The UK Public Finances look to be finally improving but local councils remain a concern

Last month ( on the 23rd) I pointed out that the UK public finances were showing signs of a turn.

Today’s public finances numbers show a more hopeful position for the UK public finances. As I have already pointed out it was on the cards due to the impact of lower inflation on our relatively higher proportion of debt index-linked to inflation.

For those unaware the cost of inflation via index-linked bonds peaks in December and June. That positive vibe has continued this morning via the latest numbers.

Public sector net borrowing excluding public sector banks (borrowing) in January 2024 was in surplus by £16.7 billion, more than double the surplus of January 2023 and the largest surplus since monthly records began in 1993 in nominal terms.

So we have had a better January too and it was backed up by some positive revisions.

combined with a downward revision of £5.8 billion to our previously published financial year-to-December 2023 borrowing estimate,

This one rather changes the financial year so far as we are now doing better than last year.

Borrowing in the financial year-to-January 2024 was £96.6 billion, £3.1 billion less than in the same ten-month period a year ago; this is the first time in the present financial year that year-to-date borrowing has been lower than in the equivalent period in the last financial year, partly because central government receipts have been revised.

I have emphasised the last bit because it is a reminder that these numbers have an error margin. Also it is a reminder that they do not actually know what the receipts are until some time afterwards. I always think that is a disappointment in the modern data led society but then public-sector IT programmes are a regular disappointment. They lead to this sort of thing.

On 29 January 2024, His Majesty’s Revenue and Customs (HMRC) announced that they had identified a potential concern with receipts data affecting Pay As You Earn (PAYE)  in the financial years ending March 2023 and March 2024.

Okay, how much?

Subsequent investigation identified an additional £6.5 billion in PAYE income tax and National Insurance Contributions (NICs) cash receipts that had not previously been recorded in the financial year to December 2023. This has now been corrected.

On the upside higher receipts suggest that the economy may have been stronger than we previously thought. Whether that is enough to alter the recession at the end of the year only time will tell.

The concept of the numbers improving over time seems to be a theme at the moment.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (financial year ending (FYE) 2023) by £10.5 billion, from £139.2 billion to £128.7 billion.

So we have a double-gain in that this year is better than last year which itself has improved by more than £10 billion on what it was originally thought to be.

The first rule of OBR Club is that the OBR is always wrong

It was yet another good day for this.

This was £9.2 billion less borrowing than the £105.8 billion forecast by the Office for Budget Responsibility (OBR).

We can look at that more deeply via the words of Diana Ross.

Do you know where you’re going to?
Do you like the things that life is showing you?
Where are you going to?
Do you know?

The truth is that the public finances struggle under her critique as we have already seen that even the past is shrouded in some doubt and we are therefore much less sure of the present than we might like to think. Thus the future projections of the OBR start on shifting sands and get worse. You might think that those in charge of the OBR would be on a mission to point this out but instead they trouser their salaries and continue to produce forecasts which are wide of the mark and sometimes very wide of the mark.

The circus continues via both our media and political class acting as if they have amnesia and forgetting all the mistakes and treating each new forecast as something to be taken very seriously.

January

We can start our analysis with revenue.

Central government’s receipts were £111.4 billion in January 2024, £3.9 billion more than in January 2023.

Whilst it is welcome revenues are higher that is similar to what we think inflation is so no particular boost here which is added to by this.

In January 2024, SA Income Tax receipts have been provisionally estimated at £21.6 billion, £0.4 billion less than in January 2023 and £2.4 billion less than the £24.0 billion forecast by the Office for Budget Responsibility (OBR).

If we move on from another OBR failure we see a decline on self assessment receipts. So having seen a sign of a stronger economy earlier this heads the other way, although for the full picture we also need to February numbers.

Switching now to expenditure we are beginning finally to see a turn here as well.

Central government’s total expenditure was £102.6 billion in January 2024, £1.6 billion more than in January 2023.

Not an outright decline but one less than inflation in spite of its influence clearly affecting some parts of spending.

Net social benefits paid by central government were £23.7 billion in January 2024, £3.4 billion more than in January 2023.

In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.

In fact it was in plat here too.

Central government departmental spending on goods and services was £34.2 billion in January 2024, £2.5 billion more than in January 2023, as inflation increased running costs.

But other areas compensated starting with lower energy subsidies.

Subsidies paid by central government were £2.3 billion in January 2024, £6.6 billion less than in January 2023.

Whilst not on the scale of December lower inflation helped with debt interest.

In January 2024, the interest payable on central government debt was £4.4 billion, £3.5 billion less than in January 2023. This was the lowest January interest payable since 2021

Oh and yes it happened again.

£2.7 billion less than the £7.1 billion forecast by the OBR.

In percentage terms that is their biggest error of the day.

Bank of England QE Problems

This is an issue which gets very little media coverage.

This increase was largely a result of payments to the Bank of England Asset Purchase Facility Fund (APF) from HM Treasury (HMT) under the indemnity agreement. These payments, recorded as capital transfers, began in October 2022, and occur every three months. This month saw a payment of £11.2 billion to the APF, £7.0 billion more than in January 2023.

The total transfers are getting larger as I have long warned.

The borrowing of both of these sub-sectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last ten months under the Asset Purchase Facility Fund (APF) indemnity agreement. This was £39.4 billion more than the £5.0 billion paid in the same period the previous year.

Comment

The trajectory for the UK public finances looks to have improved which is welcome and may over time feed into lower UK bond yields. The latter will also be influenced by any pre election tax cuts. Between public finance announcements we have seen Energy Secretary Claire Coutinho get into quite a mess on the national debt. If you follow her pronouncements on energy policy that will have been no surprise at all as she has been a cheerleader for the policies which have got us into an energy crisis.

Also there is another issue on the horizon. I note that today’s release provides no further analysis of local government spending. Because of this?

Birmingham City Council must sell off £1.25bn in assets to repay a government bailout loan.

The revelation came as the troubled local authority published draft budget documents.

They provide the starkest indication to date of how the city will drag its finances back into the black after declaring itself bankrupt in September, with other dramatic measures including a 21% council tax rise. ( BBC)

It is not alone as off the top of my head I can think of problems at Croydon and Woking councils.

Improving UK Public Finances offer hope of tax cuts

This morning has brought news of some winds of change for the UK Public Finances numbers. We had been rather stuck in double-digit borrowing each month in spite of the fact that the energy support programmes of last year had gone. But as you can see December was rather different.

Public sector net borrowing excluding public sector banks (borrowing) in December 2023 was £7.8 billion, around half or £8.4 billion less than that borrowed in December 2022 and the lowest December borrowing since 2019.

Looking at the numbers this was essentially a central government thing, which I guess is no great surprise if we note the financial mess that some local authorities are in.

The relationship between central government’s receipts and expenditure is the main determinant of public sector borrowing. Central government borrowed £4.6 billion in December 2023, £10.1 billion less than in December 2022 and £6.7 billion less than the £11.3 billion forecast by the Office for Budget Responsibility (OBR).

As you can see one of the certainties of life remains in that the first rule of OBR Club that the OBR is always wrong had had another success. We however,by contrast, have been on the ball as we have been expecting an improvement caused by lower inflation impacting on index-linked debt.

In December 2023, the interest payable on central government debt was £4.0 billion, £14.1 billion less than in December 2022. This was the lowest December interest payable since 2020 and £5.5 billion less than the £9.5 billion forecast by the OBR.

If we look further into this we see quite a change.

Capital uplift in December 2023 was negative £0.1 billion reflecting the 0.2% decrease in the RPI between September and October 2023. This reduced the capital uplift on the three-month lagged index-linked gilts, which make up around three-quarters of the index-linked gilt stock.

