The UK has opened the fiscal taps and started a fiscal stimulus

The credit crunch era has seen some extraordinary changes in the establishment view of monetary policy. The latest is this from the Peterson Institute from earlier this month.

On October 1, Prime Minister Shinzo Abe’s government raised the consumption tax from 8 percent to 10 percent. Our preference would have been that he not do it. We believe that, given the current Japanese economic situation, there is a strong case for continuing to run potentially large budget deficits, even if this implies, for the time being, little or no reduction in the ratio of debt to GDP.

Indeed they move on to make a point that we have been making for a year or two now.

Very low interest rates, current and prospective, imply that both the fiscal and economic costs of debt are low.

The authors then go further.

When the interest rate is lower than the growth rate—the situation in Japan since 2013—this conclusion no longer follows. Primary deficits do not need to be offset by primary surpluses later, and the government can run primary deficits forever while still keeping the debt-to-GDP ratio constant.

As they mean the nominal rate of growth of GDP that logic also applies to the UK as I have just checked the 50 year Gilt yield. Whilst UK yields are higher than Japan we also have (much) higher inflation rates and in general we face the same situation. As it happens the UK 50 year Gilt yield is not far off the annual rate of growth of real GDP at 1.17%.

They also repeat my infrastructure point.

To the extent that higher public spending is needed to sustain demand in the short run, it should be used to strengthen the supply side in the long run.

However there are problems with this as it comes from people who told us that monetary policy would save us.

Monetary policy has done everything it could, from QE to negative rates, but it turns out it is not enough.

Actually in some areas it has made things worse.One issue I think is that the Ivory Towers love phrases like “supply side” but in practice it does not always turn out to be like that. Also there is a problem with below as otherwise Japan would have been doing better than it is.

And the benefits of public deficits, namely higher activity, are high…….The benefits of budget deficits, both in sustaining demand in the short run and improving supply in the long run are substantial.

Are they? There are arguments against this as otherwise we would not be where we are. In addition it would be remiss of me not to point out that one of the authors is Olivier Blanchard who got his fiscal multipliers so dreadfully wrong in the Greek crisis.

UK Policy

If we look at the latest data for the UK we see that in the last fiscal year the UK was not applying the logic above. Here is the Maastricht friendly version.

In the financial year ending March 2019, the UK general government deficit was £41.5 billion, equivalent to 1.9% of gross domestic product (GDP) ; this is the lowest since the financial year ending March 2002 when it was 0.4%. This represents a decrease of £14.7 billion compared with the financial year ending March 2018.

In fact we were applying the reverse.

Fiscal Rules

The Resolution Foundation seems to have developed something of an obsession with fiscal rules which leads to a laugh out loud moment in the bit I emphasise below.

Some of the strengths of the UK’s approach have been the coverage of the entire public sector, the use of established statistical definitions, clear targets, a medium term outlook, and a supportive institutional framework. But persistent weaknesses remain, including the disregard for the value of public sector assets, reliance on rules which are too backward or forward looking, setting aside too little headroom to cope with forecast errors and economic shocks, and spending too little time building a broad social consensus for the rules.

Actually the “clear targets” bit is weak too as we see them manipulated and bent. But my biggest critique of their obsession is that they do not acknowledge the enormous change by the fall in UK Gilt yields which make it so much cheaper to borrow.

Today’s Data

That was then but this is now is the new theme.

Borrowing (public sector net borrowing excluding public sector banks) in September 2019 was £9.4 billion, £0.6 billion more than in September 2018; this is the first September year-on-year borrowing increase for five years.

Actually there was rather a lot going on as you can see from the detail below.

Central government receipts in September 2019 increased by £4.0 billion (or 6.9%) to £61.2 billion, compared with September 2018, while total central government expenditure increased by £4.3 billion (or 6.8%) to £67.6 billion.

As to the additional expenditure we find out more here.

In the same period, departmental expenditure on goods and services increased by £2.6 billion, compared with September 2018, including a £0.9 billion increase in expenditure on staff costs and a £1.6 billion increase in the purchase of goods and services.

The numbers were rounded out by a £1.6 billion increase in net investment which shows the government seems to have an infrastructure plan as well.

It is noticeable too that the tax receipt numbers were strong too as we saw this take place.

Income-related revenue increased by £1.7 billion, with self-assessed Income Tax and National Insurance contributions increasing by £1.1 billion and £0.6 billion respectively, compared with September 2018.

VAT receipts were solid too being up £500 million or 4%. But the numbers were also flattered by this.

Over the same period, interest and dividends receipts increased by £1.6 billion, largely as a result of a £1.1 billion dividend payment from the Royal Bank of Scotland (RBS).

