The UK Public Finances begin to improve as the economy picks up

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.

In April the government spent £3.0 billion on the Coronavirus Job Retention Scheme (CJRS) and £2.5 billion on the Self Employment Income Support Scheme (SEISS).

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.

Looking Ahead

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”

National Debt

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 )

Thanks to QE the UK is paying less interest on a much larger debt

A feature of the economic response to the Covid-19 pandemic is that this time around we have seen fiscal policy deployed on a large scale. This morning we have been brought up to date on much of the UK version of this as the official numbers have been released.

Public sector net borrowing (excluding public sector banks, PSNB ex) in the FYE March 2021 is estimated to have been £303.1 billion, £246.1 billion more than in the FYE March 2020 and the highest nominal public sector borrowing in any financial year since records began in the FYE March 1947. ( FYE = Financial Year End )

So there is a guide to the size and we can look at it another way.

Expressed as a ratio of gross domestic product (GDP), public sector net borrowing (excluding public sector banks, PSNB ex) in the FYE March 2021 was 14.5%, the highest such ratio since the end of World War Two, when in FYE March 1946 it was 15.2%.

For comparison purposes we borrowed some 10.1% of GDP when the credit crunch hit. So a peak for peacetime but not war as in the main part of the first world war and the early part of the second one we borrowed around 27% of GDP pretty consistently.

Much of this has been a choice as we see below.

Central government bodies are estimated to have spent £941.7 billion on day-to-day activities (current expenditure) in the FYE March 2021, £203.2 billion more than in the FYE March 2020; this includes £78.2 billion expenditure on Coronavirus job support schemes.

We also see signs of it being voluntary in the receipts data because whilst there are falls due to the decline in economic activity we have also seen VAT and Stamp Duty cuts.

Central government tax receipts are estimated to have been £523.6 billion in the FYE March 2021 (on a national accounts basis), £34.2 billion lower than in the FYE March 2020, with notable falls in taxes on production such as Value Added Tax (VAT), Business Rates and Fuel Duty.

So an extraordinary effort and let me give you a context. Because the other party involved here has been the Bank of England which by my rough calculations bought some £310 billion of UK sovereign bonds. As it and the £303 billion are both estimates ( the Bank of England numbers are muddied by refinancing of maturing bonds) we see that if we use a broad brush it has oiled this. Care is needed as it has not explicitly financed this as it does not buy new bond issues for a Beatles week or 8 days but it has been smoothing the way. We have been fed a lot of psychobabble about how they have calculated the QE purchases but I think we have just noted the reality don’t you?

First Rule of OBR Club

This has had yet another stormer as we note this from Julian Jessop.

On #3, in November the OBR forecast UK government borrowing of £394bn in 2020/21 (19% of GDP)

In March it revised this down to £355bn (16.9%)

The first official estimate from the ONS today was £303bn (14.5%), £24bn *lower* than the March forecast on a like-for-like basis

Actually it slightly unfair because of this.

The OBR borrowing forecast for the FYE March 2021 includes an estimated £27.2 billion in expenditure on calls under the government loan guarantee schemes whereas Office for National Statistics (ONS) outturn data does not yet include any such estimates.

You would think that by chance they would once be right but they continue to be so consistently wrong.

For newer readers the first rule of OBR Club is that the OBR is always wrong.

National Debt

This has been volatile for two reasons. The first we have been noting above and the second is the swings in economic output we have seen meaning that when we divide by GDP its changes have a big impact.

Public sector net debt (excluding public sector banks, PSND ex) was £2,141.7 billion at the end of March 2021 or around 97.7% of gross domestic product (GDP), maintaining a level not seen since the early 1960s.

Along the way we have noted that it will at times be above 100% then lose it as GDP swings and debt rises. As the economy opens up but we still borrow more it will remain tight for a bit.

Another context for this is how much we pay to run the debt and we immediately see a consequence of the QE bond buying by the Bank of England.

Interest payments on central government debt were £38.8 billion in the FYE March 2021, £9.3 billion less than in the FYE March 2020. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

The second sentence is something of a standard and our official statisticians have forgotten to update it. Yes lower inflation has reduced our debt costs via a lower RPI. But this year we have issued loads of new conventional bonds which have cost very little due to the way the Bank of England has driven Gilt yields lower. We have even had periods ( summer and autumn last year and early this) where we were paid to issue up to the 6/7 year maturities and at one point the ten-year yield fell to 0.1%. So if you want a broad sweep we borrowed a very large sum for (nearly) nothing.

This year will be harder because inflation is rising and so have Gilt yields. So there will be an impact on debt costs. We have a signal of that from the monthly numbers as the £1.3 billion of last March is replaced by £2 billion this March.


I though I would flip over now to economic prospects as they are the main driver in what happens next regarding the UK fiscal position. The opener from the official data was hopeful and positive.

Retail sales volumes continued to recover in March 2021, with an increase of 5.4% when compared with the previous month reflecting the effect of the easing of coronavirus (COVID-19) restrictions on consumer spending; sales were 1.6% higher than February 2020 before the impact of the coronavirus pandemic.

Tucked away in the detail was another signal of times returning to a more normal level.

Automotive fuel retailers witnessed an 11.1% growth in sales volumes in March 2021, the first monthly growth reported since a 0.1% rise in October 2020.

There is scope for more in some areas and if you sell clothing you must be desperate for normal times.

Whilst the 17.5% monthly growth in the clothing sector is a significant increase in sales volumes, they remain 41.5% below the level in February 2020 before the pandemic began.

This was backed up by this via Reuters.

The GfK Consumer Confidence Index increased to -15 in April from -16 in March, its highest since a survey conducted in early March last year, before the country went into lockdown.

In the year before the pandemic, the index averaged -11 and it sank to an 11-year low of -36 during the depths of last year’s lockdown.

Also by this from the IHSMarkit PMI business survey.

The seasonally adjusted IHS Markit/CIPS Flash UK Manufacturing Purchasing Managers’ Index® (PMI®) – a composite single-figure indicator of manufacturing performance – registered 60.7, up from 58.9 in March and the highest since July 1994.

The cautionary note is that they got French manufacturing completely wrong in February ( told us it was up when it fell by 4.7%), so take care.

But the big picture is of an opening economy that is picking up speed. How it will be broken down will be interesting as several people have told me they are keen to shop in person again for things they have bought online. So let’s see what happens to this.

The proportion spent online decreased to 34.7% in March 2021, down from 36.2% in February 2021 but still above the 23.1% reported in March 2020;

Oh and some seem yo be taking this more literally than others.

Medical goods retailers also reported strong monthly growth of 29.4% with anecdotal evidence from retailers suggesting an increase in the purchase of mobility equipment from older consumers who were venturing out more following the vaccination rollout.