In December last year the Capital uplift was £13.7 billion so in essence the fall in inflation really improved the borrowing figures for December. Care is needed in projecting this forwards because December and June are the two big months for debt interest. So whilst the number for January should also be better it relates to a Capital uplift of a much lower £3.3 billion.

Over time UK borrowing may be trimmed compared to projections due to our bond yields falling back as the ten-year is below 4% as opposed to the 4.75% of last autumn, but that is a fair way ahead.

Whilst the overall change pretty much was the debt interest move there were other factors which tended to offset. I have already noted the end of the energy support schemes.

Subsidies paid by central government were £2.4 billion in December 2023, £4.2 billion less than in December 2022.

But they were offset by a different more lagged inflation impact.

Net social benefits paid by central government were £23.7 billion in December 2023, £2.7 billion more than in December 2022. In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.

The tax numbers maybe hint at a little growth which is a different message from the retail sales fall on Friday.

Central government’s receipts were £81.5 billion in December 2023, £4.8 billion more than in December 2022.

The breakdown is below.

Of this £81.5 billion, tax receipts were £61.1 billion, £3.5 billion more than in December 2022, with Income Tax receipts and Value Added Tax (VAT) receipts increasing by £1.3 billion and £1.2 billion, respectively.

For those wondering about why taxes are so much below the total here it is because of semantics. National Insurance which is really another form of Income Tax comes under Social Contributions which were £15.3 billion in December. This comes from the way the state has over time tried to imply they pay for pensions which in fact they do so no more or less than other taxes.

Revisions Boost

The numbers also showed that last year was a fair bit better than we thought at the time.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (financial year ending (FYE) 2023) by £9.1 billion, from £139.2 billion to £130.1 billion.

That raises a wry smile because back in the day I recall working in the City of London when markets responded actively to the borrowing figures, which as you can see may be revised quite a bit. So the last financial year ended up like this.

Current estimates show that for the 12 months to March 2023, the proportion remains broadly around that of FYE 2015, having reduced by only a further 0.2 percentage points to 5.1%.

There was more welcome news in the release as we have been borrowing less this year as well.

Since publishing our Public sector finances, UK: November 2023 bulletin, we have reduced our estimate of borrowing in the financial year-to-November 2023 by £5.0 billion. This change was the result of new central government data replacing previous estimates.

This may suggest the economy has done a bit better than we were previously thinking.

Regular updates to tax and National Insurance contributions increased receipts by a total of £4.2 billion, with updated data replacing our initial estimates.

Newer readers my be surprised that the tax numbers are not more definite.The Information Technology era feels like it has bypassed this area. But it is a reminder that the numbers have quite a wide margin for error.

Bank of England

This has been in play in this financial year due to this.

The borrowing of both of these sub-sectors is affected by payments totalling £33.2 billion made by central government to the BoE over the last nine months under the Asset Purchase Facility Fund (APF) indemnity agreement.

Regular readers will be aware that I feel that the media has given the Bank of England a free pass over buying the UK Gilt market at the top and now selling at the bottom. However for today’s purposes it then does something of a magic trick.

As with similar intra-public sector transactions, these payments are public sector borrowing neutral.

Comment

Today’s public finances numbers show a more hopeful position for the UK public finances. As I have already pointed out it was on the cards due to the impact of lower inflation on our relatively higher proportion of debt index-linked to inflation. Those of a more cynical nature might be wondering about better figures when this is being mooted.

A halving of UK government borrowing over the past year has created scope for Jeremy Hunt to make tax cuts worth about £20bn in his March budget. ( The Guardian)

Actually that is classic Guardian as borrowing has not halved over the past year it halved in December only. But the issue of tax cuts feels like a song from Phil Collins.

I can feel it coming in the air tonight, oh lord
And I’ve been waiting for this moment, for all my life, oh lord
Can you feel it coming in the air tonight, oh lord, oh lord

But the idea that there is a sort of conspiracy in play hits trouble as we see that the civil service in HM Treasury is very much against it.

— Internal Treasury analysis advised Rishi Sunak that tax cuts would have only a “low impact” on boosting economic growth ( @AlexWickham)

That reminds me of the Yes Prime Minister series being re-run on BBC4 as the last episode I watched described HM Treasury as being against tax cuts in the 1980s because they considered it “their money” and a source of power It seems not much has changed.

Meanwhile this but is mind boggling. Surely if immigration boosts economic growth then the UK economy should be sprinting along rather than stumbling?

Leaked documents show the Treasury suggested increasing immigration and planning reform would do more ( @AlexWickham )

The weak economic outlook for Italy suggests a year focusing on debt costs and fiscal policy

As 2024 has opened quite a few of the economic themes in play point at it. We can start with this morning’s speech by ECB Vice-President de Guindos.

By contrast, growth developments are more disappointing. Economic activity in the euro area slowed slightly in the third quarter of 2023. Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023 and weak prospects for the near term.

As you can see the economic outlook for the Euro area overall is poor. Also you may like to note how central bankers deal with it as many ECB speakers have previously informed us there will not be a recession and that things were expected to pick up in 2024. It is a form of public relations or PR rather than an actual forecast as they only admit reality when there is no other alternative. In fact Vice-President de Guindos has become rather downbeat.

The slowdown in activity appears to be broad-based, with construction and manufacturing being particularly affected. Services are also set to soften in the coming months as a result of weaker activity in the rest of the economy.

Indeed it seems that the ECB is for the first time willing to admit that trouble looks to be on the way for the labour market.

However, we are seeing the first signs of a correction taking place in the labour market. The latest data on total hours worked show a slight decline in the third quarter, the first since the end of 2020.

For our purposes today this provides a poor backdrop for the Italian economy.

National Debt

This again is an issue in the financial news as whilst the Financial Times tried to concentrate on the UK and US it is hard not to think of Italy when you read this.

In Europe, ten of the eurozone’s largest countries will issue around €1.2tn of debt this year, around the same level as last year, according to estimates from NatWest. But the bank expects net issuance — which includes the impact of quantitative tightening and excludes refinancing existing bonds — to rise by around 18 per cent this year to €640bn.

According to Eurostat the national debt to GDP ratio was 142.4% at the end of the second quarter of last year. That has its flaws as a measure as you are comparing a stock with a flow but it provides a signal. For Italy it has told us two main things over time of which the first is that we keep being told it will fall whereas it has risen. Secondly the Euro area must regret using 120% as a level in the Greece crisis because whilst Portugal improved we see that Italy went above it and kept rising. In terms of absolute debt level that is now 2.85 trillion Euros.

Fiscal Policy

Mostly this is not a cause of Italy’s debt problem but as I pointed out on the 28th of September last year this time looks different.

ROME, Sept 25 (Reuters) – Italy’s government plans to raise its 2024 budget deficit target to between 4.1% and 4.3% of gross domestic product (GDP), up from the 3.7% goal set in April, sources familiar with the matter told Reuters on Monday.

The numbers were slipping away and a weaker economic outlook will put them under more pressure. Also as Fitch pointed out on the 11th of October 2023 was slipping away in fiscal terms as well.

The government’s wider 2023 deficit target of 5.3% of GDP (from 4.5% in April’s Stability Programme) is driven by the cost of “Superbonus” tax breaks on residential investment exceeding expectations by 1.1% of GDP (taking the overall cost of the scheme since 2020 above 6% of GDP).

The “Superbonus” scheme was just so Italian as were to efforts to keep it out of the fiscal numbers.

