How do the UK Public Finances look ahead of the General Election?

I have been waiting for the public finances data to take a look at the UK fiscal position as we use where we stand to see the reality behind all the political promises. Also I do my best to avoid politics. So it was with a wry smile that I spotted this from the Financial Times yesterday and that got bigger as I read the figures.

A new Labour government could raise extra money for investment from bond markets without causing a Liz Truss-style gilts crisis, according to fund managers.

Apparently they are a model of fiscal rectitude or will copy the present government.

Shadow chancellor Rachel Reeves has promised to retain the Conservative government’s commitment that debt as a proportion of GDP must be on track to fall in five years if Labour wins the July 4 election.

I struggle to think of any government that has stuck to its fiscal riules because there haven’t been any! Regular readers may recall how I described all the swerves employed by former Chancellor Osborne for example. But then we get a bit of a reverse ferret as we are prepared for more borrowing after all.

But bond investors said the market could be forgiving if a new government decided to boost borrowing and amend its debt rules, provided funds were channelled towards measures to stimulate the economy.

That is a curious line to take because that was what Liz Truss said she was doing. Also if I may be permitted a brief diversion we are even see a breaking of one of the things most dear to the Financial Times.

With Labour enjoying a commanding lead in opinion polls, her fiscal cautiousness has helped the gilt market to remain relatively calm leading up to the election, in contrast to turmoil in French debt sparked by the prospect of a far-right government.

Yes you did just read that the UK is handling something better than a leading light in the Euro area as we wonder if that journalist will ever see the FT cake trolley again? Actually under the reign of previous editor Lionel Barber the sentence below would surely have seen a warning letter being issued.

Sterling has been the only major developed market currency to hold its value against a rising dollar this year.

The Public Finances

In terms of the gist of the Financial Times argument it quickly hit trouble according to Reuters.

UK public debt rises to highest since 1961 ahead of election.

Oh well and the release tells us this.

Public sector net debt excluding public sector banks was provisionally estimated at 99.8% of gross domestic product (GDP) at the end of May 2024; this was 3.7 percentage points more than at the end of May 2023, and remains at levels last seen in the early 1960s.

Regular readers will know that the numbers have been distorted by the Bank of England.

Excluding the Bank of England, debt was 91.3% of GDP, 5.3 percentage points more than at the end of May 2023 but 8.5 percentage points lower than the wider debt measure.

Even here though one notes the 5.3% rise over the past year and heads to a point I have been making in 2024. These was a period when the UK public finances looked to be improving but we have seen a change in that trend as the borrowing figures reversed course somewhat. That is also in play in this morning’s release.

Borrowing – the difference between public sector spending and income – was £15.0 billion in May 2024, £0.8 billion more than in May 2023 and the third highest May borrowing since monthly records began in 1993.

So we borrowed more than last year something that is repeated if we look at the fiscal year so far.

Borrowing in the financial year-to-May 2024 was £33.5 billion, £0.4 billion more than in the same two-month period a year earlier and the fourth highest year-to-May borrowing since monthly records began.

Analysis

In fact it turns out that we needed a downwards revision to stop things looking even worse.

The £15.0 billion borrowed in May 2024, combined with a downward revision of £2.1 billion to our previously published April 2024 borrowing estimate, brings our provisional estimate for the total borrowed in the financial year-to-May 2024 to £33.5 billion. This was £0.4 billion more than was borrowed in the same two months last year

Actually we seem to get a lot more downwards revisions which is welcome from our point of view, if not for our official statisticians. But even so it is not that wise to assume they will always flatter the numbers.

If we look at receipts at first they look to be rather poor.

Central government’s receipts were £153.8 billion in the financial year-to-May, £1.8 billion more than in the same period last year. Of this £1.8 billion increase in revenue:

But in fact growth in revenues would have been better without the National Insurance cuts.

compulsory social contributions decreased by £2.3 billion to £25.9 billion, largely because of the reductions in the main rates of National Insurance in 2024

But to add to the revenue clipping there is a clear problem with spending and we can start with an issue for our political class generally.

net social benefits paid by central government increased by £2.9 billion to £50.9 billion, largely because of inflation-linked benefits uprating…..central government departmental spending on goods and services increased by £3.2 billion to £69.0 billion, as inflation increased running costs.

There is a straight line from all the Covid spending and deficit financing to the inflation which meant we had a cost of living crisis. There is a particular issue for Prime Minister Sunak as he was the Chancellor who did it. But if we look wider we see a political class which would have done the same thing so it is a generic issue as well as a specific one. Things continue to be a little awkward as we note that the total extra spending of £6.5 billion in the financial year so far comes in spite of this favourable development.

subsidies paid by central government decreased by £2.5 billion to £4.7 billion, largely because of the closure of the energy support schemes that remained active until June 2023

We can look at this via an area I have warned about.

interest payable on central government debt decreased by £0.8 billion to £17.3 billion, largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index

I have highlighted the largely because this is only part of the picture. The fall in the RPI will continue to be a downwards influence as there is around a 4 month lag for most bonds from the inflation data. But we are also beginning to see the impact of higher bond yields. We are refinancing so much debt each year if we combine maturities with the new borrowing (the 5.3% of GDP we started with) and on that we have been paying a yield of 4% plus in recent times.

