Do we face austerity and tax rises after the Covid-19 pandemic?

We have been in uncertain times for a while now and this has only been exacerbated by the Covid-19 pandemic. One particular area of concern are the public finances of nations who are copying the “Spend! Spend! Spend!” prescription of football pools winner Viv Nicholson. For younger readers the football pools were what people did before lotteries. Indeed if we note the latest IMF Fiscal Monitor there was an issue even before the new era.

Prior to the pandemic, public and private debt were
already high and rising in most countries, reaching
225 percent of GDP in 2019, 30 percentage points
above the level prevailing before the global financial
crisis. Global public debt rose faster over the period,
standing at 83 percent of GDP in 2019.

We get a pretty conventional response for the IMF which has this as a mantra.

And despite access to financing varying sharply across countries, medium- to long-term fiscal strategies were needed virtually everywhere.

There is a counterpoint here which is that the fiscal strategies approved by the IMF have been a disaster. There is of course Greece but in a way Japan is worse. Following IMF advice it began a policy of raising its Consumption Tax to reduce its fiscal deficit. It took five years for it to take the second step as the first in 2014 caused quite a dive in the economy. Then the second step last year saw Japan’s economy contract again, just in time to be on the back foot as the Covid-19 pandemic arrived.

The IMF is expecting to see quite a change this year.

In 2020, global general government debt is estimated to make an unprecedented jump up to almost 100 percent of GDP. The major increase in the primary deficit and the sharp contraction in economic activity of 4.7 percent projected in the latest World Economic Outlook, are the main drivers of this development.

Oh and where have we heard this before? The old this is “temporary” line.

But 2020 is an exceptional year in terms of
debt dynamics, and public debt is expected to stabilize
to about 100 percent of GDP until 2025, benefiting
from negative interest-growth differentials.

I make the point not because I have a crystal ball but because I know I do not. Right now the path to the end of this year looks extremely uncertain with for example France imposing a curfew on Paris and other major cities and Germany hinting at another lockdown. So we have little idea about 2021 let alone 2025.

The IMF is in favour of more spending this time around.

These high levels of public debt are hence not the
most immediate risk. The near-term priority is to
avoid premature withdrawal of fiscal support. Support
should persist, at least into 2021, to sustain the recovery and to limit long-term scarring. Health and education should be given prime consideration everywhere.

I would have more time for its view on wasteful spending and protection of the vulnerable if the places where it has intervened had actually seen much reform and protection.

Fiscally constrained economies should prioritize the
protection of the most vulnerable and eliminate
wasteful spending.

Economic Theory

The IMF view this time around is based on this view of public spending.

The Fiscal Monitor estimates that a 1 percent of
GDP increase in public investment, in advanced
economies and emerging markets, has the potential to push GDP up by 2.7 percent, private investment by
10 percent and, most importantly, to create between
20 and 33 million jobs, directly and indirectly. Investment in health and education and in digital and green
infrastructure can connect people, improve economy wide productivity, and improve resilience to climate
change and future pandemics.

If true we are saved! After all each £ or Euro or $ will become 2.7 of them and them 2.7 times that. But then we spot “has the potential” and it finishes with a sentence that reminds me of the  company for carrying on an undertaking of great advantage from the South Sea Bubble. For those unaware of the story it disappeared without trace but with investors money.

For newer readers this whole area has become a minefield for the IMF because it thought the fiscal multiplier for Greece would be 0.5 and got involved in imposing austerity on Greece. It then was forced into a U-Turn putting the multiplier above 1 as it was forced to do by the economic collapse which was by then visible to all.

Institute for Fiscal Studies

It has provided a British spin on these events although the theme is true pretty much everywhere we look.

The COVID-19 pandemic and the public health measures implemented to contain it will lead to a huge spike in government borrowing this year. We forecast the deficit to climb to £350 billion (17% of GDP) in 2020–21, more than six times the level forecast just seven months ago at the March Budget. Around two-thirds of this increase comes from the large packages of tax cuts and spending increases that the government has introduced in response to the pandemic. But underlying economic weakness will add close to £100 billion to the deficit this year – 1.7 times the total forecast for the deficit as of March.

I suggest you take these numbers as a broad brush as it will be a long economic journey to April exemplified by that fact that whilst I am typing this it has been announced that London will rise a tier in the UK Covid-19 restrictions from this weekend. I note they think that £250 billion of this is an active response and £100 billion is passive or a form of automatic stabiliser.

They follow the IMF line but with a kicker that it is understandably nervous about these days.

But, in the medium term, getting the public finances back on track will require decisive action from policymakers. The Chancellor should champion a general recognition that, once the economy has been restored to health, a fiscal tightening will follow.

They are much less optimistic than the IMF about the middle of this decade/

Under our central scenario, and assuming none of the temporary giveaways in 2020–21 are continued, borrowing in 2024–25 is forecast to be over £150 billion as a result of lower tax revenues and higher spending through the welfare system.

They do suggest future austerity.

Once the economy has recovered, policy action will be needed to prevent debt from continuing to rise as a share of national income. Even if the government were comfortable with stabilising debt at 100% of national income – its highest level since 1960 – it would still need a fiscal tightening worth 2.1% of national income, or £43 billion in today’s terms.

Comment

As you can see the mood music from the establishment and think tanks has changed somewhat since the early days of the credit crunch.Austerity was en vogue then but now we see that if at all it is a few years ahead. Let me now switch to the elephant in the room which has oiled this and it was my subject of yesterday, where the fall in bond yields means governments can borrow very cheaply and sometimes be paid to do it. That subject is hitting the newswires this morning.

The German 10-year bond yield declined to the lowest level in five months on Wednesday as coronavirus’s resurgence across the Eurozone strengthened the haven demand for the government debt. ( FXStreet)

It is -0.61% as I type this and even the thirty-year yield is now -0.22%. So all new German borrowing is better than free as it provides a return for taxpayers rather than investors. According to Aman Portugal is beginning to enjoy more of this as well.

According to the IGCP, which manages public debt, at the Bloomberg agency, €654 million were auctioned in bonds with a maturity of 17 October 2028 (about eight years) at an interest rate of -0.085%.

Although for our purposes we need to look at longer-term borrowing so the thirty-year issue at 0.47% is more relevant. But in the circumstances that is amazingly cheap.

In essence this is what is different this time around and it is one arm of government helping another as the enormous pile of bonds purchased by central banks continue to grow. The Bank of England bought another £4.4 billion this week. So we have a window where this matters much less than before. It does not mean we can borrow whatever we like it does mean that old levels of debt to GDP such as 90% ( remember it?) and 100% and even 120% are different now.

In the end the game changer is economic growth which in itself posts something of a warning as pre pandemic we had issues with it. Rather awkward that coincides with the QE era doesn’t it as we mull the way it gives with one hand but takes away with another?

UK National Grid

It was only last week I warned about this.

National Grid warns of short supply of electricity over next few days ( The Guardian)

Good job it has not got especially cold yet.

UK Statistics are in quite a mess as the Public Finances highlight

Today we complete a week filled with UK economic data with the public finances and so far it has been a good week. Before we get to it there has been news about the state of UK statistics from the Public Affairs Committee or PAC of the House of Commons. As a major part of this has been the ongoing shambles over the Retail Price Index or RPI and I gave evidence to the PAC on this issue. So what do they think?

There has been much criticism of the position that UKSA ( UK Statistics Authority) has taken at many stages during the last nine years and the position is not resolved. The Economic Affairs Committee of the House of Lords was critical of UKSA’s failure to correct errors in RPI, stating that, “In publishing an index which it admits is flawed but refuses to fix, the Authority could be accused of failing in its statutory duties.” Evidence to this inquiry from the RPI CPI User Group was similarly critical, stating: “It is a measure of the UKSA failure as an independent regulator that such an inquiry was necessary in the first place and produced such a damning report.

It seems that much of my message has got through.

Concerns have been raised about the Treasury and the Bank of England’s influence over UKSA regarding inflation measures.

That’s polite for they dictate them. Also the designation merry-go-round has been a farce.