Bond Market

This is an area which on the surface has got better since the autumn as we have seen bond yields decline across much of the world. The benchmark ten-year which briefly went above 5% is now 3.8%. Whilst the decline is welcome when you have a much debt as Italy the issue keeps chipping away at you even at lower yield levels. From the 28th of September last year.

italy has to refinance 400 billion of public debt in the next 12 months, ( @spaghettilisbon )

Last week Bloomberg estimated that Italy would pay 3.8% of its GDP in debt costs in 2023 meaning it was paying more than Greece.

If we look ahead we see that there is a potential issue on the horizon. Looking back we see that the ECB offered enormous support to the Italian bond market via its QE bond purchases. Then as they ended it offered a more technical support by being willing to adjust its portfolio in favour of Italian bonds as opposed to German or Dutch ones. Whereas if we return to the speech by Vice-President de Guindos we see sales ahead rather than purchases.

Over the second half of 2024, the PEPP portfolio will decline by €7.5 billion per month on average. We discontinued asset purchase programme reinvestment of redemptions in July 2023 and we expect to discontinue the reinvestments under the PEPP from 2025.

The Italian Economy

This morning has seen the release of the retail sales figures which were mixed. There was some monthly growth.

In November 2023, an economic growth of 0.4% in value and 0.2% in volume is estimated for retail sales.

But the rolling three monthly figures were weaker and there was a fall compared to 2022.

n the September-November quarter of 2023, in economic terms, retail sales fell both in value (-0.1%) and in volume (-0.8%)………On a year-on-year basis, in November 2023, retail sales increased by 1.5% in value and recorded a decline in volume of 2.2%.

Yesterday brought some good news on the employment front because as well as a small monthly rise there was this.

The number of employed people in November 2023 exceeds that of November 2022 by 2.2% (+520 thousand units).

Although measuring what they actually did is apparently not much.

In the third quarter of 2023, the gross domestic product (GDP), expressed in chained values ​​with the reference year 2015, corrected for calendar effects and seasonally adjusted, grew by 0.1% both compared to the previous quarter and compared to the third quarter of 2022.

Comment

For newer readers the “Girlfriend in a Coma” theme is that whilst the economy of Italy takes part in downturns it very rarely grows at an annual rate of above 1%. That means that the promised convergence with Euro area performance has not only not happened but things have got worse.

If we look at recent times there were promises that the EU Next Generation funds would improve matters and they did help create some growth, But now they have reduced the economic growth has not lasted. In essence a lack of growth is the Italian problem but this time around fiscal policy is looser and we are seeing for the first time for around a decade more substantial bond yields.

Another topic for Italy is its banks with Monte Paschi being the wrong sort of standard bearer. This phase is not helping their domestic bond holdings so any real recovery for them looks to remain in the distance.

 

 

 

 

The July UK Public Finances show quite a decent improvement

This morning has updated us on the UK public finances and there is a lot going on. But overall it is better news with something of a kicker.

Public sector net borrowing excluding public sector banks (PSNB ex) in July 2023 was £4.3 billion, £3.4 billion more than in July 2022 and the fifth-highest July borrowing since monthly records began in 1993.

If we look at the trend things have improved especially for those who were forecasting a borrowing requirement of £17 billion! I will get to their error later. But I want to also note that it is very important to be as consistent as you can when analysing these figures and let me give you an example of the reverse via the Financial Times. This morning they have moved to the political angle.

UK public sector borrowing increased by less than expected in July, helped by higher tax revenues, according to new statistics that raise expectations the chancellor could have room for tax cuts ahead of the next general election.

Yet on the 9th of November last year economics editor Chris Giles was warning us about a fiscal “black hole”.

UK government officials normally avoid the phrase “fiscal hole” like the plague because it suggests ministers have lost control of the public finances and that nasty tax rises and public spending cuts are imminent. Not this autumn: allies of chancellor Jeremy Hunt have said he is considering tax rises and spending cuts worth about £55bn a year, with one Treasury official warning that “after borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone”.

This is a very serious point and is back to one of my main themes that you should not rely on Office of Budget Responsibility style analysis because.

The first rule of OBR  Club is that the OBR is always wrong.

Let me give you a concrete example of where they have been completely wrong.

The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 per cent.

The reality has been that we have had some but not much growth which has put a spread of torpedoes into their figures. This really matters because UK economic policy was changed via tax rises by UK Chancellor Jeremy Hunt in a clear policy error. I know many of you have followed my work but for newer readers I pointed this out on November 17th last year.

As I have pointed out before only a very minor change in economic growth will wipe out any fiscal Black Hole.

In fact the whole article was a critique of the fashionable analysis back then. It is only July and it already looks silly.

So what is happening?

Let me start with receipts where July brought some good news.

Self-assessed income tax (SA) receipts in July 2023 were £11.8 billion, £2.5 billion more than in July 2022; however, because of the possibility of delayed July payments we recommend considering July and August SA receipts as a whole when making year-on-year comparisons.

We know that wages have been rising so this is a factor although we need to remember that inflation is a factor here. At this point inflation is the friend of the public finances as well as some actual growth. Plus we have also seen employment be strong as whilst it faded in the most recent figure it was strong up to then.

Actually overall the figures for receipts were weaker than the income tax ones.

Central government’s receipts were £85.2 billion, £3.4 billion more than in July 2022 and £2.3 billion more than the £82.9 billion forecast by the OBR.

As you can see the more recent efforts by the OBR are also too negative.

At first sight the expenditure numbers look awful.

In July 2023, central government’s expenditure was £103.0 billion, £19.2 billion more than in July 2022 and £5.2 billion more than the £97.8 billion forecast by the OBR.

This is because presumably in a past attempt to flatter the numbers we are told “central government” numbers rather than overall ones. Someone will be sitting in a dark room today with no visits from the cake trolley and let me explain.

The QE Effect

Again we are back to one of my main themes which is there should have been much more of a debate about QE. Here is today’s move and the emphasis is mine.

In July 2023, central government net investment was £19.7 billion, £15.9 billion more than in July 2022. This increase was largely a result of payments (recorded as a capital transfer) to Bank of England Asset Purchase Facility Fund (APF) from HM Treasury under the indemnity agreement. Payments occur every three months, and this month saw a payment of £14.3 billion to the APF.

This is where the forecasts of a £17 billion came from with them presumably forgetting this bit.

As with other such payments, intra-public sector transfers are public sector net borrowing neutral.

Debt Costs and Interest

This is a subject that has been influenced by the inflationary burst we have experienced.

The recent large month-on-month increases in RPI have led to substantial increases in debt interest payable, with the largest three payables on record being in 2022 and 2023.

Of the £7.7 billion interest payable in July 2023, £3.9 billion was mainly attributable to the 0.7% increase in the RPI between April and May 2023, affecting the uplift of the three-month lagged index-linked gilts.

That is more nuanced that shown as “uplift” is an addition to debt rather than borrowing until a bond matures. So we pay some now but the larger amount is added to future debt. But there is also something else on its way and the most recent push is this.

Last week US 10Y #Bond Yield broke above Oct’22 high and touched 4.32%. Yesterday, it went up as high as 4.354% and closed at 4.34% ( @boyz_meta )

There has pulled our UK bond yields back up again as they had improved after the inflation figures but as I type this our ten-year yield is around 4.7% so conventional bond borrowing is expensive. That is a slower burner than the inflation impact but has a drip drip effect.

A Longer Perspective

We also saw an improvement based on revisions to past numbers.

The £4.3 billion borrowed in July 2023, combined with a reduction of £2.1 billion to our previously published financial year to June 2023 borrowing estimate (largely because of updated provisional central government spending data), brings our provisional estimate for the total borrowed in the financial year to July 2023 to £56.6 billion.