France sees quite a drop in production and manufacturing in February

This morning has brought some news which has shaken up the consensus somewhat and it has come from France.

In February 2021, output plummeted again in the manufacturing industry (−4.6%, after +3.3%) as well as in the whole industry (−4.7%, after +3.2%). Compared to February 2020 (the last month before the first general lockdown), output remained in sharp decline in the manufacturing industry (−7.1%), as well as in the whole industry (−6.6%). ( Insee)

This was rather against the new theme of manufacturing recovery and coming to terms with new Covid-19 procedures. In particular it gave a very different picture to what the surveys had told us.

The seasonally adjusted IHS Markit France Manufacturing
Purchasing Managers’ Index® (PMI) – a single-figure measure of developments in overall business conditions – posted 56.1 in February, up from 51.6 in January. The latest reading signalled the quickest improvement in the health of the French manufacturing sector for just over three years, and one that was marked overall.

Just to avoid any possible confusion they then rammed the subject home.

The strong reading for the headline index was partially
supported by a renewed expansion in output during
February. The rate of growth was the fastest since last July
and solid overall. Panel members often cited improved
demand conditions when explaining increases in production.

There is quite a journey between the rate of growth being reported as the fastest since last July and a 4.6% decline to say the least.

What is happening here?

If we switch back to the official report we see the following took place in February.

In February, output plunged in the manufacture of transport equipment (−11.4% after −3.0%). It decreased sharply in “other manufacturing” (−4.0% after +3.9%), in mining and quarrying, energy, water supply (−5.4% after +2.8%) and in the manufacture of machinery and equipment goods (−5.3% after +8.8%). It declined more modestly in the manufacture of food products and beverages (−2.0% after +1.6%). Conversely, it continued to expand in the manufacture of coke and refined petroleum after the reopening of several refineries that had been shut down in late 2020 (+11.5% after +6.8%).

If we start with the transport sector there is Peugeot and Citroen for cars but then I thought of Airbus as well. Here are its latest production plans.

The new average production rates for the A320 Family will now lead to a gradual increase in production from the current rate of 40 per month to 43 in Q3 and 45 in Q4 2021. This latest production plan represents a slower ramp up than the previously anticipated 47 aircraft per month from July.

The A220 monthly production rate will increase from four to five aircraft per month from the end of Q1 2021 as previously foreseen.

Widebody production is expected to remain stable at current levels, with monthly production rates of around five and two for the A350 and A330, respectively. This decision postpones a potential rate increase for the A350 to a later stage.

So good in that there is a planned increase but it is hard to avoid noticing that the rate of increase has been reduced and March does not seem to have helped here is we look at what it tweeted yesterday.

We wrapped up March 2021 with 28 new orders including 20 for the #A220-300. 72 aircraft were also delivered last month to 34 customers (four A220, 60 #A320 Family and eight #A350) bringing the total deliveries to 125 in Q1-2021.

If you deliver 72 but only sell 28 then there is an issue for the future. February saw 11 orders but also 92 cancellations.

It has been a rough year for this sector.

and in the manufacture of transport equipment (−25.7%), especially in the manufacture of other transport equipment (−33.6%).

The Overall Economy

Things get rather awkward as according to the consensus it is the manufacturing sector which is pulling the economy along. If we now move to the latest PMI survey we were told this.

Following a six-month sequence of contraction,
latest PMI data pointed to a stabilisation in activity
levels across the French private sector. The result
was predominantly supported by a sharp expansion
in manufacturing output, while the service sector
continued to act as a drag on the economy.

Apparently manufacturing output surged by even more than it did in February posting 59.3. Make of that what you will………

There was a bit of hope for manyfacturing from the household consumption data for February.

Household consumption expenditure on goods was stable in February (0,0% in volume* compared to January 2021). The increase in manufactured goods purchases (+3.4%) was offset by a drop in energy expenditure (–3.1%) and food consumption (–2.2%).

But whilst in the circumstances a flat reading for February might seem okay January was revised down to -4.9% so the year so far has been weak in this area too.

Fiscal Stimulus

This has been in play if we look at the deficit numbers.

The general government deficit for 2020 stands at €211.5 billion, accounting for 9.2% of gross domestic product (GDP), after 3.1% in 2019.

So on the surface we have quite an effort although maybe not as much as it first appears.

Expenditures increased by €73.6 billion, reaching 62.1% of GDP, after 55.4% in 2019.

A lot of the change was lower tax revenue with expenditure rises being a bit over a third of the move.

As to the European Union fiscal response it still seems to be on hold if this from the ECB’s Isabel Schnabel this morning is any guide.

it is crucial for Europe to give a strong fiscal response, in the form of the EU recovery fund amounting to €750 billion. Funds should be used efficiently to make Europe permanently more competitive, more digital and greener.

Perhaps it was described by Bonnie Tyler.

I was lost in France
And the day was just beginning

You might reasonably think the time to spend began a while ago.

Switching to debt we are told this.

General government debt stands at 115.7% of GDP at the end of 2020.

So right now it could easily be 120% if we allow for lower GDP and more borrowing. I suggest that with a wry smile as it was the level suggested by the Euro area as a crisis signal when Greece was rescued into an economic depression. Of course that was then and this is now as evidenced by a benchmark ten-year yield of -0.06% or France is being paid to borrow. As opposed to 3% plus during those Euro area crisis days.


Today’s production figures pose quite a question for the French economy in the opening quarter of the year. The Bank of France has suggested this.

Based on the assumption that, in average terms, the first half will continue to be marked by significant health restrictions, activity should remain stable over the first part of 2021. This is consistent with our economic surveys for the start of March.

I notice that they avoid a prediction for the opening quarter of 2021 and this morning’s numbers suggest we will see another decline and maybe a solid one. The lockdown issue is of course in play here but those who forecast that production would rise by 0.5% in February knew about that. On its own it takes at least 0.5% off the expected GDP number.

Looking ahead we can at least gain some cheer from the improvement in the vaccine programme which after stumbling has now picked up.

PARIS (Reuters) -More than 10 million people in France have now received a first shot of a COVID-19 vaccine, with the government’s target for that number reached a week ahead of schedule, Prime Minister Jean Castex said on Thursday.

So let us wish them bonne sante



Italy has revised its unemployment rate up by 1% and youth unemployment by 2%

It is time for us to take a look at Italy again and see what has happened to the honeymoon period for its new Prime Minister Mario Draghi? With the rate of turnover of Prime Ministers in Italy, which approaches that of managers in the English football premiership, it was unlikely to last long. It also comes with two contexts of which the first is that many will now doubt wish he was still running the European Central Bank. The second is the way that central bankers and politicians have become interchangeable with him ascending to running Italy as the former French Finance Minister Christine Lagarde took over the ECB. If we look further afield we see more of this in the way that the former head of the US Federal Reserve Janet Yellen is now US Treasury Secretary. Believe it or not some still talk of central bank “independence” which only exists in their minds.