UKSA designated RPI as a National Statistic in 2010,286 but cancelled the designation in 2013…… Ed Humpherson later de-designated CPIH, ONS’s preferred measure, as a National Statistic……..CPIH was re-designated as a National Statistic in July 2017 following action by ONS.

As the PAC points out nothing ever seems to happen.

In evidence to our inquiry Sir David Norgrove stated that UKSA was planning to respond to the House of Lords Economic Affairs Committee report in April 2019. This did not happen.

Sadly I can also vouch for this sort of thing as I wrote to the House of Lords on the 26th of February about this issue and if I ever get a formal reply I will let you know. Also I am awaiting a response from the ONS to the points I made at the Royal Statistical Society on the 13th of June last year. I think you get the message.

View

In general this is a good report which follows on from the report on the RPI by the Economic Affairs Committee and I welcome them both. However there have been nine years of failure here by the UK Statistics Authority where it has proven incapable of getting any sort of a grip. In fact it has made things worse. My experience of giving it evidence was that my time was wasted as it was going through the motions and ignored and or did not understand my points about the large revisions to the Imputed Rent numbers.

Also there is a danger that the establishment parrots the same old lines as for example this.

Chris Giles told us “Index-linked gilts, student loans and rail fares are all pegged to the RPI” and said that “the continued use of an index known to be wrong, takes money from recent graduates, commuters and taxpayers, and hands it as a windfall to longstanding owners of index-linked government bonds”.

Chris who is economics editor of the Financial Times has done some good work highlighting the failings of the UKSA. But it is also true that he has led a campaign against the RPI and previously ( now abandoned) in favour of CPIH. This means that the fact that CPI and CPIH are systemically wrong in the area of owner-occupied housing frequently gets ignored. It has also contributed to the wasted nine years as the establishment represented by HM Treasury were more than happy to get on board with a campaign to get lower inflation numbers otherwise known as CPIH.

After all HM Treasury could de-link student loans and rail fares from the RPI today if it wished. In my opinion they do not do so for two reasons the first is greed and the second is that they want the RPI to garner bad publicity.

Public Finances

There is a link here because over the years we have observed quite a few strategic issues with the UK Public Finances. Two large ones come to mind of which the biggest has been the hokey-cokey with the Housing Associations which have been excluded, included and the excluded again. This has had an impact on the National Debt of between £50 and £60 billion. Then there was the Royal Mail situation where a pensions liability of the order of £17 billion was initially recorded as a surplus of £10 billion.

Added to that I note that this is on the way.

While the change is mainly focused on presentation, we expect public sector net debt (PSND) at the end of March 2019 to decrease by £30.5 billion as a result of the consolidation of pension schemes’ gilt holdings and liquid assets.

On a stand alone basis that may be fair enough but the collective issue is of a large almost entirely ignored liability which increases the numbers here.

Today’s Data

We learnt that the run of better data had come to a close with some signs that the closing of Prime Minister May’s term of office has led to an opening of the spending taps.

Borrowing (public sector net borrowing excluding public sector banks) in June 2019 was £7.2 billion, £3.8 billion more than in June 2018; the highest June borrowing since 2015……..Borrowing in the current financial year-to-date (April 2019 to June 2019) was £17.9 billion, £4.5 billion more than in the same period last year; the financial year-to-date April 2018 to June 2018 remains the lowest borrowing for that period since 2007.

As to why there are several factors at play and in these times it is hard not to have a wry smile at this.

This reduction in credit accounts for around half of the observed £405 million year-on-year June increase in EU contributions.

There was something of a curiosity as well.

Interest payments on the government’s outstanding debt increased by £2.1 billion compared with June 2018, due largely to movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

I have to confess that this development seems confusing. Because this time last year not only was the annual rate of RPI higher but the pattern was higher, so I will have to check how much the numbers are lagged by as this seems to be the factor at play.

Also there was some actual what we might call negative austerity.

Over the same period, there was a notable increase in expenditure on goods and services of £1.2 billion.

To that we can perhaps add this announcement via the BBC earlier.

Two million public sector workers are reportedly set to get a £2bn pay rise.

The Treasury will unveil the biggest public sector pay rise in six years as one of Theresa May’s final acts as prime minister,the Times reported.

Soldiers are set to get a 2.9% rise while teachers and other school staff will get 2.75%, police officers, dentists and consultants 2.5% and senior civil servants 2%.

This next bit seems to be unlikely though.

It is thought the money will come from existing budgets.

Comment

Today’s theme is one of reinforcing the Quis custodiet ipsos custodes line. Or if you prefer who guards the guardians? The UK Statistics Authority and Office for National Statistics regale us with rhetoric about “improvements” but misses the bigger issues and often makes them worse. Added to the problems I have highlighted earlier comes a click bait culture where it is increasingly hard to find the data you want. Also we get opinions on the data which is not the job of the ONS, as its role should be to provide the numbers. The situation with the UKSA is so bad I think it would be better to take the advice of Orange Juice.

Rip it up and start again
Rip it up and start again
I hope to God you’re not as dumb as you make out
I hope to God
I hope to God

Meanwhile I opened by saying so fat this week the economic data has been good but today we did get a possible flicker of a slowing from the tax data.

Central government receipts in June 2019 increased by £0.8 billion (or 1.5%) compared with June 2018, to £58.7 billion,

That night be a monthly quirk but it is lower than inflation.

 

 

 

 

 

Has the UK fixed its public finances?

Last night brought us the Mansion House speeches from the Chancellor of the Exchequer and Governor of the Bank of England. Whilst there was something of a ruckus as Greenpeace arrived my attention was on what the Chancellor would say about the UK public finances.

and we have fixed the public finances………In short, while we have repaired the public finances.

Some clear politics at play but elements of that are true. Then there was a reference to what has been called a “warchest” being available.

Because it doesn’t mean that there would be no extra money to spend.

As I said at the Spring Statement, if we leave the EU in a smooth and orderly way, the fiscal headroom I have built up means an incoming Prime Minister will have scope for additional spending or tax cuts.

“Gentleman Phil” then went on to list his achievements.

As the public finances have improved, I have committed over £150bn of new spending in the last 3 years…

…including an NHS settlement which is the single largest commitment ever made by a peacetime British Government.

Public capital investment is set to reach the highest sustained level in forty years…

…as we build the critical national infrastructure we need to raise our productivity;

I’ve committed £44bn to housing, delivering more new homes last year than in all but one of the last 30 years;

And I’ve cut taxes, with over 30 million people seeing their income tax cut this year;

288,000 people benefitting so far from the abolition of stamp duty for first time buyers;

And British businesses paying the lowest corporation tax rate in the G20.

Apologies for the fact that it is not possible to completely cut politics out of that. But it does give some sort of analysis of the situation. However though the big change I have been pointed out in 2019 does not get a mention.

Borrowing is very cheap

Politicians usually avoid mentioning the falling cost of borrowing because they like to take the credit themselves for the improved public finances. From time to time they may actually be responsible but the trend this year has been across much of the world as we see expectations of more central bank easing. On Tuesday the UK will take advantage of this as we borrow an extra £2.25 billion of this.

1¾% Treasury Gilt 2049

Actually even the 1 3/4% is behind the times because as I type this the UK thirty-year yield is 1.44%. Back in the day I recall it being more than ten times that. Continuing these theme the UK issued an extra £2.75 billion of our ten-year Gilt this Tuesday at a yield of 0.89%. These are practical examples of how lower bond yields feed their way into the public accounts and if we borrow as planned it will have this impact in the next year.

Gilt sales of £117.8 billion (cash) are planned in 2019-20 ( Debt Management Office )

Also there has been a windfall from the way that the rate of inflation has fallen as we move to the latest release.

Interest payments on the government’s outstanding debt decreased by £0.3 billion compared with May 2018, due largely to movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

If we return to the broad sweep I described earlier then this from Bloomberg today highlights the ongoing trend.

The world now has $13 trillion of debt with below-zero yields.

Today’s Data

If we look at this in a thematic sense then there was food for thought for the austerity debate from this in May.

Over the same period, there was a notable increase in expenditure on goods and services of £1.9 billion.