As ever the OBR were too pessimistic.

Borrowing in the financial year-to-July 2023 was £11.3 billion lower than the £68.0 billion forecast by the Office for Budget Responsibility (OBR).

Indeed last year is looking better and better as well.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (FYE 2023) by £8.6 billion, from £139.2 billion to £130.6 billion.

These means that those who wrote “hot takes” about the UK having a debt to GDP ratio over 100% are hoping that this will be missed.

 

Public sector net debt (PSND ex) was £2,578.9 billion at the end of July 2023 and provisionally estimated at around 98.5% of the UK’s annual gross domestic product (GDP)

Some of that is caused by the Term Funding Scheme so allowing for it we are some £168 billion lower and more like 92%.

Comment

There was a concerted media and establishment effort to present the UK as being in a fiscal “black hole” last November and I think they should be challenged as to how only 8 months later the Financial Times is writing about tax cuts! Even the most credulous journalist must see how often the OBR is wrong yet they rush to cheer lead for any new forecasts.

The rush to “doom and gloom” and back then panic hides the fact that there are real issues. Higher bond yields are adding to the inflation ones for example. Also there is an elephant in the room in that so many of our present problems come down to what has been a disastrous energy policy. Yet proper debate about that is missing. Frankly there is the equivalent of an energy black hole which I note the UK green party seems to have finally spotted.

We could halve energy demand without harming our quality of life – it’s the cheapest way to cut our climate impact ( @carolinelucas)

Note how the promises of loads of cheap renewable power have morphed into a sudden halving of expected future supply!

As a final point there is a swerve in the numbers as we counted the QE gains bur now are not counting the losses as it is “public-sector neutral”. If only I could do that with my own business affairs! Whilst it is not right it is what everyone else is doing as the “tax deferred assets” on the books of the US Federal Reserve show.

 

What will be the impact of the Fitch Ratings downgrade for the US?

It has been a while since a ratings agency has grabbed the headlines. That is partly due to their failures with “AAA” Mortgage Backed Securities pre credit crunch and their reputation during the Euro area crisis for closing the stable door after the horse had bolted. But this did achieve some impact last night.

Fitch Ratings – London – 01 Aug 2023: FitchRatings has downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’. The Rating Watch Negative was removed and a Stable Outlook assigned. The Country Ceiling has been affirmed at ‘AAA’.

So the world’s reserve currency is no longer AAA according to it and there did seem to be a market impact as the US ten-year yield rose above 4%. Although it was there in early July as well. It provokes an initial thought but let’s continue with the Fitch analysis.

The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

Actually the whole debt limit system has become something of a farce. We can now look at their numbers including my initial though which I have highlighted.

Rising General Government Deficits: We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden

They think that will get worse over the next couple of years.

Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the historical 20-year average).

National Debt

This has been rising even allowing for the pandemic.

General Government Debt to Rise: Lower deficits and high nominal GDP growth reduced the debt-to-GDP ratio over the last two years from the pandemic high of 122.3% in 2020; however, at 112.9% this year it is still well above the pre-pandemic 2019 level of 100.1%. The GG debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025.

I always have a wry smile at numbers of around 120% for this area as it is the threshold the Euro area used to show when the numbers were out of control. This then rather backfired as Portugal and Ireland joined Greece in exceeding it.

Debt Costs 

These are an increasing issue which Fitch puts like this.

 The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the ‘AA’ median and 1% for the ‘AAA’ median) due to the higher debt level as well as sustained higher interest rates compared with pre-pandemic levels.

Plus this.

 The CBO projects that interest costs will double by 2033 to 3.6% of GDP.

Now the Congressional Budget Office is the US version of the OBR and are therefore unlikely to be even remotely accurate. But even they have been unable to miss the present direction of travel. There has been a clear change since the US Federal Reserve was actively suppressing debt costs via interest-rate cuts and large-scale asset purchases. Whereas now it is doing this.

Fed Tightening: The Fed raised interest rates by 25bp in March, May and July 2023. Fitch expects one further hike to 5.5% to 5.75% by September………Additionally, the Fed is continuing to reduce its holdings of mortgage backed-securities and U.S. Treasuries, which is further tightening financial conditions. Since January, these assets on the Fed balance sheet have fallen by over USD500 billion as of end-July 2023.

As I have pointed out many times this is am awkward shift for central bankers who were flavour of the month in political circles and now will be under fire. But there is more to it than just interest-rate rises.

Post-pandemic, TIPS share declined to 7.5%, but a steady increase of $10 to $20bn per year starting in 2022
could return the TIPS share towards 8% by the end of 2024 and would be in line with a regular and predictable
issuance pattern. ( US Treasury)

Actually the US Treasury goes onto inadvertently make my point with this which feels like from another world now.

Based on debt payments to date, the TIPS program has saved Treasury an estimated $17bn relative to nominal
issuance, indicating that Treasury has captured inflation risk premium over time.

But the principle here is that there has been another rise in debt costs due to inflation. Ironically that has been reduced because the Federal Reserve bought some but the message is a return towards pre credit crunch levels for debt interest.

US debt-service costs are the highest since 2009: ( @unusual_whales )

That will continue to rise because as we have seen the US continues to borrow ( 6-7% of GDP) and bonds will mature. So things get worse even if yields stay here. Inflation will still be an issue although much less so than last year.Last month Bloomberg pointed out this.

The cost of servicing US government debt jumped by 25% in the first nine months of the fiscal year, reaching $652 billion and contributing to a major widening in the budget deficit.

There are various reports of it heading for US $1 trillion based on higher bond yields and we do look to be heading that way. Although things can change.

Economic Growth

In the end this is the most important factor usually.

Economy to Slip into Recession: Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the U.S. economy into a mild recession in 4Q 23 and 1Q 24, according to Fitch projections. The agency sees U.S. annual real GDP growth slowing to 1.2% this year from 2.1% in 2022 and overall growth of just 0.5% in 2024.

So many of the numbers used by Fitch for the deficit and national debt get better with economic growth and worse without it. Putting it another way in my time here I have seen many UK government forecasts based on 3% GDP growth per annum. That is because nearly everything is affordable if your economy compounds at 3% per annum. Putting it another way that is why the Euro area and IMF forecast 2%+ for Greece. The problem with all of that has been a reality which has been different and in Greece’s case very different.

The US has in general done better than others in GDP growth terms. But I too am worried about a slowing as I fear a delayed reaction to the interest-rate increases with so much debt being fixed-rate and the problems that China clearly has.

Comment

We can look at this via the official response.

US Tsy Sec. Yellen: Strongly Disagree With Fitch Ratings’ Decision To Downgrade US – Calls Downgrade ‘Arbitrary And Outdated’ ( @LiveSquawk)

Unfortunately she has an even worse record than the ratings agencies after her assurances that inflation would be Transitory.

In the end as I explained earlier the path essentially depends on economic growth. With the long-term trend for that Fitch do have a point although their issuing a statement may be a sign of change the other way. Their lagged response to events often means that they represent a turning point.

 

 

The UK economy is proving to be quite resilient in spite of the Bank of England floundering

There is much to cover about the UK economic situation and let me start with the latest which is good news.

Retail sales volumes are estimated to have risen by 0.3% in May 2023, following a rise of 0.5% in April 2023 (unrevised from our previous publication).

We have been following a pick-up in UK Retail Sales and it continued in May which provides another boost for UK economic output and hence GDP in this quarter. For some reason the Office of National Statistics have omitted the usual three monthly comparison but it too is positive at 0.3%.