There is a difference though in that in general as head of the ECB Mario Draghi gave orders and they happened. Even “Whatever it Takes”. But running Italy is a different kettle of fish as in some areas he would be in more control in his previous job.


This morning has brought a sign of a big issue at hand and there have been some large ch-ch-changes.

In February 2021 the number of employed persons were substantially stable, whereas a slight decline was
recorded for both inactive and unemployed people……..In the last month, the drop of unemployed people (-0.3%, -9 thousand) concerned men and under50; for
women and over50 a slight increase was registered. The unemployment rate declined to 10.2% (-0.1 p.p.)
and the youth rate to 31.6% (-1.2 p.p.).

The emphasis is mine and it is not because expectations missed by an extraordinary distance even by recent standards. It is because we were previously told this.

The unemployment rate rose to 9.0% (+0.2 p.p.) and the youth rate to 29.7% (+0.3 p.p.).

Those were for December and  we see that a 0.1% decline has suddenly become a 1.2% rise! What has happened?

From 1 January 2021, the new Labour Force survey started, which transposes Regulation (EU)
2019/1700. As reported in detail in the methodological note, the time series of the aggregates disclosed in
this press release have been back-recalculated on a provisional basis, for the period January 2004 –
December 2020.

So we see that they have raised the reported unemployment rate by 1% or so and the youth unemployment rate by around 2%.

If we now move forwards on the basis of the new survey we can see this as the pattern.

In the period December 2020-February 2021, with respect to the previous quarter (September-November
2020), employment dropped (-1.2%, -277 thousand) for both genders……..In the last three months, an increase was registered in the number of unemployed persons (+1.0%, +25 thousand) as well as for inactive people aged 15-64 years (+1.3%, +183 thousand).

So we are left with the view that employment has been declining again. This is reinforced by the annual employment comparison.

Compared to February 2020, employment showed a sharp fall both in terms of figures (-4.1%, -945
thousand) and rate (-2.2 percentage points).
On a yearly basis, the drop of employed people was accompanied by a growth of unemployed persons
(+0.9%, +21 thousand) and a substantial rise of inactive people aged 15-64 (+5.4%, +717 thousand).

As you can see a signal of trouble has been the inactivity level. Regular readers will be aware that I have been reporting on the failure of unemployment measures to tell us anything much at all due to the way the furlough schemes have impacted on their definitions.

But there is more and it brings back our “Girlfriend In a Coma” theme because employment in Italy has been falling since the summer of 2019 and thus quite some time before the pandemic. It peaked around 23.4 million on the three-monthly average and had already declined by at least 200,000 pre pandemic.

If we switch to earnings then the latest official survey was released last week.

Mean annual earnings in 2018 is 35,062 euros and goes up to 36,610 euros in Industry (except Construction), while it reaches the minimum value of 31,967 in Construction sector……The Gender pay gap (GPG), calculated as the difference between the m gross hourly earnings of men
and women expressed as a percentage of those of men, is equal to 6.2%…..mean hourly earnings for temporary employees is 29.7% less than those of
permanent employees. The negative gap rises to 31.1% for part-timers compared to

Economic Outlook

The official surveys tell us this.

In March 2021, the consumer confidence index decreased, passing from 101.4 to 100.9……….As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) made progress from 93.3 to 93.9.

The surveys relate to 2010 being 100 which gives one context and another is that both are around ten points below where they were back in 2019. Also the official business survey for manufacturing is presumably picking up the same as the Markit IHS PMI one.

March data highlighted a further acceleration of Italy’s
manufacturing recovery. Both output and new orders
registered the steepest expansions for more than three years, with panellists reporting surging sales due to improved client demand. Subsequently, firms continued to take on additional staff to cope with workloads, while business confidence remained robust.

So good news for manufacturing although it means other areas must be struggling.

Much of the outlook depends on the vaccine programme according to Governor Visco of the Bank of Italy.

“The main instrument we bave at the
moment is neither monetary nor fiscal,
it is vaccinations,” he said.

This led to an awkward issue.

The G20 meeting this week comes as
the pace of the US’s vaccinati on push
has increased compared with the EU’s.
Economists have forecast that the US
will grow faster than European economies this year.
Visco said progress in the EU’s vacdnation programme meant that the bloc
would not be left behind by the US.

Plainly it has been left behind and added to this Italy decided on its own type of strategy.

Still lost in the EU vaccine supplies/exports drama is the fact that Italy has decided to give away a massive amount of its available shots to the least vulnerable parts of its population……..Government data released yesterday shows 88% of people aged between 70-79 are still waiting for their first vaccine jab, as are 43% of over 80s. Over 80% of Italy’s Covid-19 deaths have occurred in the over 70s. ( Miles Johnson of the Financial Times)


As you can see the Covid-19 pandemic is one issue for Mario Draghi but there are plenty of others from the long-running “Girlfriend In a Coma” theme. An example of the latter was the fall in the population by around 400,000 in 2020. There is also the issue of the Italian banks and the Financial Times has today noted one of the issues are play here.

The Banca d’Italia said the share of the nation’s authorities bonds owned by international traders fell from 25.9 to 23.6 per cent within the first six months of final yr, whereas Italian banks elevated their share from 16.9 to 18.6 per cent………….The debt of Italian banks to home authorities debt hit  €712bn in August, up greater than 9 per cent from February and dipping barely since then.

Ironically the driving forces here have as an architect one Mario Draghi.

Banking laws deal with sovereign debt as a risk-free funding for banks, permitting them to allocate zero capital towards such property. By borrowing cash from the ECB as cheaply as minus 1 per cent, there’s a straightforward “carry commerce” for banks to make cash from shopping for authorities bonds.

They have done well to buy more with the ECB buting so many and here we can move onto something where Mario left a little present for himself. All that QE means that the debt issue has faded as presently it is so cheap as the chart from @BernhardWarner below shows.



The role of the Bank of England in UK borrowing and the National Debt is bigger than you might think

Today has brought an update on what is the economic policy response to the Covid-19 pandemic. This has been the surge in fiscal policy and its deployment on a grand scale. By contrast monetary policy which had been the main response mechanism to the credit crunch has been reduced to a supporting role. Unless of course you believe a Bank Rate cut of 0.65%  will work when one of over 5% did not. Hard to believe now that the previous peak was 5.75% in early summer 2007 is it not?

We can take a look at this from this mornings’ figures.