So on the face of it the numbers do seem to back up what the Chancellor was saying last night. We do not get any breakdown of this and I have to confess I am wondering if this is a catching-up on expenditure for March 29th which was supposed to be Brexit Day? Only time will tell on that but for now we have spent more.

Switching to the revenue numbers then they were okay in May.

Central government receipts in May 2019 increased by £1.9 billion (or 3.5%) compared with May 2018, to £56.7 billion…..Much of this annual growth in central government receipts in May 2019 came from Income Tax-related revenue, with Income Tax and National Insurance contributions increasing by £0.6 billion and £0.7 billion respectively compared with May 2018.

So if they are any guide the economy continues to move ahead as one measure is tax revenue. But they were not enough to offset the additional expenditure.

Borrowing (public sector net borrowing excluding public sector banks) in May 2019 was £5.1 billion, £1.0 billion more than in May 2018;

Also the additional expenditure in May fed straight into the picture for the year to date.

Borrowing in the current financial year-to-date (April 2019 to May 2019) was £11.9 billion, £1.8 billion more than in the same period last year;

We do not get much extra perspective at this time of year as we have only had two months in the financial year. So we remain with the view that it looks like we are spending more. As to the overall picture it remains true that we are not borrowing very much and ironically in the circumstances would qualify for this part of the Maastricht criteria very comfortably.

Borrowing in the latest full financial year (April 2018 to March 2019) was £24.0 billion, £17.8 billion less than in the same period the previous year; the lowest financial year borrowing for 17 years.

What about the National Debt?

That continues to rise in absolute terms whilst falling in relative terms.

Debt (public sector net debt excluding public sector banks) at the end of May 2019 was £1,806.1 billion (or 82.9% of gross domestic product (GDP)); an increase of £25.0 billion (or a decrease of 1.4 percentage points of GDP) on May 2018.

We would fail the Maastricht criteria here as shown below.

equivalent to 86.7% of gross domestic product (GDP); 26.7 percentage points above the Maastricht reference.

It is also time for my regular reminder that some of the debt is due to yet another subsidy for our banking system.

The Bank of England’s (BoE) contribution to net debt is largely a product of their quantitative easing measures, namely the Bank of England Asset Purchase Facility Fund (APF) and the Term Funding Scheme (TFS). If we were to exclude BoE from our calculation of public sector net debt (excluding public sector banks), it would reduce by £183.9 billion.

Comment

If we look back to when the period of UK austerity started it is important to remember that it was not only a very different world but seemed a different world. The UK thought it had borrowed some 11% of GDP in a single year and was facing a ten-year Gilt yield of the order of 4%. Indeed the Office for Budget Responsibility was expecting the bond vigilante’s to turn up as it forecast that it would now be 5%. The combination of those two factors made the future public finances look dreadful.

Now we are in a completely different situation as we borrow a mere 1.5% of GDP and the ten-year UK Gilt yield is 0.84%. After all back then we were not yet fully aware of the first rule of OBR club ( for newer readers it is always wrong). The saddest part of this is that the political debate has ignored this. So for example when there were suggestions of tax cuts in the Conservative party leadership election we went back to the “can we afford it?” stage when he general we can, often easily. Whether they would be a good idea is an entirely different matter as for example abandoning VAT for a sales tax seemed curious at best.

Returning to the question in my title today then in isolation the answer is yes. The much deeper question comes from what we want the public finances to achieve as we also see examples of areas where cut backs have hurt people and sadly they are often those least able to do something about it.

 

The UK poverty problem is more than a story about austerity

Timing can sometimes be if not everything very important and so the release of the UN report on UK poverty by Phillip Alston on the day we get the latest data on the public finances is unlikely to be a coincidence. So let us get straight to it.

Although the United Kingdom is the world’s fifth largest economy, one fifth of its population (14 million people) live in poverty, and 1.5 million of them experienced destitution in 2017.

That is certainly eye-catching especially the use of the word destitution. However it was only on Monday that Andrew Baldwin reminded us that using purchasing power parity or PPP the UK is in fact the ninth largest economy rather than the fifth. So we note immediately that many of these concepts are more elusive than you might think. That issue particularly relates to the issue of poverty which is basic terms can be absolute or relative. With the relative definition we find that people can be better off but poverty gets worse. especially if the definitions are changed. I note that the Social Metrics Commission has done exactly that.

This new metric accounts for the negative impact on people’s weekly income of inescapable costs such as childcare and the impact that disability has on people’s needs……. The Commission’s metric also takes the first steps to including groups of people previously
omitted from poverty statistics, like those living on the streets and those in overcrowded housing.

The issue is complex and on a personal level my eyes went to one of the supporters of this which is the same Oliver Wyman which assured us that Anglo Irish Bank was the best bank in the world in 2006.  It was not too long before it was nationalised and made the largest loss in Irish corporate history.

The Detail

Be that as it may the report tells us this.

 Four million of those are more than 50 per cent below the poverty line and 1.5 million experienced destitution in 2017, unable to afford basic essentials. Following drastic changes in government economic policy beginning in 2010, the two preceding decades of progress in tackling child and pensioner poverty have begun to unravel and poverty is again on the rise. Relative child poverty rates are expected to increase by 7 per cent between 2015 and 2021 and overall child poverty rates to reach close to 40 per cent.

On the other hand if we go to the absolute poverty measure then we are told this.

“There are 1 million fewer people in absolute poverty today – a record low; 300,000 fewer children
in absolute poverty – a record low; and 637,000 fewer children living in workless households – a record low.” ( Prime Minister May)

As you can see there is an extraordinary difference between the two approaches.

UK Public Finances

We can look at the situation from this perspective so here we go.

Borrowing (public sector net borrowing excluding public sector banks) in April 2019 was £5.8 billion, £0.03 billion less than in April 2018; the lowest April borrowing since 2007.

So the monthly numbers were better albeit by the thinnest of margins so let us delve more deeply.

Borrowing in the latest full financial year (April 2018 to March 2019) was £23.5 billion, £18.3 billion less than in the previous financial year; the lowest full financial year borrowing for 17 years (April 2001 to March 2002).

As you can see we are now approaching a possible budget balance because the same rate of improvement this year would pretty much wipe the deficit out. This raises a wry smile because when the government was supposedly trying to do this it remained a mirage and was always around three years away on the forecasts. Except three years later it was three years away again! Yet the current government has regularly promised to end austerity and has in fact made quite a lot of progress towards a balance budget. Make of that what you will. In fact the situation has levels of complexity as the spending numbers make clear.

Over the same period, central government spent £740.7 billion, an increase of 2.5%.

Those are the numbers for the full financial year to March and they open the austerity debate again. It depends which inflation measure you use as to whether that is a cut in real terms (RPI) or a rise ( CPI). It also depends on how you define austerity as that too varies. Monthly numbers vary but the latest month suggests a minor reduction in it.

 while total central government expenditure increased by £1.8 billion (or 2.7%) to £66.5 billion.

Moving onto what has changed the deficit numbers ( what used to be called the PSBR) the most has been this development.

In the latest full financial year (April 2018 to March 2019), central government received £739.7 billion in income, including £559.0 billion in taxes. This was 4.9% more than in the previous financial year.

As you can see revenue has been strong and that gives us a hint that maybe the economy has been stronger than the GDP data has picked up and perhaps more in line with the employment and real wages numbers. One way of looking at the situation is to compare revenue with the national debt and if we do so using the international standard ( Maastricht) then it is 40%.

Whilst we are looking at revenue I am often critical of Royal Bank of Scotland so let me also post the other side of it.

On 14 February 2019, The Royal Bank of Scotland Group plc (RBS)announced the dividend price to be paid to shareholders on 30 April 2019. As a shareholder, the government received £0.8 billion

Comment

The report from the UN’s special rapporteur does remind us of problems as well as teaching me that the word rapporteur exists. Those familiar with my work will know that the fact that real wages are still nowhere near the previous peak is an issue. Added to this comes the enormous effort to keep house prices out of the inflation index and then the way that the costs of home ownership are represented by fantasy rents which are never paid. You might reasonably argue that home ownership is the distance of Jupiter away for the poor but the mess made of this area has affected even them as via problems with the balance between new and old rents it seems likely to me that the official rental data has recorded the wrong numbers as in too low.