Comment

As you can see there are issues with the public finances in the UK. The level of bond yields combined with the rate at which we have been borrowing suggests that in a couple of years or so there may well be trouble. It has been a while before the amount of debt interest has stopped us doing things on a material scale but it could happen. Actually if I widen my scope if vision this is something of a generic issue in the western world as I note that the budget watchdog in the US has suggested that the deficit in the US looks to be heading to 7% of GDP in 2024. Plus France and Italy are now under the deficit procedure in the Euro area.

There is better news in the economic growth so far in 2024 as I spotted this from the Bank of England yesterday.

Bank staff now expected GDP growth of 0.5% in 2024 Q2 as a whole, stronger than the 0.2% rate that had been incorporated in the May Report.

That has been reinforced by this morning’s Retail Sales numbers.

Retail sales volumes (quantity bought) rose by 2.9% in May 2024, following a fall of 1.8% in April 2024 (revised from a fall of 2.3%).

Sales volumes rose across most sectors, with clothing retailers and furniture stores rebounding following poor weather in April.

Actually I think that the seasonal adjustment of that series is broken and this is further evidence of this.

First Rule of OBR Club

The public sector borrowed £122.1 billion in the financial year ending (FYE) March 2024…… but £8.0 billion more than the £114.1 billion forecast by the Office for Budget Responsibility (OBR).

Yet some will still try to present their forecasts as facts.

The UK Public Finances continue to improve as debt interest falls

Today our focus remains on the UK but not for the reason that you might think. I am not expecting an interest-rate change from the Bank of England today although the cat has been put amongst the central banking pigeons with this announcement.

The Swiss National Bank is lowering the SNB policy rate by 0.25 percentage points to 1.5%.
The change applies from tomorrow, 22 March 2024.

So someone was willing to move before the US Federal Reserve and I think one reason for that comes from the currency position.

With its decision, the SNB is taking into account the reduced inflationary pressure as well as
the appreciation of the Swiss franc in real terms over the past year.

As an aside it means that what were the “Currency Twins” have very different policies this week with the Japanese raising interest-rates and the Swiss cutting them.

Returning to the UK we have some more improving data on the public finances.

Public sector net borrowing excluding public sector banks (borrowing) was £8.4 billion in February 2024, £3.4 billion less than in February 2023.

I mean that on two counts and the most obvious is the fall compared to last year. But also we spent a period where monthly borrowing was not only in the double-digits but comfortably so and we now look to have left that trend.

Monthly Data

Looking at the numbers we see that receipts were pretty strong.

Central government’s receipts were £86.4 billion in February 2024, £7.2 billion more than in February 2023.

In terms of what areas were strong we see that Income Tax was.

with increases in Income Tax, Corporation Tax and Value Added Tax (VAT) receipts of £3.5 billion, £1.9 billion and, £0.6 billion, respectively

In spite of the fact that the Self Assessment numbers were not.

SA Income Tax receipts in February increased by £0.8 billion to £3.9 billion, bringing the total for January and February 2024 to £25.5 billion, £0.4 billion more than in the same two months in 2023.

One interesting nuance is that Capital Gains Tax has been weaker in the self-assessment numbers.

SA Capital Gains Tax receipts in February increased by £0.2 billion to £2.2 billion, bringing the total for January and February 2024 to £13.6 billion, £1.2 billion less than in the same two months in 2023.

On the other side of the coin government spending is more under control.

Central government’s total expenditure was £89.6 billion in February 2024, £2.9 billion more than in February 2023.

There is a nuance as there is still an impact from the previous inflation surge.

net social benefits paid by central government increased by £5.9 billion to £25.0 billion, largely because of inflation-linked benefits uprating and around £2 billion in cost-of-living payments……..central government departmental spending on goods and services increased by £3.2 billion to £34.0 billion, as inflation increased running costs.

But on the other side of the coin the past energy subsidies have fallen heavily.

subsidies paid by central government reduced by £4.9 billion to £2.2 billion………payments recorded under central government “other current grants” reduced by £2.3 billion to £1.5 billion, largely because of the cost of the previous year’s Energy Bills Support Scheme

Also debt interest continues its decline.

interest payable on central government debt reduced by £1.1 billion to £6.8 billion, largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index

The decline in inflation as measured by the Retail Prices Index is the main player here.

Capital uplift in February 2024 was £2.5 billion reflecting the 0.5% increase in the RPI between November and December 2023.

That compares with £5.2 billion in February 2022 and £3.4 billion in February last year. Looking ahead we know that better numbers are coming via the three month lag used here. So the larger monthly fall in January that in 2023 and the smaller rise in February compared to the previous year will be in future numbers.

The Financial Year so far

We are now seeing numbers below that of the previous year.