So we can start with a theme which is in line with what has been said in the comments section that the UK economy is doing better than the “doom and gloom” in the media would make you think. As I look at the numbers I see that my theme about lower inflation being good for retail sales is in play here. Whilst consumer inflation was at 8.7% for the CPI measure and 11.3% for the RPI my ersatz measure for retail inflation recorded 0.8% for the last 3 months. So an annual rate of 3-4% should it persist. The annual rate by the same method of 6.9% suggests a slowing too.

To this we can add something ignored by the present media obsession with mortgage rates and mortgages. Yes we have seen rises but on the other side of the coin savers will be getting higher interest-rates and there are more savers than mortgagees. So perhaps they are spending it. Economic theory assumes that borrowers spend more than savers but after the equivalent of a nuclear winter for savers since 2009 we can now see what Bank of England Deputy Governor Charlie Bean was talking about.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

As he said it back on the 28th of September 2010 savers have had to eat into their capital by rather more than the “bit” he suggested. He meanwhile has picked up plenty of roles including one at the Office for Budget Responsibility where his forecasting skills fitted in nicely. However, care is needed as inflation is higher than savings rates so real rates remain negative.

The underlying picture for UK Retail Sales may be slightly better due to the Coronation.

Food stores sales volumes fell by 0.5% in May 2023, following a rise of 0.6% in April 2023, with some anecdotal evidence of increased spending on takeaways and fast food because of the extra bank holiday.

So we may see a pick up from this in June.

Finally for this area we see the reverse side of my inflation theme and quite a correction for conventional economic theory.

When compared with their pre-coronavirus (COVID-19) level in February 2020, total retail sales were 17.0% higher in value terms, but volumes were 0.8% lower.

Not much sign of people buying extra to get ahead of inflation as theory argues is there? The numbers tell a different story.

The Public Finances and QE

I thought I would look at these in a different way and we can bring in the Bank of England and its dithering ion interest-rate rises. This after a longish road led to what was something of a panic move with a 0.5% increase in interest-rates to 5% yesterday. Let me take you back to some issues I raised back on September 23rd 2021.

One is the move the fixed-rate mortgages and the other is the fact that the Bank of England QE book is effectively financed at Bank Rate so they are not keen to raise it. Also any rise in bond yields will be expensive for the government which is already facing more debt costs due to the rise in inflation it and the Bank of England have worked together to create.

You can see part of my argument that they needed to start interest-rate rises due to the fact that the increased number of fixed-rate mortgages would mean that monetary policy lags would be increased also. The Bank of England turned a blind eye to this as part of its mishandling of the situation. But my main point about the public finances is that as I highlighted back then QE was being shown up as being a bit of a confidence trick. When Bank Rate was low ( especially when it was 0.1%) then they looked like masters ( and mistresses) of the universe as they bought government debt and had a funding cost of 0.1%. Virtually anything looks good at a finding cost of 0.1% doesn’t it?

If we go back to those days this is why the Bank of England set thresholds of 0.5% and 1% for Bank Rate and all its QE bond buying. Also it was arrogant and did not believe it would need to exceed them. Whereas it had lit the inflationary fires by pumping up the money supply. But returning to the public finances it made itself very popular with politicians when it remitted the “profits” of QE and ignored that these were another form of carry trade. It took the interest gains and ignored the capital risk, Let me give you a specific example of how this has gone wrong. It sold some of its holdings of our 2071 bond last week at 46. It will have paid more than 100 and at times a fair bit more.

So the Bank of England has capital losses just as the UK faces higher debt costs.

In May 2023, the interest payable on central government debt was £7.7 billion, £0.2 billion less than in May 2022,

The fall in inflation has flattered the annual numbers and the real picture is shown by the fact we paid £4.3 billion in May 2021 and £3.4 billion in May 2020. So this year we paid what was previously enough for two years. If we look ahead there will be an issue from UK bond yields being higher as we will be committing ourselves to higher future payments each time we issue new debt. Having borrowed so much for the pandemic we need to issue more new debt that we did simply to replace maturing bonds. For example we sold some five-year bonds earlier this week and had to offer a yield of 4.9% on them.

Adding to this costs here is the way that QE in my opinion meant that the Bank of England was afraid of raising interest-rates which meany that we will see more inflation and higher debt costs.

Our national debt is in relative terms not too bad but on its way to subsidising the banks the Bank of England inflated it too via the Term Funding Scheme.You may have read that our debt to GDP ratio passed 100%. Whereas.

Public sector net debt excluding the Bank of England (BoE) was £2,298.6 billion, or around 89.6% of GDP, £268.6 billion (or 10.5 percentage points of GDP) less than the wider measure.

Some of that represents QE losses so a running figure would be more like 95% I think.

Comment

The UK economy is doing much better than the Bank of England expected. I am no great fan of the PMI numbers but they continue to show growth.

At 52.8 in June, down from 54.0 in May, the headline
seasonally adjusted S&P Global / CIPS Flash UK
Composite Output Index signalled only a moderate
expansion of private sector business activity. ( S&P)

Plus there was this.

UK consumer confidence improves to the strongest in 17 months ( Bloomberg)

Switching back to the Bank of England I note that a past Financial Secretary to the Treasury ( David Mellor) is calling for the Bank of England Governor to be sacked. He has a point as we mull that the higher you climb the greasy pole the less you seem to be made responsible for your actions.

 

 

The biggest danger to the UK public finances is our failed energy policy

Today the UK public finances are in the news but as well as the monthly update we have something even more significant for it.

The British government unveiled a multibillion-pound bailout to help companies with their energy bills this winter amid soaring prices that threaten to put many out of business. ( Bloomberg)

We are going to borrow the money for this so it will flow into or rather more literally out of the public finances, so let us examine the details.

The cap for businesses is set at 21.1 pence per kilowatt-hour for electricity and 7.5 pence for gas, the government confirmed, after Bloomberg reported the numbers on Tuesday. That would impose a discount of roughly 50% on the winter contract for electricity and 25% on gas for next month, but the exact discount depends on when a contract was agreed.

What will this cost?

The government is trying to shield British businesses from the worst effects of energy prices that have soared since Russia squeezed pipeline flows to Europe after being sanctioned over its invasion of Ukraine in February. Wednesday’s package, which may cost in the region of £40 billion ($46 billion), comes on top of a separate, £130 billion plan to help households with their power and gas bills.

The problem with presenting fixed numbers as Bloomberg have done is that we are facing a dynamic moving situation. For example there is a continuous UK natural gas futures contract which reached a peak of £8.80 at the end of August. As we are at £5,85 this morning things have improved considerably. Still much higher than last year when the price was just below £2.

In fact the volatility of the situation has been added to this morning with the partial mobilisation announcement by President Putin of Russia. Today’s price is up just under 8% in response. Because the UK is imposing a domestic cap and a fixed price for business the cost to the taxpayer is a variable one.

Actually there is an undercut to this as well which is how many businesses would simply have folded under the new much higher energy prices? The hospitality industry would have taken yet another pounding. Also whilst the company below is French the UK has its own glass manufacturers with one being on BBC Breakfast TV earlier.

Doing so requires intense heat to melt sand into glass in furnaces that must stay lit 24 hours a day. In summer, Europe’s power crunch propelled Arc’s energy bill to $75 million, from 19 million euros a year ago. On top of that, consumers suddenly stopped buying items like candleholders and washing machines, for which Arc makes glass windows, sending orders plunging. ( New York Tines)

Here is the impact so far.

This month, 1,600 workers were asked to stay home two days a week to cut costs.

So doing nothing and just letting energy costs for businesses rise would have led to lower tax revenues as some businesses would cut output and employment and others would just close.

House Price Pumping

I do keep warning you they will never stop!

