There was a hopeful signal for the UK Public Finances this morning as I noted that the UK TV media were ignoring them. So let us take a look.
In April 2021, the public sector spent more than it received in taxes and other income requiring it to borrow £31.7 billion, £15.6 billion less than in April 2020 but still the second highest April borrowing on record.
One would expect a better number than last year as we are comparing with the initial lockdown but it also implies a better trajectory than suggested by the Office for Budget Responsibility.
UK public borrowing in April is now estimated at £31.7bn, about 20 percent below #OBR projection of £39bn. ( Andrew Sentance)
So our first rule of OBR Club that the OBR is always wrong is off to another good start. As in terms of the fiscal year is the economy according to tax receipts.
Central government receipts were estimated to have increased by £3.8 billion in April 2021 compared with April 2020 to £58.0 billion, including £42.5 billion in tax receipts.
Looking into the detail we see that VAT receipts were up by 8.8% and Pay as You Earn income tax up by 16.4% backing up the reopening of the economy vibe. There was a curious number as well suggesting a surge in smoking as Tobacco Duty rose by 183.5% on last year to £700 million. Staying with sin taxes alcohol receipts were up by 15.6% as well which if I recall correctly is in addition to the post pandemic rise in drinking.
There was also a signal of a strong housing market because even though the Stamp Duty threshold has been raised to £500,000 receipts were up by £400 million or 71% on last year. Finally the numbers are better than what they look because the Bank of England paid some £3.7 billion less to the UK Treasury than last April so allowing for that receipts were in fact some £7.5 billion better.
As you would expect we spent less this year in April.
Central government bodies spent £95.9 billion in April 2021, £12.9 billion less than in April 2020.
In fact the main player was local government.
Central government current transfers to local government were £16.7 billion in April 2021, £11.6 billion lower than in April 2020. In part, these payments enable local authorities to fund coronavirus policies.
Central government saw more of a shift in what the money was spent on than a change. Procurement and wages rose and net investment rose by £2.3 billion but subsidies to business fell by over £5 billion.
In terms of supporting employment this was spent.
Also some £1.1 billion was saved on contributions to the European Union compared to last year.
The Bigger Picture
There was some better news here as well as a sobering total.
In the financial year ending (FYE) March 2021 (April 2020 to March 2021), the public sector borrowed £300.3 billion, £243.1 billion more than in the same period last year.
That was the sobering bit as it is nearly double the £157.7 billion peak of 2010. The better news is below.
revised down by £2.8 billion from last month’s first provisional estimate.
One can also look at this compared to annual economic output.
Expressed as a ratio of gross domestic product (GDP), public sector net borrowing (PSNB ex) in FYE March 2021 was 14.3%, revised down by 0.2 percentage points from last month’s first provisional estimate; it remains the highest such ratio since the end of World War Two, when it was 15.2% in FYE March 1946.
Oh and the first rule of the OBR Club was in play again.
Public sector net borrowing (PSNB ex) in FYE March 2021 is estimated to have been £27.1 billion less than the £327.4 billion expected by the Office for Budget Responsibility (OBR) in their Economic and Fiscal outlook – March 2021 on a like for like basis.
On Friday the Financial Times noted this.
As lately because the chancellor’s March 3 Funds, Britain’s fiscal watchdog predicted the government would want to borrow £233.9bn in 2021-22 to take care of the pandemic, however the FT calculates that may now be as little as £150bn.
There are several reasons for this. As we have already analysed the OBR was too pessimistic for last year. Not only was its forecast of borrowing too high it thought UK GDP was 10% lower when it is more like 6%. Then it feels the UK economy will grow by a bit more than 4% this year as opposed to the 7-8% that most others think.
This was something of a change for the Financial Times which seems to be in the process of doing a U-Turn on UK economic prospects. But for the OBR this is an issue that even the FT cannot ignore. As to hope for the future well this is from the Chair of the OBR Richard Hughes at the end of last month and the emphasis is mine.
I should stress that my remarks concern the forecasting profession as a whole (in the UK and around
the world), and not the OBR in particular who, if anything, have been at the forefront of innovation
and adaptation in this area long before I arrived.
I think he means innovation in the sense of the Irish banks who in their crisis described what turned out to be a road to collapse as “innovative”
This is a story which has become more complicated than it needs to be and it revolves around the way the activities of the Bank of England are measured and counted.
Public sector net debt (excluding public sector banks, PSND ex) was £2,171.1 billion at the end of April 2021 or around 98.5% of GDP, the highest ratio since the 99.5% recorded in March 1962.
That is where the story starts but there is a kicker.
If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of April 2021 would reduce by £224.6 billion (or 10.2 percentage points of GDP) to £1,946.4 billion (or 88.3% of GDP).
A bit more than half of that is because the Bank of England’s holdings of UK Gilts ( bonds) are worth more than it paid for them. Yes you did read that correctly where a profit becomes a debt.
There may be some losses in all the Bank of England activity but an allowance of say £20 billion or so seems sensible at this stage.
The numbers today continue the better news from Friday where we saw signs of the UK economy picking up quickly. That has fed through into the pubic finances and that seems likely to continue this month as well. Projecting that forwards leads to a lot better picture for 2021. However the welcome news puts us in a position where we will have borrowed some £400 billion or so more than previously expected. Whilst Gilt yields remain low as even the fifty-year is a mere 1.15% we can be relaxed about the affordability of this for now we do have a higher burden. So we cannot afford much of a rise in debt costs which means that we are reminded that the future is of low interest-rates and more frequent Bank of England bond buying or QE
Returning to the Tobacco Duty issue social media has come up with a couple of suggestions. One is that we are smoking some more. The other is based on this.
Nope, lack of Duty Free cigs due to non-travel. ( @Iansharpsmithy)
Oh and also this from Philip Aldrick of The Times.
Or was it harder to smuggle them in ?
Perhaps we have been miscounting for a while?
No. Because nobody has been allowed to travel, they are having to buy U.K. cigarettes. It’s been underestimated for years how much comes in from abroad, mostly Poland. They have been overestimating how many people have stopped smoking. Just stopped paying UK prices for them. ( @gibraltarfx )