Whilst the good professor has sadly resorted to a bit of politicking I thing he is on form ground pointing out issues like this.

Children are showing up at school with empty stomachs, and schools are collecting food and sending it
home because teachers know their students will otherwise go hungry…….In England,
homelessness rose 60 per cent between 2011 and 2017 and rough sleeping rose 165 per cent
from 2010 to 2018……. Food bank use increased almost
fourfold between 2012–2013 and 2017–2018,29 and there are now over 2,000 food banks in
the United Kingdom, up from just 29 at the height of the financial crisis.

The rough sleeping issue has increased in the area I live ( Battersea). I also agree that Universal Credit was a good idea that has been implemented incompetently.

Returning to the number-crunching it gets ever more complex to see through the fog as I fear HM Treasury plans to start making smoke.

In the financial year ending March 2019, £8.0 billion in dividends were transferred from the Bank of England Asset Purchase Facility Fund (BEAPFF) to HM Treasury.

Also moving to today’s inflation data which I will pick up on another time I noticed that computer games are hitting the news again, this time with a downwards effect. The official statistics are having real problems with such fashion items and @Radionotme has suggested that the trend to digital sales ( which he thinks are not reported) may also be an issue.

80 per cent of UK video game sales are now digital, new figures have revealed.

The Entertainment Retailers Association said of the £3.86bn generated by the video game market in the UK in 2018, £3.09bn was from digital and £770m was from physical sales. ( Eurogamer)

 

 

UK Austerity and the next Governor of the Bank of England

Today brings into focus an area that has brought good news for the UK over the past couple of years. This has been the improvement in the public finances which rather curiously lagged the period where the economy recorded its fastest economic growth by around 2 years. Also some of the detail along the way has hinted at a better economic situation than that suggested by economic growth measured by Gross Domestic Product or GDP data. This swings both ways in my view as what were called the bond vigilantes will be happier with the state of play. But also those on the other side of the coin who would like more government spending and/or lower taxes would have fiscal room to do so.

Austerity

This has been a matter of debate for some time and let me start by saying there are several ways of looking at this. The harshest would be to actually cut government spending which we have not seen in the UK. Let me add more detail by pointing out that some areas clearly have but overall the story has nor been that as other areas spent more. The more realistic version seems to be restricting government spending in real terms which we have seen some of overall. If we look at it in terms of years then we have recorded on here two main phases firstly from around 2010 when the brakes were applied and from 2012/13 when the pressure on the spending brakes was loosened.

Also there was some tightening on the other side of the fiscal ledger of which the standout was the rise in Value Added Tax or VAT. There was a relatively brief cut from 17.5% to 15% but then a rise to 20% where in spite of the claims of a return to normal it is still at the supposedly emergency rate.

Having established some perspective let us look at this from the IPPR which compared us to these countries “This comprises Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Spain and Sweden.”.

We find that on average these countries spend 48.9 per cent of GDP on public spending, compared to just 40.8 per cent in the UK. Furthermore, whilst the UK’s spending has fallen by 7 percentage points – from around 47 per cent of GDP to 40 per cent of GDP – since the onset of austerity, the comparable fall across these countries is just 3 percentage points. Moreover, if the UK were to match their current levels of spending tomorrow it would be worth £2,500 per person per year, of which £1,800 would go towards social spending; meaning health, education and social security.

Okay if we break this down we see that the picture is more complex. Let me show you this by looking at the Euro area in total for 2018 for which we got figures yesterday. There the fiscal deficit was a mere 0.5% of GDP with spending at 46.8% and revenue at 46.3%. Furthermore many of the countries in the IPPR list ran fiscal surpluses in 2018

Germany (+1.7%), the Netherlands (+1.5%), Sweden (both +0.9%), Denmark (+0.5%). Austria (+0.1%).

So on that measure they are more fiscally austere than the UK which ran a deficit. As you can see things are more complex than they argue which is hinted at by the way they use tax revenue as a benchmark rather than total revenues which changes the numbers quite a bit. We have numbers for different periods but my 46.3% for the Euro area is rather different to the 41.1% for their sample and looks a swinging rather than a straight ball to me.

Of course spending is not a free good either. Could we match the spending tomorrow? Yes we could if we wished and for a while with bond yields where they are it would at first be no big deal, but even the IPPR realises it would have to come with this.

But in the UK, as IPPR has previously recommended, significant additional revenue could be raised through increasing the rate of corporation tax in line with the European average, reforming income tax but in a way that protects those on low and middle incomes, and changes to the way in which we tax wealth.

As to Corporation Tax I am dubious as one thing we have learned in the credit crunch era is the way multinationals pretty much choose where they pay tax or if you want the issue in one word, Ireland.

Moving on we see this and again the catch is that in the credit crunch era such Ivory Tower calculations are fine up in the clouds but down here at ground level they have often crumbled.

They find that the cumulative effect of austerity has been to shrink the economy by £100bn today compared to what it would have been without the cuts: that is worth around £3,600 per family in 2019/20 alone.

Today’s Data

The overall picture presented continues to be a strong one.

In the latest full financial year (April 2018 to March 2019), central government received £739.4 billion in income, including £558.6 billion in taxes. This was 5% more than in the previous financial year.

This again hints that the economy has been stronger than the GDP data suggests and follows the labour market theme of rising employment and higher real wages.

On the other side of the ledger the throwing around of the word austerity makes me uncomfortable when we are increasing spending in real terms.

Over the same period, central government spent £741.5 billion, an increase of around 3%.

Well unless you use the RPI as your inflation measure but even then it is roughly flat.

The combination meant this.

Borrowing in the latest full financial year (April 2018 to March 2019) was £24.7 billion, £17.2 billion less than in the previous financial year; the lowest financial year borrowing for 17 years.

Or if you prefer our credit crunch era journey can be put like this.

In the latest full financial year (April 2018 to March 2019), the £24.7 billion (or 1.2% of gross domestic product (GDP)) borrowed by the public sector was less than one-fifth (16.1%) of the amount seen in the FYE March 2010, when borrowing was £153.1 billion (or 9.9% of GDP).

As a single month March was not one for austerity as it looks like departments made sure that they spent their annual budgets so if some potholes were filled in around your locale that is why.

 while total central government expenditure increased by 5.7% (or £3.5 billion) to £65.7 billion.

The explanation is rather bare but if we look at the ledger we see spending on goods and services was up by £1.9 billion. So maybe there was some Brexit stockpiling too.

Comment

The last decade has seen a lot of debate over the concept of austerity involving quite a lot of goalpost moving, so much so that it is fortunate designers give them wheels these days. Whereas we do know what real austerity has been as @fwred made clear yesterday,

Today’s craziest chart goes to Greece, with a primary surplus of 4.4% of GDP in 2018, beating an already insane target of 3.5%. Jaw-dropping for those of us old enough to remember the whole story.

Or as The Nutty Boys put it.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha

We have seen nothing like that but now face choices ahead as do we copy the Germand and go for a surplus? Or do we now pick out areas where we can spend more? With borrowing so cheap with our ten-year Gilt yield at 1.2% it is not expensive. As ever some care is needed as we have spent in some areas as I note in the IPPR paper than at 7.4% of GDP we spend the same on health as the countries they compare us too which completes something I recall Tony Blair aiming at back in the day.

Meanwhile this has hit the news. I have floated two candidates in Andrew Sentance and Ann Pettifor, but who would you suggest?

Although if Yes Prime Minister has its usual accuracy the choice has already been made and this is just for show

The UK Public Finances are looking strong ahead of the Spring Statement

Today brings one of the set piece events of the UK financial year as the Chancellor of the Exchequer presents his Spring Statement. Of course it was supposed to follow a success last night for the government’s proposed Brexit deal but that did not happen. Thus the rumours about providing financial sweeteners after such a deal are likely to remain just that. However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

There are quite a few issues here and let me open by illustrating with some recent tweets from Ben Chu of the Independent.