Liz Truss will announce radical plans to cut stamp duty in the government’s mini-budget this week in an attempt to drive economic growth, The Times has been told.

The prime minister and Kwasi Kwarteng, the chancellor, have been working on the plans for more than a month and will announce them on Friday. ( The Times)

The argument in favour is this.

Truss believes that cutting stamp duty will encourage economic growth by allowing more people to move and enabling first-time buyers to get on the property ladder.

The problem is that house prices usually rise to make up the difference and the last time around which was only last year they rose by more. So in fact first-time buyers were made worse off. Also there is the issue of why we have a tax we apparently keep on needing to cut!

So far this tax year ( so since April) it has raised some £7.8 billion which is up £2.1 billion on last year. So it does raise a decent amount of revenue for the government. Well when we are not cutting it,anyway!

August

We can start with some good news.

Central government receipts in August 2022 were estimated to have been £69.6 billion, which was £5.6 billion more than in August 2021. Of these receipts, tax revenue increased by £3.9 billion to £51.4 billion.

However this is good news for the public finances it is not as good overall for the economy. This is because if we look at the VAT ( sales tax) revenue we see that it is up by 10.9% on last year which is suspiciously like the inflation rate. Even the £1 billion rise in employee ( PAYE) income tax will have some influence from wage rises influenced by inflation. Oh and it is hard not to have a wry smile at Stamp Duty receipts which were up by £700 million to £1.7 billion. If policy leak from The Times is correct then that rally is over for now anyway. Plus as we we seemingly keep needing “cuts” and “holidays” or whatever it will be called there is the question of what is the point of it.

Overall expenditure is in many ways under control or at least it was until the energy support plan we looked at earlier.

Central government bodies spent £73.2 billion on current (or day-to-day) expenditure in August 2022, which was £0.1 billion more than in August 2021.

However if you follow my work you will be expecting one area to be seeing quite a change and here it is.

Central government debt interest payable was £8.2 billion in August 2022, £1.5 billion more than in August 2021 and the highest August figure since monthly records began in April 1997; the volatility in interest payable is largely because of the effect of Retail Prices Index (RPI) changes on index-linked gilts.

Care is needed because the media do not understand what this means so let me explain a bit more via this.

In August 2022, the interest payable on central government debt was £8.2 billion, of which £4.7 billion reflected the impact of the RPI.

Much of the RPI “interest” is a future obligation rather than a cash payment now. This is because there is an uplift in the price to reflect inflation that is paid on maturity of the bond.

National Debt

As I get regularly asked here is the most relevant number.

Our public sector net debt excluding the public sector banks and the Bank of England (PSND ex BoE) measure removes the debt impact of these schemes along with the other transactions relating to the normal operations of the BoE. Standing at £2,107.4 billion at the end of August 2022 (or around 83.8% of GDP), PSND ex BoE was £320.2 billion (or 12.8 percentage points of GDP) less than PSND ex.

Comment

We are in a situation where we keep being asked to take hits to the public finances. Just like with the housing market which seems to permanently need “Help” I think that we should stop and think where we are going? Otherwise we are going to end up in an even bigger mess. The reality of the new situation for our public finances is that it is in fact our failed energy policy which has put them in trouble this time around. We have an establishment which chants repeatedly about the virtues of both wind and solar power but ignores the fact that they are unreliable and thus makes us even more dependent on the gas and coal they tell us are bad.

So the metrics for our public finances come from the fact that as I type this UK wind and solar are producing some 7 GW. That is a long way short of the 50 GW claimed capacity. Another example of the madness is that because of the gap between 7 and 50 we are burning 1 GW of coal. As an island we have lots of coal but that is “bad” so instead we pay others to mine it and ship it here. So the environmental argument collapses and we contribute to this.

In recent days,global coal prices have jumped to an all-time high, with the Asian benchmark in Newcastle surging to an all-time high of nearly $450 pert tonne, up from less than $150 per tonne earlier this year ( @JavierBlas)

So the solution to the public finances is to sort out energy policy. The problem is that both our political class and the media are clinging to their version of the Titanic as it sinks.

 

How much can we borrow and what will it cost?

It is not usually put like this but many countries are about to embark on a new fiscal adventure. It is rather soon after the last one and our political class are keen to distance themselves from the way that their previous fiscal splurge has partly created the need for the new one. Or indeed the way that their ill thought out energy policies have done so. As I type this the claimed 50 GW renewable capacity in the UK is producing just under 5 GW or as UB40 would say.

I am the one in ten
A number on a list
I am the one in ten

Hopefully Solar will pick-up as the morning progresses but we find ourselves joining the dash for gas and indeed coal ( 1.2 GW right now) just as they are as expensive as they have ever been.

I will be looking at some UK numbers but the issue is a European generic and true in many other places as well. For example Germany had a 65 billion Euro “Rescue package” not even a week ago and now there is this.

After saying that some companies would have to close this winter, now Germany’s Economy Minister Robert Habeck promises help. “We will open a wide rescue umbrella,” he said Thursday in a speech. “We will open it widely so that small and medium enterprises can come under it.” ( @JavierBlas)

Returning to the UK the BBC is reporting this.

New Prime Minister Liz Truss will unveil plans to limit energy bill rises on Thursday, spending billions to protect people from soaring prices.

Typical household energy bills could be capped at around £2,500 a year, with firms also likely to get some relief.

It is unclear how long the support will last, but the government is expected to borrow at least £100bn to pay for it.

The original leaks were more in the area of £150 billion but the cap is now higher than what was originally floated which is the present just below £2000.

If we take the £100 billion then it is the second major fiscal intervention in short order.

Expressed as a ratio of UK gross domestic product (GDP), borrowing in the FYE March 2021 was 14.4%, which was the highest for 75 years. Early estimates indicate that this ratio fell by 8.3 percentage points to 6.1% over the 12 months to March 2022. ( Office for National Statistics )

In fact we borrowed approximately £450 billion in those two years but it is not quite so easy to say what the extra fiscal support was. It is a bit of a moving target as the definitions do change and the numbers get revised. But if we take the previous years borrowing and subtract that rate of borrowing we get £330 billion extra.

So the switch in policy from the days of claimed austerity post credit crunch has been enormous. Regular readers will recall that we were on the case and looked at this back in the day.

We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis ( IMF 2013)

That was too late for Greece where the economy had been plunged into an economic depression but it was the seed of fiscal policy doing a Terminator style “I’ll be back” in the next big crisis. In the UK it returned for the Covid crisis and now is also back for something at least partly created by it.

What do we owe?

There are always issues around what we do and do not owe. But of the published numbers this is the best guide.

Standing at £2,069.6 billion at the end of July 2022 (or around 82.8% of GDP), PSND ex BoE was £318.4 billion (or 12.7 percentage points of GDP) less than PSND ex.

You could add a £20 billion margin for the Term Funding Scheme is you wish but it does not materially change things and as we stand requiring that is not likely.

What do we pay?

In terms of debt interest we paid £34.4 billion in 2020/21 and £69.8 billion in 2021/22.  These numbers were effectively suppressed by the bond buying ( QE) of the Bank of England. It did not happen explicitly as it buys in the secondary market but in practice it pretty much bought what we were issuing for a while before reducing its involvement. As well as keeping yields lower we of course paid interest to it before then getting i So one factor looking ahead is that we have lost, at least for the time being the largest buyer.

As well as keeping yields lower we of course paid interest to it before then getting it back which saved us a bit over £15 billion last year.

The factor which has been raising things so far this year is simply inflation. In the financial year to July our debt costs have risen by 80.5% from £22.1 billion to £39.8 billion.So we are running hot in this sense and there is more to come because the impact of the rise in inflation is lagged as the bonds are mostly based on it 3 months before, so the recent rises have yet to arrive in the numbers.