Stamp Duty

We get an insight into the UK housing market from the Stamp Duty position. September was slightly better than last year at £1.1 billion. But in the fiscal year so far ( since March) receipts are £200 million lower at £6.3 billion.

Comment

We find signs that of UK economic strength and extra government spending in September. They are unlikely to be related as the extra government spending will more likely be picked up in future months. If we step back for some perspective we see that the concept of the fiscal taps being released remains.

Over the same period, central government spent £392.4 billion, an increase of 4.5%.

The main shift has been in the goods and services section which has risen by £11.6 billion to £145.7 billion. Of this some £3.5 billion is extra staff costs. Some of this will no doubt be extra Brexit spending but we do not get a breakdown.

As to economic growth well the theme does continue but it also fades a bit.

In the latest financial year-to-date, central government received £366.5 billion in receipts, including £270.0 billion in taxes. This was 2.8% more than in the same period last year.

How strong you think that is depends on the inflation measure you use. It is curious that growth picked up in September. As to the total impact of the fiscal stimulus the Bank of England estimate is below.

The Government has announced a significant increase in departmental spending for 2020-21, which could raise GDP by around 0.4% over the MPC’s forecast period, all else equal.

If we move to accounting for the activities of the Bank of England then things get messy.

If we were to exclude the Bank of England from our calculation of PSND ex, it would reduce by £179.8 billion, from £1,790.9 billion to £1,611.1 billion, or from 80.3% of GDP to 72.2%.

Also it is time for a reminder that my £2 billion challenge to the impact of QE on the UK Public Finances in July has yet to be answered by the Office for National Statistics. Apparently other things are more of a priority.

 

 

The UK could borrow £25 billion or indeed more very cheaply if it wished

It would appear that one of the main features of the credit crunch era which has been turbo-charged in 2019 so far has escaped the chatting and think tank classes. This is the situation where the UK can borrow on extraordinarily cheap terms. As I type this the two-year and five-year Gilt yields are of the order of 0.46% and the benchmark ten-year is at 0.67%. The only other time we have ever seen yields down here is when Governor Mark Carney was cracking the whip over the Bank of England in late summer and autumn 2016 demanding that they buy Gilts at nearly any price. That kamikaze phase even pushed us briefly to negative yields as the market let him buy at eye watering prices.

This was on my mind as I read this from the Institute for Government which has written what it calls an explainer on whether the UK can do this.

During the election campaign, Johnson said that it “is certainly true is at the moment (that) there is cash available.  There’s headroom of about £22bn to £25bn at the moment.”

The whole concept is predicated on a complete fantasy.

This figure for headroom refers to the gap between the latest official forecast for borrowing in 2020/21 and the maximum amount that is consistent with meeting Philip Hammond’s fiscal mandate – that borrowing should be no more than 2% of GDP in 2020/21, after adjusting for the ups and downs of the economic cycle (which is typically referred to as “cyclically-adjusted” or “structural” borrowing).

Firstly no sniggering at the back please when you read “the latest official forecast for borrowing in 2020/21” as we recall that the first rule of OBR Club is that the OBR is always wrong! Next comes the “fiscal mandate” which in the ordinary course of events would have a half-life that would not reach 2021 which is of course even more likely now that the man called Spreadsheet Phil has fallen on his sword.

Oh and that is before we get to “structural” borrowing which means pretty much whatever you want it too. But finally we get a grain of truth.

Mr Hammond has bequeathed his successor a level of borrowing that is low by historical standards. The Office for Budget Responsibility’s March forecast suggested borrowing would be 0.9% of GDP (or £21bn) next year, virtually all of which would be structural.

The reliance on the number-crunching of the serially unreliable OBR is odd but there is a kernel of truth in there which is that we are currently not borrowing much. Last year it was 1.1% of GDP and the debt to GDP ratio has been falling as the economy has grown faster than the debt.

This brings me back to the piece de resistance which is that we can borrow incredibly cheaply and if we look at in terms of the infrastructure life cycle the thirty-year Gilt yield is a mere 1.33%. So we could if we chose borrow quite a large sum on very cheap terms. As to how much well into the tens of billions and maybe a hundred billion. Just in case readers think I am breaking my political neutrality I have made similar points to my friend Ann Pettifor who is an adviser to the Labour Party with the only difference being that markets would trust a Corbyn led government less. How much less is hard to say as we know that any yield ( the Greek ten-year is around 2%) tends to get hoovered up these days.

If we move to the other side of the coin which is how such funds would be spent the picture then sees some dark clouds. They are called Hinkley C, HS2 and the Smart Meter debacle although I think the latter was foisted onto out electricity bills.

Oh and before I move on real yields are much more complicated than often presented. After all none of us know what UK inflation will be over the next 30 years, but it seems more than likely that the yields above will not only be negative but significantly so.