Public sector net borrowing (excluding public sector banks, PSNB ex) is estimated to have been £19.1 billion in February 2021, £17.6 billion more than in February 2020, which is the highest February borrowing since monthly records began in 1993.

We can compare that to Bank of England bond purchases which we were updated on yesterday.

The Bank intends to purchase evenly across the three gilt maturity sectors. For operations scheduled between 22 March 2021 and 6 May 2021 the planned size of auctions will be £1.48bn for each maturity sector. The range of gilts eligible for purchase will remain unchanged from previous operations.

It has been buying at that rate for a while and will therefore have bought £17.8 billion in February so slightly less than the borrowing requirement. However things are more complex than that as a UK Gilt of some £32.6 billion matured on the 22nd of January. There is not another one until the 7th of June so one can spread the effect but as you can see other buyers of Gilts are needed. Indeed some of the Bank of England purchases are replacing its holdings of that bond.

These purchases include the initial part of the reinvestment of the £7.0bn cash flows associated with the gilt maturity occurring on 22 January 2021 which the Bank intends to complete by the MPC’s May policy announcement.

So if we note the UK actually borrowed just over £23 billion in February and the Bank of England bought net say £16 billion then it was £7 billion short and we perhaps see a rationale behind higher bond yields.

February Details

There was some potentially good news form Income Tax.

Each February, accrued receipts tend to be boosted by the late payment of self-assessed taxes, due in January of each year. Self-assessed Income Tax receipts were £4.2 billion in February 2021, £0.9 billion more than in February 2020.

Regular readers will recall that January was better too.

Looking at January and February combined, self-assessed Income Tax receipts were £21.0 billion, £2.3 billion more than in the same two months last year.

There was a tax deferral which is why I added potentially to the good news but considering where we are the tax take looks pretty good.

In February 2021, central government receipts were estimated to have fallen by £0.9 billion compared with February 2020 to £63.2 billion, including £46.2 billion in tax receipts.

The main cautionary note is that whilst one might reasonably think the government would know the tax receipts for February it does not so there is the danger of revisions but the first signs are okay.

The real change has been on the spending side.

Central government bodies spent £79.2 billion in February 2021, £15.9 billion more than in February 2020.

One part of the deliberate fiscal stimulus is here.

In February 2021, central government paid £6.1 billion more in subsidies to businesses and households than in February 2020. These additional payments included the cost of the job furlough schemes; £3.8 billion as a part of the Coronavirus Job Retention Scheme (CJRS) and £0.1 billion Self Employment Income Support Scheme (SEISS). Additional transport subsidies account for much of the remaining £2.1 billion growth.

The transport issue is one which will return and has a local issue. What I mean is that in the many years I have lived in Battersea locals have dreamed of the London underground coming here. Now it is nearly here ( test trains have been run) how much will it be used? Also the difference between support for the employed and self-employed looks a lot to me.

This is a sort of implicit fiscal response via extra health spending and the like.

Central government departments spent £5.8 billion more on goods and services in February 2021 than in February 2020, including £4.2 billion more on procurement and £1.5 billion more on pay.

There was also more spending on debt.

Interest payments on central government debt were £5.3 billion in February 2021, £1.2 billion more than in February 2020. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

So it will pretty much have been higher inflation but let me add a bit. As you will have seen from the breakdown above we will need on the first half of this year to refinance some £57 billion or so of maturing bonds plus new borrowing so the higher bond yields will begin to filter into the numbers in a drip drip fashion.

We did however save £1.3 billion on this.

 This month the UK did not record any of its regular VAT and gross national income-based contributions to the EU budget.

National Debt

The recording of this has become an example of this from Lewis Carroll.

Who are you?” said the Caterpillar.
This was not an encouraging opening for a conversation. Alice replied, rather shyly, “I—I hardly know, Sir, just at present—at least I know who I was when I got up this morning, but I think I must have been changed several times since then.”

Regular readers will know that I have drawn attention to many issues with the numbers over the years. But today let me zero in on the role of the Bank of England because in a combination of mishap and some incompetence it has become a major player when it should not be.

The story begins here.

Public sector net debt (excluding public sector banks, PSND ex) rose by £333.0 billion over the 11 months of the financial year-to-February 2021, taking it to £2,131.2 billion or around 97.5% of gross domestic product (GDP); maintaining a level not seen since the early 1960s.

But part of this involves counting capital gains on the QE portfolio as debt and even for these times it amounts to a tidy sum.

The estimated impact of the APF’s gilt holdings on debt currently stands at £113.1 billion, representing the difference between the value of the reserves created to purchase gilts (or market value of the gilts) and the face (or redemption) value of the gilts purchased.

Lewis Carroll would no doubt explain that much better than I.

Even someone who dislikes the Term Funding Scheme as much as me would not count every penny as debt.

At the end of February 2021, the TFS loan liability stood at £39.6 billion and the TFSME loan liability stood at £75.4 billion, making a combined liability of £114.9 billion, adding an equivalent amount to the level of debt.

Add in the Corporate Bond scheme and we are well on our way to six impossible things before breakfast.

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 February 2021 would reduce by £232.5 billion (or 10.6 percentage points of GDP) to £1,898.8 billion (or 86.9% of GDP).


As you can see there is a lot going on beneath the surface with the UK public finances. Sadly what gets reported is often quite far from reality. But I do my best and I am pleased to report that my challenge to the UK Average Earnings numbers with their claimed 4.7% growth was successful. Below is a link to the Office for Statistics Regulation for their formal response.

Can the UK afford all the extra debt?

I thought that it was time to take stick and consider the overall position in terms of the build up of debt. This has come with a type of economic perfect storm where the UK has begun borrowing on a grand scale whilst the economy has substantially shrunk.So an stand alone rise in debt has also got relatively much larger due to the smaller economy. Hopes that the latter would be short and sharp rather faded as we went into Lockdown 2.0. Although as we look to 2021 and beyond there is increasing hope that the pace of vaccine development will give us an economic shot in the arm.

In terms of scale we got some idea of the flow with Friday’s figures.

Public sector net borrowing (PSNB ex) in the first seven months of this financial year (April to October 2020) is estimated to have been £214.9 billion, £169.1 billion more than in the same period last year and the highest public sector borrowing in any April to October period since records began in 1993.

The pattern of our borrowing has changed completely and it is hard not to have a wry smile at the promises of a budget balance and then a surplus. Wasn’t that supposed to start in 2016? Oh Well! As Fleetwood Mac would say. Now we face a year where if we borrow at the rate above then the total will be of the order of £370 billion.

If we switch to debt and use the official net definition we see that we opened the financial year in April with a net debt of 1.8 trillion Pounds if you will indulge me for £500 million and since then this has happened.