…Because there ISN’T a pot of money waiting to be spent, which is what that language from the Chancellor suggests……Instead there is, according to the last October, projected to be a structural deficit of 1.3% of GDP in 2020-21. The Chancellor’s self-imposed ‘fiscal mandate’ requires a deficit of less than 2% of GDP in that year……so he’s set to undershoot that by 0.7% of GDP in that year, which works out as £15.4bn. (These figures will be updated next week at the Spring Statement BTW but Treasury leaks suggest they will be direction that’s beneficial for the Chancellor)……so it’s this £15.4bn (or more) which Hammond seems to be saying will be made available for public spending or tax cuts or whatever if MPs approve May’s deal…

Let us work our way through this. Is there a pot of money waiting to be spent? Not literally as in as having squirreled some away but the improvement in the public finances means that we could borrow more. The latest numbers for the public finances show this.

Borrowing in the current financial year-to-date (April 2018 to January 2019) (YTD) was £21.2 billion, £18.5 billion less than in the same period last year; the lowest YTD for 17 years (since 2001)……..Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear. Regular readers will recall there was a period when the numbers underperformed the economy well after a lag we got that back. So whilst there is not a literal pot of money there is a metaphorical one. For perspective the peak year for borrowing after the credit crunch was a bit over £150 billion.

Structural Deficit

If we address this next then let me point out that in reality it is pretty meaningless. At a time where by definition the credit crunch has brought enormous structural change there is a clear conceptual problem. Politician’s love this sort of number as it allows them to claim success after hitting an easier target. But as we have seen before a small tweak to the assumptions can lead to large ch-ch-changes.

Fiscal Mandate

These sort of things are really will o’ the wisp style developments which suit the political agenda but can disappear as quickly as they appeared. For example the deficit of 2% of GDP quoted is a self-imposed rule that could be changed overnight in either direction. It is simply a choice ( unless you hit a stage where the “bond vigilantes” impose things on you) presented as a fait accompli until it changes again.

State of Independence

We find ourselves wondering what establishment claims of independence mean in practice yet again? If you claim the Office for Budget Responsibility is independent the tweets above pose two clear challenges. Firstly if so. how is the Treasury leaking its figures? Next comes the way that it regularly manages to tweak its assumptions to suit the government of the day.

If we stay with the OBR then Ben Chu seems to be a believer.

What the lord of forecasting (in this case OBR director Robert Chote) giveth, he can also taketh away.

That was from the Independent last November and again as I have noted above there is an element of truth but the “lord of forecasting” ignores the simply woeful forecasting record of the OBR. The latest example of this is the way that the OBR has been forecasting rises in the UK fiscal deficit over the past 2/3 years whereas the deficit has been falling sharply.

Gilt Yields and Inflation

These are two big influences on the public finances as they determine the costs of our borrowing. They have declined in three main ways.

  1. UK Gilt yields are very low in historical terms with the benchmark ten-year yield only 1.18% and even the thirty-year yield being only 1.71%
  2. Inflation has fallen reducing the cost of index-linked debt which is indexed to the Retail Prices Index. That currently rising at an annual rate of 2.5%
  3. As we are borrowing less this is a smaller influence as on our fixed-interest borrowing (~78%) the extra costs are on new debt only.

Thus the impact of matters such as the QE ( Quantitative Easing) era and the way that central banks have operated is positive for the public finances. A recent example of this was the response to the new policy announcement of the ECB which reduced UK debt costs as they followed European ones lower.

Tariffs

We do already have one announcement which may affect the public finances as this was announced this morning. From the Department for International Trade.

Today the government announces details of 12-month 🇬🇧 temporary tariff that will only be applied if we leave the EU with no deal: UK businesses will not pay tariffs on 87% of goods imports by value – helping to avoid price increases & supporting households.

They go on to give some examples.

There will be a mix of tariffs & quotas on products including: Finished vehicles Beef, lamb, pork & poultry Butter & some cheeses Bananas, raw cane sugar, and certain kinds of fish And in sectors where the UK is maintaining protection from unfair trading practices.

That is how we will treat other countries it is up to them how they treat our exports. But moving back to today;s theme there will be a loss of revenue from this should it take place.

Comment

In terms of the public finances alone then the UK has done well. If we widen the debate though there are consequences elsewhere. For example there is the issue of austerity which we have not seen in outright terms as government spending has risen and usually by more than inflation. However it has hit some for example the way that some benefits rises were capped at 1% per annum. Also the rise in knife crime has refocused attention on cuts to the policy budget.

Meanwhile the improvement will not be welcome in other areas as here is the Financial Times from November 2016.

Philip Hammond will admit to the largest deterioration in British public finances since 2011 in next week’s Autumn Statement when the official forecast will show the UK faces a £100bn bill for Brexit within five years.

As we are nearly half-way through that period it is safe to say that things could not be going much worse for that Chris Giles analysis. If I may offer him some help then my first rule of OBR club that it is always wrong worked yet again.

With bad income tax revenues so far this financial year, the OBR has already said it was “very unlikely” to hit the 2016-17 Budget forecast.

Actually time was not especially kind to this bit either.

Public sector debt will jump, Mr Hammond will be forced to admit, by £100bn this year, raising it from 83 per cent of national income to almost 90 per cent from higher borrowing and because the ONS has announced it will treat the Bank of England’s new term-funding scheme as additional debt.

Still at least one reply kept a sense of humour as we note we have not left the European Union yet so things could change.

The last time we left Europe was May 1940. It didn’t go very well. ( Three line flip )

Number Crunching

Last night Ronaldo scored a Champions League Hat-Trick. This morning the shares of Juventus are up by 16% meaning the club is in theory worth an extra amount more than they paid for him. Of course you would be unlikely to be able to sell all the shares at that price but as they have doubled since he arrived the number crunching goes on.

Even the bond market has got in on the game.

 

The UK public finances are seeing outright austerity

The UK Public Finances are something that have been quietly improving over the past year or two. This has been taking place mostly outside the news headlines partly because the numbers are much smaller than they were. From the Office of National Statistics or ONS.

Over the next 12 months (April 2018 to March 2019), the Office for Budget Responsibility, which produces the official government forecasts, expects the public sector to borrow £37.1 billion; around one-quarter of what it borrowed in the financial year ending March 2010 (April 2009 to March 2010), at the peak of the financial crisis.

Another reason why this has been in the shade rather than daylight is that it has to some extent come in spite of our economic performance. If we look back regular readers will recall times when UK economic growth was a fair bit stronger than now but the public finances were slow to respond whereas now we are seeing some catch-up. Of course an alternative view is that maybe we were not doing quite so well back then and perhaps are doing better now than we are told.

In terms of economic growth the position looks as though it has improved slightly with the NIESR suggesting this.

Building on the official data, our monthly GDP Tracker suggests that growth is set to nudge higher to 0.5 per cent in the third quarter.Recent survey evidence suggests that the manufacturing and construction sectors are recovering after a particularly weak start to the year and the dominant services sector is set to maintain a similar rate of growth in the third quarter.

Should this turn out to be true it will provide a more favourable back drop for the public finances than the first half of this year. Tucked away in the detail was something else which in terms of economic theory and to some extent practice was hopeful.

Growth is now close to our estimate of potential.

They think the economy can grow at 0.6% per quarter which is a fair bit higher than the 1.5% per annum “speed limit” produced by the Bank of England Ivory Tower. It would be helped considerably if any of this came true. From the BBC.

Britain can be a “21st Century exporting superpower”, Liam Fox is expected to say in a speech detailing the government’s post-Brexit ambitions.

The international trade secretary will say he wants exports as a proportion of UK GDP to rise from 30% to 35%.

Of course we all want lots of things and the real issue is what plan there is to achieve this.

A Helping Hand

I have pointed out before how the policies of the Bank of England and QE (Quantitative Easing) in particular have been very government friendly. This issue was taken up by Toby Nangle yesterday.

Back in 2010 it was thought that UK debt service costs would soar, but lower rate rates (Gilt & BoE) have meant massive undershoot while debt level overshot big time.