Consumer Credit

We can continue our number crunching with this from the Bank of England this morning.

The annual growth rate of consumer credit continued to slow in June, falling to 5.5%. Annual growth has fallen steadily since its peak in late 2016, and particularly over the past year reflecting a fall in the average monthly net flow of consumer credit. Since July last year, the net flow has averaged £1.0 billion per month, compared with £1.5 billion per month in the year to June 2018.

Let me translate this a little. The annual rate of growth has fallen since they pumped it up with their “Sledgehammer QE” of August 2016. This was a change in claimed strategy as of course Governor Carney has regularly told us that “This is not a debt fueled recovery” ( BBC August 2015). Of course according to Governor Carney the August 2016 move saved around 250,000 jobs although even his biggest fans have to admit he has had a lot of problems in the area of unemployment forecasting.

Whilst 5.5% is slower than compares not only to an extraordinary surge but is for example nearly double wage growth, quadruple likely GDP growth and around five times real wage growth. Also the actual amount at £218.1 billion has grown considerably.

Mortgages

There seems to be a serious media effort going on to support the UK housing market. Here is @fastFT from earlier.

Rise in mortgage borrowing points to stabilisation in UK house market.

Does it? Here is the actual Bank of England data.

Net mortgage borrowing by households was £3.7 billion, close to the average of the previous three years. This followed a slightly weaker net flow of £2.9 billion in May. The annual growth rate of mortgage lending remained stable at 3.1%, around the level that it has been at since 2016.

The trouble for House price bulls is that those are the sort of levels which saw house price growth across the UK grind to a near halt. A similar situation exists for what seems to be coming down the chain.

Mortgage approvals for house purchase (an indicator of future lending) increased by around 800 in June to 66,400 and the number of approvals for remortgaging rose slightly to 47,000. Notwithstanding these small rises, mortgage approvals remained within the narrow ranges seen over the past three years.

Comment

I have looked at things in a different light today showing how numbers are twisted, manipulated and if that does not do the trick get simply ignored like the level of bond yields. Some of this sadly starts at the official level where we get what are in practice meaningless concepts like structural borrowing or this from Bank of England Governor Mark Carney in August 2015 via the BBC.

“The timing of a rise in interest rates is drawing nearer,” Bank of England governor Mark Carney says at the start of the Inflation Report press conference. He also says speculation about when interest rates begin to rise is a good thing and a sign of growing economic confidence.

Let me finish by referring to a campaign I have been running for seven years or so now which is over the impact of the Funding for Lending Scheme. Remember all the promises about small business lending?

and the growth of SME borrowing rose to 0.8%, its highest since August 2017.

Also as we note lending to SMEs at £167.8 billion has fallen far below unsecured credit is it rude to wonder how much of the £67.6 billion lent to the real estate sector ended up in the buy-to let bubble?

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Relax we just got wealthier and better off in the UK

From time to time our official statisticians give us some extra insight into where we stand and yesterday that happened in the UK.

The total package of current price GDP changes increases the size of the economy in 2016 by approximately £26.0 billion, around 1.3% of GDP.

Average growth of real GDP over the period from 1998 to 2016 has been revised up 0.1 percentage point to 2.1% per year.

I hope that readers in the UK feel suitably better off! Some have suggested that it makes our economy larger again than that of France but if a change of that size does make a difference the truth is we are very close and within the margin of error.

One factor I do welcome is the effort to improve the deflators which are the inflation estimates used in the national accounts.

the expenditure approach has traditionally been the determinant of annual benchmarked volume GDP estimates; research has been undertaken to identify the best deflator at a product level for each transaction in the UK National Accounts from those deflators that are currently available, therefore improving the volume estimate of GDP.

Now I do not know about you but I would think we should have been trying to use the best deflator all along. Also there has been an effort to record more accurately what is happening in out services sector something which regular readers will know I have been pressing for.

Blue Book 2019 has benefitted from the new Annual Survey of Goods and Services and the Annual Purchases Survey. These surveys have improved the quality of the current price estimates, providing new insights on the diversification of the services economy and the costs incurred by businesses in their production processes.

Some of you may be having a wry smile at the way that these moves always seem to raise GDP. Funny that as an ex-colleague of mine used to say. Perhaps that is what they mean by the use of the word “improvements” when revisions would be more accurate, as we note a potential Freudian slip. Sadly though even though it is Glastonbury season I can find no mention of rock and roll being added to the sex and drugs that were added on the previous improvement.

Tucked away in the numbers was something which reminded me of the description of the pre-credit crunch period as the NICE ( No Inflation Constant Expansion) decade.

Average nominal GDP growth for the period 1998 to 2007 remains unchanged at 5.0%,

So as it turns out we were targeting nominal GDP growth all along. Of course supporters of that policy have to then face a rather inconvenient truth that rather than a nirvana the economy then collapsed.

