The UK Public Finances continue to improve as debt interest falls

Today our focus remains on the UK but not for the reason that you might think. I am not expecting an interest-rate change from the Bank of England today although the cat has been put amongst the central banking pigeons with this announcement.

The Swiss National Bank is lowering the SNB policy rate by 0.25 percentage points to 1.5%.
The change applies from tomorrow, 22 March 2024.

So someone was willing to move before the US Federal Reserve and I think one reason for that comes from the currency position.

With its decision, the SNB is taking into account the reduced inflationary pressure as well as
the appreciation of the Swiss franc in real terms over the past year.

As an aside it means that what were the “Currency Twins” have very different policies this week with the Japanese raising interest-rates and the Swiss cutting them.

Returning to the UK we have some more improving data on the public finances.

Public sector net borrowing excluding public sector banks (borrowing) was £8.4 billion in February 2024, £3.4 billion less than in February 2023.

I mean that on two counts and the most obvious is the fall compared to last year. But also we spent a period where monthly borrowing was not only in the double-digits but comfortably so and we now look to have left that trend.

Monthly Data

Looking at the numbers we see that receipts were pretty strong.

Central government’s receipts were £86.4 billion in February 2024, £7.2 billion more than in February 2023.

In terms of what areas were strong we see that Income Tax was.

with increases in Income Tax, Corporation Tax and Value Added Tax (VAT) receipts of £3.5 billion, £1.9 billion and, £0.6 billion, respectively

In spite of the fact that the Self Assessment numbers were not.

SA Income Tax receipts in February increased by £0.8 billion to £3.9 billion, bringing the total for January and February 2024 to £25.5 billion, £0.4 billion more than in the same two months in 2023.

One interesting nuance is that Capital Gains Tax has been weaker in the self-assessment numbers.

SA Capital Gains Tax receipts in February increased by £0.2 billion to £2.2 billion, bringing the total for January and February 2024 to £13.6 billion, £1.2 billion less than in the same two months in 2023.

On the other side of the coin government spending is more under control.

Central government’s total expenditure was £89.6 billion in February 2024, £2.9 billion more than in February 2023.

There is a nuance as there is still an impact from the previous inflation surge.

net social benefits paid by central government increased by £5.9 billion to £25.0 billion, largely because of inflation-linked benefits uprating and around £2 billion in cost-of-living payments……..central government departmental spending on goods and services increased by £3.2 billion to £34.0 billion, as inflation increased running costs.

But on the other side of the coin the past energy subsidies have fallen heavily.

subsidies paid by central government reduced by £4.9 billion to £2.2 billion………payments recorded under central government “other current grants” reduced by £2.3 billion to £1.5 billion, largely because of the cost of the previous year’s Energy Bills Support Scheme

Also debt interest continues its decline.

interest payable on central government debt reduced by £1.1 billion to £6.8 billion, largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index

The decline in inflation as measured by the Retail Prices Index is the main player here.

Capital uplift in February 2024 was £2.5 billion reflecting the 0.5% increase in the RPI between November and December 2023.

That compares with £5.2 billion in February 2022 and £3.4 billion in February last year. Looking ahead we know that better numbers are coming via the three month lag used here. So the larger monthly fall in January that in 2023 and the smaller rise in February compared to the previous year will be in future numbers.

The Financial Year so far

We are now seeing numbers below that of the previous year.

Borrowing in the financial year-to-February 2024 was £106.8 billion, £4.6 billion less than in the same eleven-month period a year ago, and the lowest for four years in nominal terms.

That comes in spite of an upwards revision of £1.8 billion to the local government numbers. Rather awkwardly due to beneficial revisions in the meantime we are doing a lot better than we thought at the time.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (financial year ending (FYE) 2023) by £11.2 billion, from £139.2 billion to £128.0 billion.

Bank of England QE

This appears in these numbers in a rather confusing fashion.

This was partially offset by a £22.5 billion Bank of England (BoE) surplus and balanced by remaining subsectors.

As what HM Treasury has paid is public-sector neutral.

The borrowing of both of these subsectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last eleven months under the Asset Purchase Facility Fund (APF) indemnity agreement.

National Debt

This too has been made more complex by the activities of the Bank of England.

Debt was provisionally estimated at around 97.1% of the UK’s annual gross domestic product (GDP) at the end of February 2024, 2.3 percentage points more than at the end of February 2023, and remains at levels last seen in the early 1960s.

If you take out its activities then the debt is quite a bit lower.

Excluding the Bank of England, debt was £2,423.5 billion, or around 88.5% of GDP, £236.0 billion (or 8.6 percentage points) lower than the wider measure.

The main issue to my mind is over the Term Funding Scheme  This is presently £150 billion and has been declining by at least £6 billion per quarter in the last year. So it flatters the debt numbers when in fact it was never really borrowing as one would usually understand it in the first place. One could say put in a 10% margin as security but I think that is it.

Comment

The UK public finances have seen several months now where they have turned for the better. This morning has brought some further news which should reinforce this.

The survey data are indicative
of first quarter GDP rising 0.25% to thereby signal a
reassuringly solid rebound from the technical recession
seen in the second half of 2023. ( S&P PMI)

There is some spurious accuracy in them using a second decimal place but any growth is welcome and the data so far suggests around 0.3% GDP growth for the first quarter of 2024. I rather suspect the Bank of England will follow the US Federal Reserve in hinting at interest-rate cuts later in the year as well.

There is a possible challenge to this if National Insurance is scrapped as the government has tried to hint at. To be fair this looks like a brain fart from a Chancellor splashing around but only time will tell.

Finally you may have spotted that I have not mentioned that the first rule of OBR Cub is that the OBR is always wrong and it is because of this.

On 6 March 2024, the Office for Budget Responsibility (OBR) published its latest outlook for the economy and public sector finances. The statistics in this bulletin do not yet fully reflect these updated forecasts,

Perhaps they have got on the phone to the Office for National Statistics and asked them not to publish the forecasts next to the out turns.