It will come as no surprise that it was the Office for Budget Responsibility was completely wrong but the difference in the numbers is stunning. Using Toby’s projections we can estimate debt costs per annum at around £80 billion whereas in reality it is in the low forty billions. Also per unit the move has been even larger because we have borrowed much more than the OBR projected.

So we have two factors here the first is the impact of lower Gilt yields due to the low official interest-rates and QE sovereign bond purchases and the second is the fact that the Bank of England owns around 22% of the Gilt market and refunds the money ( minus costs) to the government.

Whilst we looking at Gilt yields they have been falling again recently with the ten-year yield down from 1.4% when the Bank of England raised Bank Rate to 1.24% now. This seems set to reduce debt costs further as well as meaning that Governor Carney’s bazooka looks reduced to one of those potato guns I used to play with as a child.

Today’s data

The good news keeps on coming to coin a phrase. From the ONS.

Public sector net borrowing (excluding public sector banks) was in surplus by £2.0 billion in July 2018, a £1.0 billion greater surplus than in July 2017; this is the largest July surplus for 18 years (2000).

For those wondering about the surplus this is because July is a month for Self Assessment payments and therefore has a favourable wind behind it. But if we move to the financial year so far the picture remains good.

Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to July 2018) was £12.8 billion; that is, £8.5 billion less than in the same period in 2017; this is the lowest year-to-date (April to July) net borrowing for 16 years (2002).

As you can see this is quite a drop and moves us into a zone where we can for once dream ( or for some as I will discuss later have nightmares) about an actual surplus. If we look into what is driving this we see that revenues are strong rising by 5% and in particular income tax is up by 6.1% perhaps hinting the economy has been stronger than we thought. On the other side of the coin we get an insight into cooling in the housing market in the way that Stamp Duty receipts are down by just under £400 million to £4.3 billion.

Austerity

We have often debated how much of this we have seen but the year to date figures show one of the clearest signals of it we have had.

Over the same period, central government spent £246.9 billion, around 1% less than in the same period in 2017.

After all we have found ourselves mostly discussing austerity allowing for inflation whereas at the moment we have outright austerity. Also those looking at the problems various councils are facing ( e.g Northamptonshire) will find their eyes alighting on this.

 while local government borrowing was in surplus by £4.9 billion.

National Debt

We can expect an aggressive headline today from the London Evening Standard once its editor spots that the current Chancellor is achieving one of his great hopes. The emphasis is mine.

Public sector net debt (excluding public sector banks) was £1,777.5 billion at the end of July 2018, equivalent to 84.3% of gross domestic product (GDP), an increase of £17.5 billion (or a decrease of 1.7 percentage points as a ratio of GDP) on July 2017.

Comment

The situation we find ourselves in is one which we were promised for 2015/16 so it has come Network Rail style. Also there is a space oddity element about it as the previous chancellor was supposed to be the man for austerity and Phillip Hammond was one for a more relaxed view yet reality looks the opposite. An alternative view is that the numbers are much less under their control than they would like us to think. But such as they are and judging them on their own basis they now look pretty good. As ever they depend a lot on economic growth but should that continue the trajectory is for a surplus and a declining debt to GDP ratio and maybe even some falls in the national debt.

There are three challenges to this. The first is the most basic which is the inability of politicians to keep their hands out of the cookie jar. That brings us to the second which is to some extent related which is that some areas such as local councils seem to have an especially tight noose around their neck at the moment highlighted by the fact they are in surplus so far this year by £4.9 billion. Something odd is going on there. We can take this forward more generally as to whether tight now we want or need outright austerity? Even without the impact of lower inflation on debt interest we would be spending the same as last year.

Next comes the issue of the reliability of official statistics which has been raised recently by the Resolution Foundation.

When we first looked at the data, back in 2012, we came up with a clear answer: the corporate sector had been sitting on too much cash for too long……..By June 2017, a series of data revisions had lowered the scale of the corporate surplus across the entirety of the period, by a relatively uniform average of 2.4 per cent of GDP per year.

That is quite a lot but it was not the end of the story.

But a change of 4 per cent of GDP in both 2015 and 2016 – worth roughly £80 billion a year – is huge. At the very least, it might better be considered a correction rather than a revision.

Impacts on the public finances are usually from a different route in terms of how you define things but for example if you added up the impact of the Housing Associations and the Term Funding Scheme of the Bank of England you end up debating around £190 billion in national debt terms.

 

Greece is still in an economic depression meaning the debt remains

This morning the Greek Prime Minister flies to the UK for an official visit so let us welcome him, According to Alexis Tsipras it comes at a significant time.

After eight years, we managed to solve the problem of Greek debt. A debt that we did not create. A debt we inherited from the forces of the old regime. From the old Greece of oligarchy, corruption, interdependence, and offsets of power.

The debt is solved? But wait there is more.

With an honest and prudent fiscal policy that will respect our commitments, but at the same time put an end to the austerity and to all that we have experienced, to the injustices we have experienced in the past.

Austerity is over? Well that lasts two short paragraphs.

the fact that the primary surplus will remain at 3.5% for those years, ie from 2019 to 2022.

There is one more issue at hand.

With his Eurogroup decision yesterday, he creates new data for the day after, as Greek debt, Greek public debt, is at last sustainable.

As to the issue of austerity that does not appear to be going so well according to developments this morning.

Members of the union of Greek hospital workers, POEDIN, on Monday morning blocked the entrance to the Finance Ministry on Nikis Street near Syntagma Square, protesting austerity with a black banner bedecked with ties. ( Kathimerini)

What about the debt?

My long-running theme that this will be a case of “To Infinity! And Beyond” can take a bow as it gets ten years nearer. From the Eurogroup.

Further extension of the grace period for the loans of the European Financial Stability Facility (some 100 billion euros) by 10 years and an extension of the average maturing period by a decade.

This is more significant than it might seem as this particular can had already taken quite a bit kicking. But even that has turned out not to be enough. Let us remind ourselves that back at the time of the original “Shock and Awe” bailout the target for this was 120% of GDP ( Gross Domestic Product). Whereas now the latest public debt bulletin tells us the debt is not only 343.7 billion Euros but it rose by 15 billion Euros in the first quarter of this year. That being so we are looking at 187% now.

Next there was some good news but you may note it is being handed out in packets presumably in return for the correct behaviour.

Return to the Greek coffers of the profits that national central banks in the eurozone have from Greek bonds (ANFAs and SMPs), currently amounting to some 4 billion euros. This money will be returned to Athens in two equal tranches every year, starting in December 2018 up to June 2022

Whilst I am no great fan of these bailouts the paragraph above does allow me to point out some Fake News championed by former Finance Minister Yanis Varoufakis earlier this month.

It is now official: The only euro area country that will NOT benefit even by a single euro from the ECB’s 2.4tr QE program designed to defeat deflation will be the one country that suffered the worst deflation by far: Greece! The waterboarding never ends!

He was so incompetent that it is not impossible he is unaware that the ECB holds quite a bit Greek debt still and much of the rest of it is owned by the ESM/EFSF. So Greece had its own earlier equivalent of QE which regular readers will know was called the Securities Markets Programme or SMP. As of the end of last year it still held some 9.5 billion Euros of Greek debt. Then there are the two SPVs which sadly are not Spectrum Pursuit Vehicles from Captain Scarlet.

We have seen disbursements of €245 billion, when I add up the Greek Loan Facility, EFSF and ESM loans.

I am amazed that Yanis still gets so much airtime.

One way that this particular show is managing to stay on the road is this.

The ESM is prepared to disburse €15 billion to Greece after national procedures have been completed. €9.5 billion will go into a dedicated account for the cash buffer, and this will cover post-programme financing needs, until the year 2020. The remaining €5.5 billion will go to the segregated account to cover immediate debt servicing needs.

As you can see the wheels are being oiled so that the show can stay on the road for the next couple of years which is about how it goes, Triumph is proclaimed and then we go through it all again a couple of years later which of course is another triumph. Sadly that cycle has yet to end.

Meanwhile there is always European Commisioner Pierre Moscovici.

But I am also proud to have always been with the Greek people over the years, against austerity and Grexit.

He of course missed the soup kitchens bit and does he mean breath-taking rather than breathe below?