Public sector net debt excluding public sector banks (PSND ex) rose by £276.3 billion in the first seven months of the financial year to reach £2,076.8 billion at the end of October 2020, or around 100.8% of gross domestic product (GDP); debt to GDP ratios in recent months have reached levels last seen in the early 1960s.

You nay note that the rise in debt is quite a bit higher than the borrowing and looking back this essentially took place in the numbers for April and May when the pandemic struck. Anyway if we assume they are now in control of the numbers we are looking at around £2.2 trillion at the end of the financial year if we cross our fingers for a surplus in the self assessment collection month of January.

The Bank of England

How does this get involved? Mostly by bad design of its attempts to keep helping the banks. But also via a curious form of accountancy where marked to market profits as its bond holdings are counted as debt.

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 October 2020 would reduce by £232.9 billion (or 11.3 percentage points of GDP) to £1,843.9 billion (or 89.5% of GDP).

So on this road we look set to end the fiscal year with a net debt of the order of £2 trillion.

Quantitative Easing

This is another factor in the equation but requires some care as I note this from the twitter feed of Richard Murphy.

Outside Japan QE was unknown until 2009. Since then the UK has done £845 billion of it. This is a big deal as a consequence. But as about half of that has happened this year it’s appropriate to suggest that there have been two stage of QE, so far. And I suggest we need a third.

Actually so far we have done £707 billion if you just count UK bond or Gilt purchases. That is quite a numerical mistake.As we look ahead the Bank of England plans to continue in this manner.

The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.

We see that this changes the numbers quite a lot. There are a lot of consequences here so let me this time agree with Richard Murphy as he makes a point you on here have been reading for years.

The first shenanigan is that the so-called independence of the Bank of England from the Treasury is blown apart by the fact that the Treasury completely controls the APF and the whole QE process. QE is a Treasury operation in practice, not a Bank of England one. ( APF = Asset Protection Fund)

Actual Debt Costs

These are extraordinarily low right now. Indeed in some areas we are even being paid to borrow. As I type this the UK two-year yield is -0.03% and the five-year yield is 0%. Even if we go to what are called the ultra longs we see that the present yield of the fifty-year is a mere 0.76%. To that we can add the pandemic effect on the official rate of inflation.

Interest payments on the government’s outstanding debt were £2.0 billion in October 2020, £4.4 billion less than in October 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

As an aside this also explains the official effort to neuter the RPI measure of inflation and make it a copy of the CPIH measure so beloved of the UK establishment via the way they use Imputed Rents to get much lower numbers. I covered this issue in detail on the 18th of this month.

So far this financial year we have paid £24.1 billion in debt costs as opposed to the £33.9 billion we paid in the same April to October period last year.


The elephant in the room here is QE and by using it on such a scale the Bank of England has changed the metrics in two respects. Firstly the impact on the bond market of such a large amount of purchases has been to raise the price which makes yields lower. That flow continues as it will buy another £1.473 billion this afternoon. Having reduced debt costs via that mechanism it does so in another way as the coupons ( interest) on the debt it has bought are returned to HM Treasury. Thus the effect is that we are not paying interest on some £707 billion and rising of the debt that we owe.

Thus for now we can continue to borrow on a grand scale. One of the ways the textbooks said this would go wrong is via a currency devaluation but that is being neutered by the fact that pretty much everyone is at the same game. There are risks ahead with the money supply as it has been increased by this so looking ahead inflation is a clear danger which is presumably why the establishment are so keen on defining it away.

I have left until the end the economy because that is so unpredictable. We should see some strength in 2021 as the vaccines kick in.But we have a long way to go to get back to where we were in 2008. On a collective level we may need to face up to the fact that in broad terms economic growth seems to have at best faded and at worst gone away.




Some welcome good economic news for the UK

Today is proving to be something of a rarity in the current Covid-19 pandemic as it has brought some better and indeed good economic news. It is for the UK but let us hope that such trends will be repeated elsewhere. It is also in an area that can operate as a leading indicator.

In July 2020, retail sales volumes increased by 3.6% when compared with June, and are 3.0% above pre-pandemic levels in February 2020.

As you can see not only did July improve on June but it took the UK above its pre pandemic levels. If we look at the breakdown we see that quite a lot was going on in the detail.

In July, the volume of food store sales and non-store retailing remained at high sales levels, despite monthly contractions in these sectors at negative 3.1% and 2.1% respectively.

In July, fuel sales continued to recover from low sales levels but were still 11.7% lower than February; recent analysis shows that car road traffic in July was around 17 percentage points lower compared with the first week in February, according to data from the Department for Transport.

As you can see food sales dipped ( probably good for our waistlines) as did non store retailing but the recovery in fuel sales from the nadir when so few were driving was a stronger influence. I suspect the fuel sales issue is likely to continue this month based on the new establishment passion for people diving their cars to work. That of course clashes with their past enthusiasm for the now rather empty looking public transport ( the famous double-decker red buses of London are now limited to a mere 30 passengers and the ones passing me these days rarely seem anywhere near that). Actually it also collides with the recent public works for creating cycle lanes out of is not nowhere restricted space in London which has had me scratching my head and I am a regular Boris Bike user.

As we look further I thought that I was clearly not typical as what I bought was clothing but then I noted the stores bit.

Clothing store sales were the worst hit during the pandemic and volume sales in July remained 25.7% lower than February, even with a July 2020 monthly increase of 11.9% in this sector.

Online retail sales fell by 7.0% in July when compared with June, but the strong growth experienced over the pandemic has meant that sales are still 50.4% higher than February’s pre-pandemic levels.

In fact the only downbeat part of today;s report was the implication that the decline of the high street has been given another shove by the current pandemic. On the upside we are seeing innovation and change. Also if we look for some perspective we see quite a switch on terms of trend.

When compared with the previous three months, a stronger rate of growth is seen in the three months to July, at 5.1% and 6.1% for value and volume sales respectively. This was following eight consecutive months of decline in the three-month on three-month growth rate.

It is easy to forget in the melee of news but UK Retail Sales growth had been slip-sliding away and now we find ourselves recording what is a V-Shaped recovery in its purest form.

There is another undercut to this which feeds into a theme I first established on the 29th of January 2015 which is like Kryptonite for central bankers and their lust for inflation. If we look at the value and volume figures we see that prices have fallen and they have led to a higher volume of sales.I doubt that will feature in any Bank of England Working Paper.

Purchasing Manager’s Indices

These do not have the street credibility they once did. However the UK numbers covering August also provided some good news today.

August’s data illustrates that the recovery has gained speed
across both the manufacturing and service sectors since July. The combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.