What is on its way is the rise in the cost of issuing new conventional bonds or Gilts. This has become more expensive with our bond yields being 3% or so. It would be logical to borrow the extra £100 billion for as long as possible and our 50 year yield is 3.1%, So assuming we could borrow at that rate which does have some realism to it because markets have been adjusting to the likely news means a cost of £3.1 billion a tear going forwards.

Comment

There are more than a few moving parts in such analysis as the definitions change pretty frequently. But if we step back and observe the broad picture we see that we were going to be paying quite a bit more in debt costs anyway. But the energy plan will push this higher by £3.1 billion a year assuming it is £100 billion and by a multiple of that is it is more.

We should borrow all of this via conventional borrowing because we are seeing how inflation linked debt is proving so expensive. Those of you who have followed me will know I had a debate about this with Jonathan Portes who essentially argued that real rates mattered as opposed to my argument that we pay with nominal money which is what we are doing right now. We are paying a lot of it too. Although it may seem expensive paying 3% or so is in fact being inflated away with inflation in double-digits.

The fundamental question is why we always need bailouts? They are getting more frequent and are often in response to policy mistakes of which the latest has been energy policy. At some point we need to have an honest discussion based on facts and reality but instead we mostly just kick that poor battered can.

In the end the answer to “Is this affordable?” comes down to economic growth. That is more awkward as in recent  times it has been in short supply.

There is a counter-point to this and that is assuming it reduces inflation ( specifically the RPI) it will reduce our future debt costs for as long as it lasts.

 

Both UK Retail Sales and the Public Finances are feeling the strain of inflation

This has been a week rich in UK data and we have this time an opportunity to look at some better news.

Retail sales volumes rose by 0.3% in July,

So we had an outright rise accompanied by a number that was better than forecast. Frankly the forecasts are so often wrong they serve little purpose as they mislead more often than help, but it only seems to be me who is bothered by this.

The main driver of the better news is below.

Non-store retailing sales volumes rose by 4.8% in July 2022, up from a fall of 3.7% in June 2022…….Feedback from online retailers suggested that there were a range of promotions in July 2022 which boosted sales.

We were in the sales season as some of the inflation data from earlier this week showed ( particularly clothing and household goods). But we can combine that with yet more grim news for the high street.

Clothing stores sales volumes fell by 1.2% in July 2022, following a fall of 3.9% in June 2022.

Household goods stores sales volumes fell by 0.4% in July 2022, mainly because of falls in furniture and lighting stores. Feedback from retailers suggests that consumers are cutting back on spending because of increased prices and affordability concerns.

As you can see the online numbers saw quite a swing from June but it looks as though the switch towards it continues.

Online spending values rose by 5.3% in July 2022 because of strong growth in non-store retailing…..This increased the proportion of online sales which rose to 26.3% in July 2022, from 25.3% in June 2022.

I am not sure where the official release is going at the start below because of course it is below the level when you couldn’t shop anywhere else! The message is that it has continued at much higher levels and maybe is growing again.

Despite this pick-up, the general trend in the proportion of online sales is one of decline since its peak in February 2021 (37.5%) but remains comfortably above pre-coronavirus (COVID-19) levels (19.8% in February 2020).

There was a minor boost here too.

Food store sales volumes rose by 0.1% in July 2022, from 2.7% in June 2022 when Queen’s Jubilee celebrations boosted sales.

With us maybe moving away from supermarkets.

Specialist food stores (such as butchers and bakers) increased by 4.7% over the month, while alcohol and tobacco stores fell by 8.7%.

On the other side of the coin we seem to be driving less.

Automotive fuel sales volumes fell by 0.9% in July 2022, following a fall of 4.0% in June 2022.

Rather curiously our statisticians blame the weather.

This coincides with a red and amber alert heatwave across parts of the UK, which may have reduced sales.

Curious as it usually leads to trips to the coast and cars these days mostly have air conditioning. Personally I would focus on the cost of it as an explanation.

Fuel prices increased by 2.9% between June and July 2022, and by 43.7% in the year to July 2022.

With times as they are I would have thought presumable cheaper second-hand goods would be in favour, but not in July.

The sub-sector of other non-food stores reported a monthly fall in sales volumes of 1.5% in July 2022 because of a strong fall in second-hand goods stores (particularly antiques stores and auctioning houses).

Where does this leave us?

Whilst we managed a little growth on a monthly basis we still face this.

Looking more broadly, in the three months to July 2022, sales volumes fell by 1.2% when compared with the previous three months; this continues the downward trend since summer 2021.

The reason for the relative struggle returns me to the theme I first established back in January 2015.

Retail sales volumes rose by 0.3% in July, following a fall of 0.2% in June 2022 (revised from a fall of 0.1%). Retail sales values, unadjusted for price changes, rose by 1.3% in July 2022, following a rise of 1.1% in June 2022.

We can make an ersatz inflation measure by subtracting volume growth from value growth. So 1% in July and 1.3% in June. As it happens we did better with lower inflation but I think that is over analysing and the real issue is that higher inflation has been accompanied by a turn lower in retail sales volumes.

We are still above pre pandemic levels but can we sustain that?

sales volumes were 2.3% above their pre-coronavirus (COVID-19) February 2020 levels.

I see a lot of attention being paid to this.

Joe Staton, Client Strategy Director, GfK says: “The Overall Index Score dropped three points in August to -44, the lowest since records began in 1974. All measures fell, reflecting acute concerns as the cost-of-living soars. A sense of exasperation about the UK’s economy is the biggest driver of these findings.

But we have been on this case since around a year ago when it was clear that inflation was coming. So whilst it is welcome that others have been catching up I counsel caution against a sort of gloom party.

Public Finances

I have watching these to pick up the changes in our economy and the one that was clearest last month was the rise in debt costs due to inflation. It was also in play in July.

Central government debt interest payable was £5.8 billion in July 2022, £2.3 billion more than in July 2021 but £13.9 billion less than the record £19.7 billion payable in June 2022;

As the monthly profile of these bonds varies the outright monthly fall is not especially helpful for analysis whilst being welcome. The essential issue is that we saw a £2.3 billion or 65% increase on last year’s £3.5 billion. It is not quite as immediately bad as it looks because most of it is added to future debt repayments rather than paid now. But it is an issue.

On the positive side receipts look pretty good overall.

Central government receipts were £78.2 billion in July 2022, which was £6.1 billion more than in July 2021; of this, tax receipts were £58.6 billion, which was an increase of £4.6 billion compared with July 2021.

Self-assessed Income Tax receipts were £9.1 billion in July 2022, which was £0.6 billion more than in July 2021.

On the other side of the coin inflation affects us in other areas as well as debt costs.

Social assistance payments in July 2022 were £2.8 billion, £2.2 billion higher than those paid in the July last year and reflect the Cost of Living support payments made this month via existing benefit schemes.

It spent a bit more in other areas and local government was £1.1 billion worse than last year.

Some Perspective

We are doing better than last year but the gap is narrowing.

Public sector net borrowing excluding public sector banks (PSNB ex) was £55.0 billion in the financial year (FY) to July 2022, £12.1 billion less than in the same period last year.

As to our debt this is the most realistic estimate from today’s release.

Our public sector net debt excluding the public sector banks and the Bank of England (PSND ex BoE) measure removes the debt impact of these schemes along with the other transactions relating to the normal operations of the BoE. Standing at £2,069.6 billion at the end of July 2022 (or around 82.8% of GDP), PSND ex BoE was £318.4 billion (or 12.7 percentage points of GDP) less than PSND ex.

