion to the borrowing this year. That is another addition to the debit side on all its QE bond buying on which it so rarely gets challenged. I will return to that later as with the recent declines in bond yields its 2023 sales of bonds look awful. Or if you prefer it has added selling at the bottom to buying at the top.

Debt Interest

We can cover a lot of ground with this one and we can start with November.

In November 2023, the interest payable on central government debt was £7.7 billion, £0.1 billion more than in November 2022 and the highest November total since monthly records began in April 1997.

This became more of a factor as two influences came into play. First was the rise in inflation and specifically RPI inflation which pushed the expenditure on paying interest on them ( around a fifth of our debt higher). Then came the rises in bond yields which pushed the interest payments on the rest of our debt higher. As you can see above things stopped getting worse in November if you will indulge me for £100 million.

Part of the change has been this.

In November 2023, capital uplift was £3.0 billion and was largely determined by the 0.5% increase in the RPI between August and September 2023.

For those unaware most UK index-linkers have a three month lag to the inflation rate and thus changes are on their way. What I mean by that is that we already know the next two months and they were -0.2% and -0.1% so falls will happen soon and we may see more of that ahead. For example the latest energy price estimates for the April Energy Price Cap suggest a fall then.

Next up is the fact that issuing debt for the UK is now a lot cheaper than it was as recently as October. As I type this the benchmark ten-year yield is now 3.55% whereas it peaked at 4.7% in October. So the bond market rally you have been reading about means that going forwards it will be a fair bit cheaper to issue new debt and to refinance existing debt.

Bank of England QE Problems

I said I would return to this and we can look at it via the UK long Gilt future. It bought a lot of bonds in the range 135-140 and it has sold some in the second half of this year in the mid 90s. Actually down to a low of 92. So there are strategic losses here from as I put it earlier buying at the top and selling at the bottom.

Also there is the tactical issue of selling bonds down to an equivalent of 92 and then seeing a ten point rally as we are above 102 as I type this. Yet this so rarely seems to get questioned.

Or if you want the change in the situation put another way.

The borrowing of both of these subsectors is affected by payments totalling £33.2 billion made by central government to the BoE over the last eight months under the Asset Purchase Facility Fund (APF) indemnity agreement. This was £32.4 billion more than the £0.8 billion paid in the same period last year.

Comment

The situation with the UK Public Finances is one which sees quite a few views bandied about. For instance in the over a decade I have been reporting on these numbers there has been a lot of talk of austerity but especially in the more recent period we have seen some extraordinary fiscal deficits. That drum beat seems to be continuing as we have a government which claims to be austere but is in fact fiscally expansionary.

Next up is the issue of the first rule of OBR Club which is that the OBR is always wrong.

In March 2023, the Office for Budget Responsibility (OBR) forecast that borrowing would settle at £152.4 billion in the financial year ending March 2023. In its Economic and fiscal outlook – November 2023, the OBR reduced this estimate by £24.1 billion to £128.3 billion.

As you can see their skill set not only involves getting the present and future wrong as they add the past to it. But on a more fundamental level they predicted a severe recession for this year leading to reports of a “Black Hole” for the Public Finances. Government policy was changed in response to this and it was changed in the wrong direction. In a way we see it from this.

Public sector net debt excluding the Bank of England (BoE) was £2,418.6 billion at the end of November 2023, or around 88.3% of GDP, £252.8 billion (or 9.2 percentage points of GDP) less than the wider measure. This difference is largely a result of the BoE’s quantitative easing activities, including the gilt-purchasing activities of the Asset Purchase Facility (APF) Fund.

Actually in a theme of the times deciding on the national debt is not as clear cut as you might reasonably think but I think the headline of 97.5% is misleading. Probably it is more like 91-92%.