Public-Sector Finances

This is an example of a number which is both good and bad at the same time.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in July 2020 is estimated to have been £26.7 billion, £28.3 billion more than in July 2019 and the fourth highest borrowing in any month on record (records began in 1993).

That is because we did need support for the economy ( how much is of course debateable) and even so the monthly numbers are falling especially if we note this as well.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in June 2020 was revised down by £6.0 billion to £29.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions.

We can now switch to describing the position as the good the bad and the ugly.

Borrowing in the first four months of this financial year (April to July 2020) is estimated to have been £150.5 billion, £128.4 billion more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records.

The size of the debt is a combination of ugly and bad but we see that the numbers look like they are falling quite quickly now. Indeed if we allow for the effect of the economy picking up that impact should be reinforced especially if we allow for this.

Self-assessed Income Tax receipts were £4.8 billion in July 2020, £4.5 billion less than in July 2019, because of the government’s deferral policy;

National Debt

There has been some shocking reporting of this today which basically involves copy and pasting this.

Debt (public sector net debt excluding public sector banks, PSND ex) has exceeded £2 trillion for the first time; at the end of July 2020, debt was £2,004.0 billion, £227.6 billion more than at the same point last year.

It is a nice click bait headline but if you read the full document you will spot this.

The Bank of England’s (BoE’s) contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund (APF), Term Funding Schemes (TFS) and Covid Corporate Financing Facility Fund (CCFF).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of BoE, PSND ex at the end of July 2020 would reduce by £194.8 billion (or 9.8 percentage points of GDP) to £1,809.3 billion (or 90.7% of GDP).

Regular readers may be having a wry smile at me finally being nice to the Term Funding Scheme! But its total should not be added to the national debt and nor should profits from the Bank of England QE holdings. Apparently profit is now debt or something like that.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £115.8 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase.


It is nice to report some better news for the economy and let us hope it will continue until we arrive at the next information point which is how the economy responds to the end of the furlough scheme in October. As to the Public Finances I have avoided any references to the Office for Budget Responsibility until now as they have managed to limbo under their own usual low standards. Accordingly even my first rule of OBR Club that the OBR is always wrong may need an upwards revision.

Let me now take you away from the fantasy that the Bank of England has taken UK debt above £2 trillion and return to an Earth where it is implicitly financing the debt. Here is the Resolution Foundation.

These high fiscal costs of lockdown look to be manageable, though. 1) The @UK_DMO   has raised over £243bn since mid-March. 2) While debt is going up, the costs are still going down. Interest payments were £2.4bn in July 2020, a £2bn fall compared with July 2019.

That shows how much debt we have issued but how can it be cheaper? This is because the Bank of England has turned up as a buyer of first resort. At the peak it was buying some £13,5 billion of UK bonds a week and whilst the weekly pace has now dropped to £4.4 billion you can see that it has been like a powered up Pac-Man. Or if you prefer buying some £657 billion of something does tend to move the price and yield especially if we compare it to the total market.

Gilts make up the largest component of debt. At the end of July 2020 there were £1,681.2 billion of central government gilts in circulation.

Finally the UK Retail Prices Index consultation closes tonight and please feel free to contact HM Treasury to ask why they are trying to neuter out best inflation measure?



UK Public-Sector Borrowing starts to improve

Today has brought the UK public-sector finances into focus and we find some better news which is very welcome in these times. I was going to type good but as you will soon see the numbers remain somewhat eye-watering. Let me illustrate with the opening paragraph from this morning’s release.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in June 2020 is estimated to have been £35.5 billion, roughly five times (or £28.3 billion more) that in June 2019 and the third highest borrowing in any month on record (records began in 1993).

We can’t call that good when we were pre pandemic thinking of borrowing that sort of amount in the whole year. But it represents a slowing on the pandemic trend which is reinforced by this from May.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in May 2020 was revised down by £9.8 billion to £45.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions

The better news theme continues with two nuances. The first is simply welcoming a lower number and the second is the strong hint that the economy was doing better than so far thought via stronger tax receipts. So I dug a little deeper.

Central government tax receipts and NICs for May 2020 have been increased by £6.6 billion and £2.3 billion respectively compared with those published in our previous bulletin (published 19 June 2020). Previous estimates of Pay As You Earn (PAYE) Income Tax increased by £4.2 billion and Value Added Tax (VAT) increased by £2.3 billion, both because of updated data.

This is outright good news as we see that both income taxes and expenditure or consumption taxes are better than previously thought. For overseas readers National Insurance Contributions can be confusing as they are presented as everything they are not. For example they hint they are for pensions and the like when in fact they just go in a common pot, and they give the impression they are not income taxes when they are.

Oh and something else we have been noting was in play.

Alcohol duty collected in May has increased by £0.5 billion (on a national accounts basis) compared with our previous estimate. A large proportion of this additional revenue relates to repayment of arrears of duty payments (or debt) from February, March and April 2020.

Perhaps whoever was collecting those numbers had been having a drink themselves….

Tax Receipts

This pandemic has reminded us that they are not what you might expect.

To estimate borrowing, tax receipts and NICs are recorded on an accrued (or national accounts) rather than on a cash receipt basis. In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.

In a modern online IT area that seems poor to me. But it gets worse as we note my first rule of OBR club which for newer readers is that it is always wrong.

This process means many receipts are provisional for the latest period(s) as they depend on both actual cash payments and on projections of future tax receipts (currently based on the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario ( 14 May 2020) , which are “accrued” (or time adjusted) back to the current month(s)).

So as usual we see that in May the OBR was wrong.


After noting the above please take this with a pinch of salt.

In June 2020, central government receipts are estimated to have fallen by 16.5% compared with June 2019 to £49.4 billion, including £35.0 billion in taxes…..This month, tax revenue on a national accounts basis fell by 20.1% compared with June last year, with Value Added Tax (VAT), Corporation Tax and Pay As You Earn (PAYE) Income Tax receipts falling by 45.1%, 19.2% and 1.6% respectively.

Hopefully they have learned something from the May experience. There is some hope from this although surely it should also apply to NICs?

However, we have applied an additional adjustment to PAYE Income Tax and Air Passenger Duty (APD).

There are a couple of extra points to note from the detail. For example they expect Stamp Duty on property to be £600 million as opposed to £900 million last June which gives us some more data on the property market. Also in the light of the upwards revision to alcohol duty I am a bit surprised they expect less this June ( £200 million lower) but £100 million more from tobacco.

We are spending much more.

In June 2020, central government spent £80.5 billion, an increase of 24.8% on June 2019.

There was also quite a win from reporting lower inflation levels.

Interest payments on the government’s outstanding debt in June 2020 were £2.7 billion, a £4.6 billion decrease compared with June 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.


We get some from this.