Comment

Essentially things are progressing pretty much as we expected and to some extent feared. I suggested the UK will have a difficult year with the numbers ebbing and flowing around zero and that is how we are progressing. For the rest of the year much depends on the October domestic energy price cap announcement and in particular the government response to it. If they wish to stop a sharp downturn then a substantial intervention will be required which if we return to one of today’s issues will worsen the borrowing and national debt numbers.

Let me finish by reminding you of my first rule of OBR Club which is that the OBR is always wrong. From today’s release.

This required it to borrow £4.9 billion, which was £4.7 billion more than the £0.2 billion forecast by the Office for Budget Responsibility (OBR)

That is a pretty spectacular effort for a single month.

The new Elizabeth Line shows the risks for Public Finances

Today has brought us some clues as to how the UK economy behaved in April so we are getting the first glimpse of life post the domestic energy price surge (54%). Overall it is hopeful via the implied view from tax receipts.

Central government receipts were £70.2 billion in April 2022, £9.9 billion more than in April 2021, of which tax receipts were £50.2 billion, an increase of £5.5 billion.

As you can see tax receipts are strong and the slightly confusing gap of £20 billion is mostly because National Insurance ( £13.4 billion) is technically not a tax when of course it is a tax on income in reality. If we look at the individual taxes we see that Pay as You Earn income tax is up by 18%, VAT is up 12% and National Insurance by 11%. The numbers are of course inflated by all the price rises were are seeing but even the RPI rate of inflation at 11.1% was below the tax rise.

Also the past was better than we thought in terms of tax receipts as we look at the financial year which ended in March.

Increases to our previous estimates of central government tax and national insurance contributions of £5.0 billion and £1.8 billion, respectively, are largely the result of higher than anticipated April 2022 cash receipts accruing back to earlier months.

So there is a small nudge higher for April as it is being compared to a past that is better than previously thought.

What was April like overall?

We see that in spite of the improvement in tax receipts we are struggling to get the deficit down as we have been around this sort of level for a while now.

Public sector net borrowing excluding public sector banks (PSNB ex) was £18.6 billion in April 2022, the fourth-highest April borrowing since monthly records began in 1993; this was £5.6 billion less than in April 2021, but still £7.9 billion more than in April 2019, pre-coronavirus (COVID-19) pandemic.

So we have gained less that the receipts rise. Sadly the official numbers try to hide this a bit in the way that they are reported as we only get a sub-category of total public expenditure in the headlines.

Central government current (or day-to-day) expenditure was £76.0 billion in April 2022, £6.7 billion less than in April 2021, with the additional £3.0 billion cost of the Council Tax rebate payments being offset by reductions in other areas of expenditure, including subsidies and transfers to local government.

I can help out a little as we spent another £2.6 billion on a combination of depreciation and investment but the numbers still do not add up.

Moving on we always seem to be finding reasons to spend more and the issue of higher energy bills and their impact on public expenditure is going to have a further impact as this year develops and probably 2023 in my opinion.

This month we have recorded the Council Tax rebate in England as a payable tax credit from central government to households. This is recorded within other miscellaneous current transfers, and reported as Other Expenditure in Table 3. This additional expenditure has increased central government and subsequently public sector net borrowing by £3.0 billion in April 2022.

Debt Costs

This is a growing area as I have been recording.

The recent high levels of debt interest payments are largely a result of higher inflation, as the interest paid on index-linked gilts rises with increases in the Retail Prices Index (RPI).

In the April 2022, debt interest was £4.4 billion, of which the RPI uplift on index-linked gilts contributed £3.9 billion over and above the accrued coupon payments and other components of debt interest.

However whilst there is a clear trend ( mostly driven by inflation ) this months numbers were £500 million below the £4.9 billion of last year. For those of you wondering about that it is likely to be a quirk in the numbers which is because the inflation impact is lagged ( mostly by 3 months but we still have some lagged by 6 months).

What about the last financial year?

We can take another look via my first rule of OBR Club ( for newer readers it is that the OBR is always wrong), that has worked yet again.

The public sector borrowed £144.6 billion in the financial year ending (FYE) March 2022. This was £16.8 billion more than the £127.8 billion forecast by the Office for Budget Responsibility (OBR) in its Economic and fiscal outlook – March 2022.

They first over estimated the amount then completely changed tack and guess what? If you like to see a debt to GDP ratio then here it is.

Provisional estimates indicate that this ratio has fallen by 8.7 percentage points over the 12 months to March 2022, to 6.1%.

We get a similar picture from receipts to what we noted earlier.

Central government receipts in FYE March 2022 were £836.9 billion, £111.9 billion more than a year earlier. Of these, tax receipts were £624.9 billion, an increase of £99.0 billion compared with the FYE March 2021.

But spending has been stickier than we might have hoped with some of this down to higher inflation.

Notably, there was a reduction of £67.7 billion (or around 57%) in subsidies, mainly because of the closure of the job support (furlough) schemes. However, this saving was partially offset by a £30.5 billion (or around 77%) increase in debt interest payments. This was largely a result of the interest being paid on index-linked gilts rising with inflation.

Thus even with the subsidies now virtually gone we have found other things replacing them at least partially.

National Debt

Due mostly to the QE bond buying and the Term Funding Scheme the Bank of England has inflated the size of the national debt without it actually being debt.

Currently standing at £2,027.0 billion at the end of April 2022 (or around 82.6% of GDP), PSND ex BoE is £320.7 billion (or 13.1 percentage points of GDP) less than PSND ex.

Regular readers will know I have criticised the TFS frequently for the way it further pumped up house prices but not even I think all of it will be lost! A reserve of 10% should be more than enough.

There are various ways of accounting for QE but doing this is in my opinion not a little bizarre.

It is important to understand that this £734.9 billion (conventional) gilt holding, is not recorded directly as a component of public sector net debt. Instead, we record the £112.1 billion difference between the £847.0 billion of reserves created to purchase gilts (or market value of the gilts) and the £734.9 billion face (or redemption) value of the gilts purchased.

Comment

The situation for the UK Public Finances was one of an improving story. There is an irony here though and it comes in the form of the deep state or HM Treasury, because a factor in this below is the rise in the National Insurance rate.

The headline seasonally adjusted S&P Global / CIPS Flash
UK Composite Output Index registered 51.8 in May, down
sharply from 58.2 in April, to signal the slowest rise in
business activity since the current phase of recovery began
in March 2021.

Regular readers will be aware that I am no great fan of the PMI series but I think that they have picked up something here.

Also there are some consequences for the Bank of England and QE and let me point out that £27.9 billion of its holdings matured in March but….

As a result of a gilt redemption, in March 2022, the APF’s gilt holdings (at face value) reduced by £25.1 billion, to a redemption value of £734.9 billion.

So there was a £2.8 billion loss. There will be more of these as time passes because the Bank of England paid the top of the market in price terms. If you think about it then it was trying to pay the top of the markets something QE fans try to gloss over. Switching to market levels and using yields as our measure it drove our 15 year yield down towards 0.3% whereas it is 2.16% as I type this.

We can observe this from the new London Tube line. From the Mayor of London.

LONDON: The Elizabeth line is open! Great to meet so many passengers on the first-ever Elizabeth line train! A huge moment for our city and country. 

But with Tube and Rail travel heavily down post pandemic then the impact is not what it would have been pre 2020. A reminder that the benefits of expenditure can be very different to those promised/expected.

Call me friend but keep me closer (call me back)
And I’ll call you when the party’s over ( Billie Eilish )

And yes the concept of the Tube party being over also applies to the 2 new stations in Battersea.