Like Ulysses back to Ithaca, Greece is finally reaching its destination today, ten years after the beginning of a long recession. She can finally breathe, look at the path she has traveled and contemplate again the future with confidence.

Of course it wouldn’t be Pierre without this.

The greatest danger of this odyssey has been the monster called Grexit!

Comment

Let me now introduce the most damning statistic of the so-called triumphs and it is provided by the Greek statistical agency. The pre credit crunch peak for Greece was the exactly 65 billion Euros of GDP ( 2010 prices) produced in the third quarter of 2007. This was replaced by just under 50 billion Euros a decade later and the third quarter last year remains the best since in total unadjusted GDP.  So a lost decade where there has been a great depression wiping out some 23% of output which of course has been the real “monster” which is why Commisioner Moscovici is so keen to create fake ones.

The consequences of this can be seen in many areas.

The seasonally adjusted unemployment rate in March 2018 was 20.1% compared to the 22.1% in March 2017 and the downward revised 20.6% in February 2018.

This compares with between 8% and 10% pre credit crunch. The youth (15-24) unemployment rate is 43.2% reminding us of how many must reach 24 having never had a job and even worse never had any hope of one. Another consequence is this.

According to the results of the 2017 Survey on Income and Living Conditions, persons at risk of poverty or social exclusion represent 34.8% of the total population (3,701,800 persons), recording a decrease compared to the previous year (3,789,300 persons representing 35,6% of
the total population).

Even worse that survey looks as though it is looking a relative poverty and of course the situation has shifted lower. In fact last week was a grim week at the statistics office.

Material deprivation for children aged up to 17 years, in 2017 amounts to 23.8%, in comparison with 11.9% in
2009.

The minor improvement needs to be set against the 11% for the measure below in 2009.

In 2017, 22.1% of the population aged 18-64 years was in severe material deprivation with
a decrease of 1.6 percentage points compared to 2016

Looking ahead even the rose-tinted spectacles of the European Commission are not especially upbeat.

Real GDP is now forecast to grow by 1.9% in
2018 and 2.3% in 2019, revised down compared to
the 2018 winter forecast.

This is a bigger issue than you might immediately think as following such a depression Greece should be having a “V” shaped recovery but instead has an “L” shaped one. The next bit really is from an Ivory Tower high in the clouds.

suggests that households may be more financially
stretched than previously assumed

For what it is worth ( they are in a bad run) the Markit PMI thinks that manufacturing is in a bad run. Next we have the issue of how much the ongoing Euro area slow down will affect things in Greece. We have seen the numbers fall apart before.

Let me finish by wishing Greece well and some ying and yang. First the extraordinary from Vicky Pryce.

Long-suffering Greek friends here in Athens puzzled by UK complacency about brexit economic hit

But next a reminder of the glorious beauty to be found there.

https://twitter.com/search?q=greece&src=typd

The UK Public Finances are improving fast

A feature of the credit crunch era is the way that the same or similar stories get recycled and this is what I was thinking of when the proposed NHS ( National Health Service) spending boost was announced by Theresa May at the weekend.

There has been a change of Chancellor as George Osborne was removed and replaced with Phillip Hammond and it looks as though the new government will be fiscally looser.

That was from October 3rd 2016 and you may recall it was in tune with the mood music as even the IMF which had helped impose so much austerity on Greece had come out in favour of fiscal stimuli. However like with so much about the current government it never really happened on any scale. In fact if we look at the numbers I quoted then we see that the UK has continued to reduce its deficit and as ever confound the forecasts of the Office of Budget Responsibility or OBR.

In the financial year ending March 2016 (April 2015 to March 2016), the public sector borrowed £76.5 billion. This was £18.9 billion lower than in the previous financial year and less than half of that in the financial year ending March 2010 (both in terms of £ billion and percentage of GDP).

That was the picture then and it has been replaced by a deficit more like £40 billion in the fiscal year just completed. So whilst there has been an ongoing stimulus as we have had a persistent deficit the annual amount has been reduced partly due to growth in the economy which has made the national debt situation look more contained and to some extent better.

Public sector net debt (excluding public sector banks) was £1,777.3 billion at the end of April 2018, equivalent to 85.1% of gross domestic product (GDP), an increase of £56.8 billion (or 0.3 percentage points as a ratio of gross domestic product (GDP)) on April 2017.

As you can see it is rising in amount but the growth in the economy means that relatively it has changed much less.

Today’s data

This morning has brought borrowing figures which are very good.

Public sector net borrowing (excluding public sector banks) decreased by £2.0 billion to £5.0 billion in May 2018, compared with May 2017; this is the lowest May net borrowing since 2005.

Of course monthly data can be erratic but the fiscal year so far seems set fair as well.

Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to May 2018) was £11.8 billion; that is, £4.1 billion less than in the same period in 2017; this is the lowest year-to-date (April to May) net borrowing since 2007.

Should we continue on anything like such a trajectory this year will see a solid fall in the fiscal deficit.

The NHS Proposal

If we skip the foaming at the mouth over the phrase “Brexit Dividend” it was reported like this by the Financial Times.

The NHS financial settlement — which could be unveiled as soon as next week, ahead of the taxpayer-financed system’s 70th anniversary — is expected to provide increases to the £150bn UK health budget of at least 3 per cent above inflation every year.

As you can see implementing such a policy would be a boost in real terms as at least 3% is circa £5 billion a year. The Institute for Fiscal Studies puts it like this.

Yesterday’s announcement implies that day-to-day spending by NHS England will increase by £16 billion in real terms between now and 2022–23 (with a further £4 billion in 2023–24).

Paying for it

There are three routes. One is simply higher economic growth which in the short-term is problematic as we are in a soft patch which the monetary numbers are signalling will remain through the autumn. Taxes could rise but this government ha shad trouble with that as the debacle over national insurance for the self-employed showed. This leaves borrowing more which in the circumstances seems feasible.

In terms of amount we are borrowing less as discussed above and the cost of our borrowing remains cheap. The UK ten-year Gilt yield is a mere 1.3% and the more relevant for these purposes thirty-year yield is 1.77% . This is of course more expensive than in the late summer of 2016 when Bank of England Governor Mark Carney spent £60 billion on in this respect kamikaze style purchases driving the market to all-time price highs and yield lows including in the madness some negative ones. But it is in terms of the thirty-years I have been following this market certainly low and in fact ultra low.

The Institute of Fiscal Studies is rather dismissive of this route.

But a significant increase in forecast borrowing would mean that the government was not taking its stated commitment to eliminate the deficit by the mid-2020s seriously. The deficit is already forecast to be £21 billion in 2022–23, implying further consolidation measures – in the form of tax rises or spending cuts –would need to be implemented.  The Government could decide to abandon its fiscal objective, as its predecessors have frequently done in the past.

Actually the recent fiscal data suggests that they probably would not have to do that as we see yet another Ivory Tower lost in the clouds of its own rhetoric.

What has today’s data told us?

For all the talk of a fiscal stimulus something of a squeeze has been going on.

In the latest financial year-to-date, central government received £112.9 billion in income, including £82.6 billion in taxes. This was around 3% more than in the same period in 2017.

Over the same period, central government spent £123.6 billion, roughly equal to that spent in the same period in 2017.

In terms of controlling public spending we have come to learn that this is about as good as it gets. We are mostly incapable of reducing it in nominal terms but we do have phases of reducing it in real terms.

Also the receipts data hint at the economy having been stronger than we thought. What I mean by this is that income tax receipts have risen by £2,5 billion to £25,5 billion in the latest couple of months. Indeed even the much maligned retail sector may be getting some support as VAT ( Value Added Tax) receipts rose by £1.1 billion to £23.2 billion. In case this seems like over explaining the rise the numbers are influenced by Bank of England QE from which dividend or coupon payments are taken as receipts and that was a -£0.9 billion influence.

Oh and the spending numbers have been boosted by a fall in debt costs as the rise in ( RPI) inflation washes out of the system.