Borrowing in the first quarter of this financial year is estimated to have been £127.9 billion, £103.9 billion more than in the same period last year and the highest borrowing in any April to June period on record (records began in 1993), with each of the months from April to June being records.

We only get some written detail.

This unprecedented increase largely reflects the impact of the pandemic on the public finances, with the furlough schemes (CJRS and SEISS) adding £37.6 billion in borrowing alone as subsidies paid by central government to the private sector.

So let me help out a bit. Income taxes are only a little bit down on last year but VAT receipts are £10.8 billion lower which means there has been some saving going on. Fuel Duty is unsurprisingly some £3.2 billion lower and Stamp Duty some £1.2 billion lower.

One matter I would note is that expenditure on debt is down substantially by some £5.6 billion and I would caution about putting it all down to lower inflation and inflation ( RPI) linked Gilts. We have begun to issue the occasional Gilt at negative yields and others for little or nothing which will add to this. It is a development which I think only  we have had on our radar which is that whilst we are issuing so much debt it is at only a small annual cost. By the way this is another area which the OBR has got spectacularly wrong and confirmed my first rule about them one more time.


So we learn that the UK economy has been doing better than previously reported as one of the signals is tax receipts. However, that is relative and one could easily type less badly. Moving onto the National Debt I have to confess I had a wry smile.

At the end of June 2020, the amount of money owed by the public sector to the private sector was just under £2.0 trillion (or £1,983.8 billion), which equates to 99.6% of gross domestic product (GDP).

So I was both right and wrong in awarding myself a slice of humble pie last month. Right in that unless you can prove the numbers are wrong you take it on the chin. But on the other side I was in fact more accurate than the Office for National Statistics in expecting the breaching of the 100% threshold to take longer. Also my first rule of OBR Club won again. Oh well! As Fleetwood Mac sang.

Another matter of note is how the Bank of England is affecting these numbers which is two ways. It has inflated how we record the debt.

If we were to remove the temporary debt impact of APF and Term Funding Scheme, public sector net debt excluding public sector banks (PSND ex) at the end of June 2020 would reduce by £192.9 billion (or 9.7% percentage points of GDP) to £1,790.9 billion (or 89.9% of GDP).

However all its purchases ( another £3.45 billion today) mean that we are borrowing very cheaply with some bond yields negative ( out to 6/7 years) and even the fifty-year being only 0.53%.



How much do the rising national debts matter?


A symptom of the economic response to the Covid-19 virus pandemic is more government borrowing. This flows naturally into higher government debt levels and as we are also seeing shrinking economies that means the ratio between the two will be moved significantly. I see that yesterday this triggered the IMF (International Monetary Fund) Klaxon.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.

Firstly we need to take this as a broad-brush situation as we note yet another IMF forecast that was wrong, confirming another of our themes.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

It is hard not to laugh. At the moment things are so uncertain that we should expect errors but the issue here is that the media treat IMF forecasts as something of note when they are regularly wrong. Be that as it may they do give us two interesting comparisons.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis………Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

Being the IMF we do not get any analysis on why we always seem to need economic support.

What do they suggest?

Here come’s the IMF playbook.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

Readers will have differing views on the green washing but that is simply an attempt at populism which once can understand. After all if you has made such a hash of the situation in Argentina and Greece you would want some PR too. That leads me to the last sentence, were the poor protected in Greece and Argentina under the IMF? No.

The IMF has another go.

Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

Would the “wasteful spending” include the part of this below that props up Zombie companies?

and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.

Now I know it is an extreme case but this piece of news makes me think.

BERLIN (Reuters) – German payments company Wirecard said on Thursday it was filing to open insolvency proceedings after disclosing a $2.1 billion financial hole in its accounts.

You see the regulator was on the case but….

German financial watchdog #Bafin last year banned short selling in its shares, and filed a criminal complaint against FT journalists who had written critical pieces. .. ( @BoersenDE)

Whereas now it says this.

The head of Germany’s financial watchdog says the Wirecard situations is “a disaster” and “a shame”. He accepts there have been failings at his own institution. “I salute” those journalists and short-sellers who were digging out inconsistencies on it , he says. ( MAmdorsky )

As you can see the establishment has a shocking record in this area and I have personal experience of it blaming those reporting financial crime rather than the criminals. I raise the issue on two counts. Firstly I am expecting a raft of fraud in the aid schemes and secondly I would point out that short-selling has a role in revealing financial crime. Whereas the media often lazily depict it as being a plaything of rich financiers and hedge funds. Returning directly to today’s theme the fraud will be a wastage in terms of debt being acquired but with no positive economic impulse afterwards.

Still I am sure the Bank of England is not trying to have its cake and eat it.

Join us on 30 June for an interactive webinar with restaurateur, chef and The Great British Bake Off judge, @PrueLeith . Find out more and register for your place here:

Debt is cheap

The IMF does touch on this although not directly.

monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

It does not have time for the next step, although it does have time for some rhetoric.

In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

Then it tip-toes around the subject in a “look at the wealth effects” sort of way.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened.

Let me now give you some actual figures and I am deliberately choosing longer-dated bonds as the extra debt will need to be dealt with over quite a period of time. In the US the long bond ( 30 years) yields 1.42%, in the UK the fifty-year Gilt yields 0.43%, in Japan the thirty-year yield is 0.56% and in Germany it is -0.01%. Even Italy which is doing its best to look rather insolvent only has a fifty-year yield of 2.45%

I know that it is an extreme case due to its negative bond yields but Germany is paying less and less in debt interest per year. According to Eurostat it was 23.1 billion in 2017 but was only 18.5 billion in May of this year. Care is needed because most countries pay a yield on their debt but presently the central banks have made sure that the cost is very low. Something that the IMF analysis ( deliberately ) omits.


So we are going to see lots more national debt. However the old style analysis presented by the IMF has a few holes in it. For a start they are comparing a stock (debt) with an annual flow (GDP). For the next few years the real issue is whether it can be afforded and it seems that central banks are determined to make it so. Here is yet another example.

Brazil may experiment with negative interest rates to combat a historic recession, says a former central bank chief who presided over some of the highest borrowing costs in the country’s recent history ( @economics)

That is really rather mindboggling! Brazil with negative interest-rates? Anyway even the present 2.25% is I think a record low.

If we go back to debt costs then we can look at the Euro area where they were 2.1% of GDP in 2017 but are expected to be 1.7% over the next year. Now that does not allow for the raft of debt that will be issued but of course a few countries will be paid to issue ( thank you ECB!). The outlier will be Italy.

Looking further ahead there is the capital issue as this builds up. I do not mean in terms of repayment as not even the Germans are thinking of that presently. I mean that as it builds up it does have a psychological effect which is depressing on economic activity as we learnt from Greece. Which leads onto the final point which is that in the end we need economic growth, yes the same economic growth which even before the pandemic crisis was in short supply.