Today’s Numbers

The final revision of the first quarter held no surprises.

UK gross domestic product (GDP) increased by 0.5% in Quarter 1 (Jan to Mar) 2019, following a slowing in growth in the previous quarter. In comparison with the same quarter a year ago, UK GDP increased by 1.8%, its fastest rate since Quarter 3 (July to Sept) 2017.

We should enjoy that annual rate of growth as that is as good as it will get for a while as we know the UK economy had a difficult April and May causing the Bank of England to reduce its estimate of GDP growth this quarter from 0.2% to 0%.

Those wondering about what the influence of stockbuilding was on these numbers got a little more insight.

The underlying data show a substantial increase of £6.6 billion in stocks being held by UK companies in the most recent quarter.

Trade Problems

Another way of potentially looking at the issue of stockbuilding comes from the trade data.

The UK total trade deficit more than doubled to a record £20.3 billion in Quarter 1 (Jan to Mar) 2019, or 3.7% of GDP, and was the main contributor to the UK’s widening current account deficit……..The widening of the total trade deficit was due to a worsening trade in goods deficit (of £10.1 billion) and a narrowing trade in services surplus (of £0.7 billion)

That looks a signal of stockbuilding, however the UK’s status as a centre for trading in gold muddies the waters quite a bit so we learn less than one might initially think.

due largely to increased imports of unspecified goods (including non-monetary gold), which rose £6.0 billion.

But we can record some specific indicators.

Chemical imports increased £1.8 billion in the three months to March 2019, due largely to a £1.3 billion increase in imports of medicinal and pharmaceutical products.

Fans of the song Lily The Pink will appreciate the use of the word medicinal albeit with some disappointment that it was not followed by the word compounds.

How do we finance this?

I have no great faith in the official data for what are called the primary and secondary accounts because they rely a great deal on estimates of returns rather than reality. But we do know that selling assets abroad is one way of financing trade deficits. The Financial Times provided a glimpse of this yesterday.

Viewed from Bangalore, the purchase of a newly built three-bedroom apartment in London for more than £1.4m seemed like a safe investment bet.The top-floor three-bedroom home under construction in Keybridge House south of the Thames boasted views of the City of London and the Shard skyscraper. As Shonu Bhandari considered the purchase two years ago, agents told him he could expect the value to rise 15 per cent before the property had even been finished. The Indian entrepreneur, who runs a medical products company, happily signed up to buy.

Sadly for Mr.Bhandari things did not go well.

But his purchase soured quickly. When Bhandari approached a mortgage lender, it valued the property not at 15 per cent more than he had agreed to pay — but at 20 per cent less. With completion of the building looming, he signed over the property to a new buyer in March this year for £1.2m, losing more than £200,000 of his deposit.

That is one version of it which has been in full flow for quite a few years. But prospects for the Shard, Chelsea Barracks and Nine Elms to name just a few are not what they were.

But there are other types of asset sale if we move to Sky News.

Madame Tussauds owner Merlin Entertainments has accepted a £5.9bn takeover offer from the family owners of Lego and the private equity firm Blackstone.

Merlin, which also owns the Alton Towers and Legoland attractions, accepted the bid from Kirkbi, the investment vehicle of Lego’s Danish founding family, Blackstone and Canadian pension fund CPPIB.

Are we borrowing?

We have become used to Governor Carney and the Bank of England telling us that this has not been a debt fuelled recovery in the UK. They were at the same game in front of Parliament on Wednesday.

BoE’s Cunliffe: Low UK Interest Rates Haven’t Led To Explosion In House Prices Or Consumer Borrowing ( @LiveSquawk )

Meanwhile this morning’s national accounts tell us this.

Quarter 1 2019 was an unprecedented 10th consecutive quarter of households being net borrowers; households saw their net borrowing increase to 1.3% of GDP from 0.8% in the previous quarter………The households’ saving ratio remained historically low and was the joint fourth-lowest quarterly saving ratio since records began in 1963.

Comment

As we continue out journey through the post credit crunch era we see more and more consequences of the policies enacted. Sometimes it is the little details which are the most revealing as this story from Nobby in the Financial Times of how a flat he sold was converted into two.

However, it had been split into a 2 bed plus studio, total asking price more than doubled. Looking at the pictures, I couldn’t work out how the heck they had fitted a 2 bed into 700 sq feet and how big the pictures made it look. I realised they had put furniture in that was 3/4 normal size – tiny chairs and beds that can’t have been more than 5 feet long. Nothing illegal, but only someone who didn’t actually visit would fall for it.

We have a word for that which is innovative ( for newer readers that described the Irish banks, which then collapsed). Oh what a tangled web and all that.

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)