Comment

There is a lot to consider here so let us start with the UK public finances. Back in October 2016 they were disappointing in the circumstances and now they are good in the circumstances. As some tax receipts represent past activity there may be at least some logic at play as it takes time for the numbers to reflect it. If the data carries on like this then those who use tax receipts as a measure of the economy may feel it is out performing what the GDP data tells us and fits the employment numbers.

The catch is the current slow down and the one we expect from the money supply data which will weaken the above trends. However we find yet another situation where the first rule of OBR Club has hit the cricket ball for six.

 and £5.7 billion less than official (Office for Budget Responsibility) expectations;

So as we stand the UK Public Finances might shrug off a fiscal boost for the NHS although as ever recession would change that. As to how much of a good idea it is remains open to question. On a personal level Frimley Park Hospital gave good care to my father and on less serious matters my mother and I am grateful to Chelsea and Westminster for the work on my knee. Yet there is also an institutional problem.

An expert on hospital mortality data has said scandals such as the deaths at Gosport War Memorial Hospital could be being replicated elsewhere in the NHS.

Prof Sir Brian Jarman told the Today Programme he thinks “it is likely” similar situations are happening in other hospitals.

An inquiry found doctors at the hospital gave patients “dangerous” amounts of powerful painkillers.

More than 450 older patients’ lives were shortened as a result. ( BBC)

 

The UK Public Finances give the UK economy a positive message

The focus returns to the UK economy today and as the sunshine pours through my windows let us remind ourselves of one of its strengths. From the BBC.

Ed Sheeran was the big winner at this year’s Billboard Awards, held in Las Vegas.

The singer took home four awards: top artist, top radio songs artist, top song sales artist and top hot 100.

Yes it was overall a good weekend for those of the ginger persuasion as we got a reminder of a successful part of our economy. From the UK Music website.

The UK music industry grew by 6% in 2016 to contribute £4.4 billion to the economy, a major new report reveals today…….Successful British acts including Ed Sheeran, Adele, Coldplay, Skepta and the Rolling Stones helped exports of UK music soar in 2016 by 13% to £2.5 billion.

Millions of fans who poured into concerts ranging from giant festivals like Glastonbury to small bars and clubs pushed the contribution of live music to the UK’s economy up by 14% in 2016 to £1 billion.

There was a time that the success of the industry was frittered away by the use of Columbian marching powder but of course in a masterstroke that is now added to the GDP numbers. Although exactly how to measure this is a mystery to me and when I have checked appears to be something of a mystery to our statisticians too. As Fleetwood Mac would put it “Oh Well!”

Bank of England

No doubt Governor Mark Carney will be cheered by this week;s headlines assuming of course he has spotted them. From Graeme Wearden of the Guardian

FTSE 100 hits record high as US and China call a trade war truce 🇺🇸🇨🇳

Perhaps he will take the opportunity when he gives evidence to Parliament today to claim yet more wealth effects from higher asset prices as following that headline yesterday the FTSE 100 has pushed even higher to 7868 this morning. This would be in not dissimilar fashion to the way that the Bank of England has done so with house prices after it made a policy switch back in the summer of 2012 to explicitly boost them with the Funding for Lending Scheme. Of course a full exposition of the state of play in the equity market would need to allow for dividends and inflation.

Meanwhile the last week has seen the Bank of England and Mark Carney hit troubled water again on this issue of what we might call “woman overboard”. This is where the intelligent one ( Kristin Forbes) did not want a second term and the much less intelligent one ( Minouche Shafik)  had to be made a Dame to cover up her early departure. That is before we get to this. From the BBC

Charlotte Hogg has spoken of learning lessons after the “mistake” that ended her career at the Bank of England.

A former deputy governor – and tipped to take the top job – she says in her first interview that the experience made her a “different kind of leader”.

Somehow the BBC economics editor Kamal Ahmed seems to have forgotten the way she broke the rules she had set and the implied effort to in essence ride it out in a manner suggesting such rules were not for “one of us”. Also it is hard to know where to start with this.

Since her resignation in March 2017, Ms Hogg has remained out of the public eye.

It is a lesson in the way the UK establishment operates as I note the daughter of a baroness and a Viscount has the chutzpah to tell us this.

As a leader of Visa, I want it to be a more diverse organisation.

This was combined with an even more important issue that her lack of knowledge about monetary policy was no barrier to being appointed to the Monetary Policy Committee (MPC) for what Sir Humphrey Appleby would no doubt call “One of Us”.

As to Governor Carney I do hope that the Treasury Select Committee will grill him on his Forward Guidance. Here he is from August 2013 on the BBC.

So that people watching this at home, so that people running businesses here across the United Kingdom can make decisions about whether they are investing or spending with greater certainty about what’s going to happen with interest-rates.

What this has meant in practice is that the Unreliable Boyfriend has regularly promised interest-rate rises but these have not turned up.However when the opportunity came to cut interest-rates he did so immediately. Even that went wrong and had to be reversed after long enough had been left to try to avoid it looking too embarrassing.

Oh and they could also ask how he seems so often to talk for the whole MPC when the other eight members are supposed to be of independent mind especially the four external members?

Public Finances

These have been performing pretty well recently and this morning’s data continued on this happier theme.

Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £7.8 billion in April 2018, compared with April 2017; this is the lowest April net borrowing since 2008.

The last bit is of course going to be true every time now until the next downturn but behind it has been a consistent stream of improvements  which have contradicted some of the other data which have been weaker. For example receipts from Income Tax were strong rising from £11.4 billion last year to £12.8 billion this. Even VAT rose a little from £11.2 billion to £11.5 billion which may suggest that the more apocalyptic surveys on retail sales have been exaggerated. Also debt costs fell which seems likely to reflect the fading of the rate of inflation as the main player here will be the impact of the Retail Price Index on index-linked debt costs.

The good news continued if we look back for some more perspective although you may note not very everyone as my first rule of OBR club hits another winner.

Public sector net borrowing (excluding public sector banks) in the latest full financial year (April 2017 and March 2018) was £40.5 billion; that is, £5.7 billion less than in the previous financial year (April 2016 to March 2017) and £4.7 billion less than official (OBR) expectations; this is the lowest net borrowing since the financial year ending March 2007.

So we have passed the time which regular readers will recall saw the economy apparently improve but the public finances struggle to one where the tables have been reversed. If April was any guide then the Income Tax data suggests a better economic situation than we have seen elsewhere and was quite an improvement on 2017/18 when it struggled. But of course one month;s figures are unreliable.

More problems for the Bank of England

The 2017/18 financial year saw a rise in UK debt costs of £5.9 billion which will essentially be the rise in inflation ( RPI) triggered by the fall in the UK Pound £ after the EU leave vote. This is an actual cost often ignored of the Bank of England not only “looking through” the likely inflation rise but adding to it with its Bank Rate cut and Sledgehammer QE of August 2016.

Also there is something rather embarassing in terms of number-crunching.

n compiling debt estimates for March 2018, there was an error in the treatment of data for the Asset Purchase Facility (APF), which incorrectly recorded the data relating to two events in the compilation process:the closure of the Term Funding Scheme in February 2018….the maturation of a tranche of gilts held by the APF.

Okay so what?

However, correcting this error has reduced PSND ex as at the end of March 2018 by £11.0 billion, equivalent to 0.5 percentage points as a ratio of GDP.

Comment

The news from the UK Public Finances is good and was particularly so in April. In addition we were told that the last financial year was around £2 billion better than we had previously calculated. So we now qualify for the Stability and Growth Pact in something of an irony and face the issue of what happens next? We have seen economic stimulus via the ongoing deficits but also austerity for many as funds have been switched between areas and different groups sometimes hurting the poorest. Of course we are several years already behind the planned surplus.

Maybe the numbers tell us we are doing better economically than some of the others although there is a catch and that is the way the numbers have been manipulated. Many of you will recall the Royal Mail pension fund saga where adding future liabilities supposedly improved the public finances and the housing associations who have blown into and then out of the numbers like tumbleweed in the wild west. More recently there is the issue of Bank of England involvement.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,583.2 billion at the end of April 2018, equivalent to 75.8% of GDP, a decrease of £10.5 billion (or 2.8 percentage points as a ratio of GDP) on April 2017.

Meanwhile over at the Treasury Select Committee