Will the UK be raising or reducing taxes?

The UK Public Finances data we looked at on Friday has triggered something of a policy response. Or at least some proposals, although if we look at the Financial Times the messaging has got itself in a mess.

Rishi Sunak is planning to defer tax rises and cut public spending in his Autumn Budget after delivering a further stimulus for the UK economy.

That looks a little confused on its own with its message of a stimulus followed by what looks like a lagged version of what has become known as austerity. That leads us to something of a collision between economics 101 and likely human behaviour. Let me explain with reference to the suggested plans.

The Treasury is first considering a temporary cut to value added tax and specific reductions in the rate for some sectors, according to those close to the chancellor, following significant pressure from industry and Tory MPs. A lower VAT rate for the tourism sector — including pubs, restaurants and hotels — is one option being discussed.

Okay and when would it happen?

This could come as early as July as the government prepares to scrap the two-metre social distancing rule and replace it with “one metre plus” guidelines that are likely to include further use of masks and physical screens.

Okay so there is an Undertone(s) here.

Its going to happen – happen – till your change your mind
Its going to happen – happen – happens all the time
Its going to happen – happen – till your change your mind.

Economic Impact

We do have some recent evidence for the impact of what is a change in a consumption tax and it comes from Japan last autumn. So let us remind ourselves via the Japan Times.

Japan saw a 6.3 percent economic contraction in the last three months of 2019, fueling criticism of Prime Minister Shinzo Abe’s decision to carry out the tax increase at a vulnerable time for the economy. After factoring in the early signs of impact from the coronavirus, analysts now believe the economy is falling into recession.

That is in the American annualised style and as we note the further downward revision and convert we now see the economy shrank by 1.9% in that quarter, driven by factors like this.

Like many people in Japan, she isn’t planning to splash out again anytime soon, leaving the economy teetering on the edge of recession. And that was before the spreading coronavirus gave yet more cause for caution.

“These days, I really scrutinize the price tags,” Mitsui said.

The economic consequence of this change in behaviour is shown below.

Household spending fell for the third straight month in December on the continued impact of October’s consumption tax hike together with sluggish demand for winter items due to warm temperatures, government data showed Friday.

Spending by households with two or more people dropped 4.8 percent in real terms from a year earlier to ¥321,380 ($2,900), the Ministry of Internal Affairs and Communications said.

The collective impact on the quarter was for a 3% fall in private consumption on the quarter.

So we see that a consumption tax rise led to quite a drop in the economy thus we have some hope for the impact of the reverse. Indeed the impact looks really rather powerful. This reinforces the impact we saw of the VAT rise back in 2010. One area where we have less evidence is the impact of inflation which is harder to read. I would expect there to be a welcome disinflationary effect in the UK that is stronger that we would see in Japan. Why? Well price rises in Japan tend to not have secondary impacts on inflation and of course there were two other factors. The Japanese economy was slowing anyway as the consumption tax brake was applied and now we have the further impact of the Covid-19 pandemic. The Bank of Japan calculates various inflation indices to try to suggest its policies are working but the latest release excluding the effects of the consumption tax rises suggests inflation is er 0% ( actually slightly below), so if you like what is normal for Japan.

What next?

There is a possible worm in the apple of the UK plans, so let us return to the FT.

But any move to lower VAT — at considerable cost to the exchequer — would come with a sting in the tail, as Mr Sunak works up proposals for deferred tax rises and lower public spending as part of the autumn Budget.

The message switches from “Spend! Spend! Spend!” to tighten your belts which adds a layer of confusion. For younger and overseas readers the spend quote is from Viv Nicholson who won the (football) pools which was analagous to winning the lottery now and I think you have already figured her plan.

The response seems to have been influenced at least to some extent by mis-reporting like this, which I noted on social media over the weekend.

There has been some really rather poor reporting from the BBC today with analysis by @DharshiniDavid

“UK debt now larger than size of whole economy”

There were several factors at play such as the policies of the Bank of England inflating the recorded numbers by £195.6 billion whereas even in pessimistic scenario it might not be a tenth of that. Also the numbers were not only based on a forecast they were based on a forecast by the Office of Budget Responsibility which has lived down to its reputation by being wrong yet again. How much of an influence that was in this is hard to say.

Neil O’Brien, MP for Harborough and a former Treasury adviser, said: “We simultaneously need a stimulus now to fight recession, but also need to roll the pitch so that we can deal with very high levels of debt.”

Neil seems to be trying to have his cake and eat it. An excellent idea in theory but one which crumbles in practice. However his lack of realism is typical of someone who has been involved at the Treasury. Next is an anonymous effort at sticking the boot in.

Another former Tory minister said the public finances were so stretched that a fiscal tightening would be necessary before long: “The public aren’t going to like it but it feels like either spending cuts or tax rises are going to be necessary soon.”


The situation is on one level quite simple. Will a VAT cut boost the economy? Yes it will both directly as people spend more and then via a secondary effect of lower inflation via some lower prices. The second bit is awkward for the inflationistas so we may not seem them for a day or two. The undercut is the impact on the public finances which will be added to the £8.6 billion fall in VAT receipts in the year so far. There will be some amelioration as for example people dash for a haircut or a pint of beer at their local pub, but overall receipts will be lower. The overall impact depends on the economic boost and how long it lasts and the evidence we have is positive.

Switching to the public finances the numbers are not as bad as some have claimed, partly because of a factor which should get more publicity. In the fiscal year so far (April and May) the cost of our debt fell by £1.1 billion to £8.4 billion due to lower inflation and the fact our ordinary debt is so cheap to finance. I would be switching as much debt as I could to the fifty-year maturity at a yield of around 0.5% and in fact would issue some 100 year Gilts. In the long run we will have to deal with the capital issue of the debt we are issuing at an express rate but as it is cheap the interest implications are relatively minor. What we need to squarer the circle is some economic growth. That will reduce the tax increases required.

Let me end by looking at the other side of the coin from the slice of humble pie i put in front of myself on Friday. So a slap on the back for this.

Regular readers will be aware that I wrote a piece in City-AM in September 2013 suggesting the Bank of England should let maturing Gilts do just that. So by now we would have trimmed the total down a fair bit which would be logical over a period where we have seen economic growth which back then was solid, hence my suggestion.

Because it seems to be on the radar of the present Governor.

#Monetary policy – significant change of approach suggested by #BOE governor #Bailey – says may be best for the bank to start reversing its asset purchases before raising interest rates on a sustained basis. Opposite view to that which has been held at BoE ( @HowardArcherUK )