Borrowing in the financial year-to-February 2024 was £106.8 billion, £4.6 billion less than in the same eleven-month period a year ago, and the lowest for four years in nominal terms.

That comes in spite of an upwards revision of £1.8 billion to the local government numbers. Rather awkwardly due to beneficial revisions in the meantime we are doing a lot 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 £11.2 billion, from £139.2 billion to £128.0 billion.

Bank of England QE

This appears in these numbers in a rather confusing fashion.

This was partially offset by a £22.5 billion Bank of England (BoE) surplus and balanced by remaining subsectors.

As what HM Treasury has paid is public-sector neutral.

The borrowing of both of these subsectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last eleven months under the Asset Purchase Facility Fund (APF) indemnity agreement.

National Debt

This too has been made more complex by the activities of the Bank of England.

Debt was provisionally estimated at around 97.1% of the UK’s annual gross domestic product (GDP) at the end of February 2024, 2.3 percentage points more than at the end of February 2023, and remains at levels last seen in the early 1960s.

If you take out its activities then the debt is quite a bit lower.

Excluding the Bank of England, debt was £2,423.5 billion, or around 88.5% of GDP, £236.0 billion (or 8.6 percentage points) lower than the wider measure.

The main issue to my mind is over the Term Funding Scheme  This is presently £150 billion and has been declining by at least £6 billion per quarter in the last year. So it flatters the debt numbers when in fact it was never really borrowing as one would usually understand it in the first place. One could say put in a 10% margin as security but I think that is it.

Comment

The UK public finances have seen several months now where they have turned for the better. This morning has brought some further news which should reinforce this.

The survey data are indicative
of first quarter GDP rising 0.25% to thereby signal a
reassuringly solid rebound from the technical recession
seen in the second half of 2023. ( S&P PMI)

There is some spurious accuracy in them using a second decimal place but any growth is welcome and the data so far suggests around 0.3% GDP growth for the first quarter of 2024. I rather suspect the Bank of England will follow the US Federal Reserve in hinting at interest-rate cuts later in the year as well.

There is a possible challenge to this if National Insurance is scrapped as the government has tried to hint at. To be fair this looks like a brain fart from a Chancellor splashing around but only time will tell.

Finally you may have spotted that I have not mentioned that the first rule of OBR Cub is that the OBR is always wrong and it is because of this.

On 6 March 2024, the Office for Budget Responsibility (OBR) published its latest outlook for the economy and public sector finances. The statistics in this bulletin do not yet fully reflect these updated forecasts,

Perhaps they have got on the phone to the Office for National Statistics and asked them not to publish the forecasts next to the out turns.

 

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 UK government spends rather a lot for its austere claims

As we approach the end of the calendar year it is time to be a little more reflective. If one does that with this morning’s release on the UK Public Finances it is hard to avoid the view that the present government is somewhat spendthrift.

Borrowing in the financial year-to-November 2023 was £116.4 billion, £24.4 billion more than in the same eight-month period last year and the second highest financial year-to-November borrowing on record.

Another way of putting it is that it is fiscally expansionary which contrasts with the way that the word austerity is often bandied around as a description of it. One can argue that inflation is a factor here via its impact on cost of living payments and inflation linking. But that is a little awkward for the Prime Minister as the inflation fires were lit by perhaps the most expansionary UK fiscal policy ever via one Chancellor Sunak. Perhaps the Prime Minister could have a word with him.

November Borrowing

That general theme continues as I look at these numbers.

In November 2023, the public sector spent more than it received in taxes and other income, requiring it to borrow £14.3 billion. This was £0.9 billion less than was borrowed in November 2022 and is the fourth highest November borrowing since monthly records began in 1993, behind those of the 2020 coronavirus (COVID-19) pandemic period, the energy support schemes period of 2022, and in 2010 following the global financial crisis.

We are now supposed to be fully recovered from Covid in economic terms as we spent enough to achieve that. But we still seem to be borrowing a substantial sum. If we look back a year this was a government that was presented by the establishment as having what they considered to be sensible policies  as in getting borrowing back under control. Whereas we now know they in theory tightened policy but we are still borrowing large sums. This November might be considered to be a month where we would borrow less than last year due to the cost of the energy support schemes, but the reality is that we have borrowed very little less.

If you look at the total expenditure it does not look too bad and you might return to some sort of austerity theme.

In November 2023, central government’s total expenditure was £87.6 billion, £0.7 billion more than in November 2022 and the highest November total since monthly records began in 1993.

But the end of the energy support schemes changes that.

Subsidies paid by central government were £2.2 billion in November 2023, £3.1 billion less than in November 2022. This is largely because of the cost of the Energy Price Guarantee (for households) and Energy Bill Relief Scheme (for businesses) affecting this month last year.

There was another bit of that in the other category.

Payments recorded under central government “other current grants” were £1.7 billion in November 2023, £2.0 billion less than in November 2022, largely because of the cost of last year’s Energy Bills Support Scheme.

So a change of the order of £5 billion.

On the other side of the coin Receipts were higher.

Central government’s receipts were £77.6 billion, £3.6 billion more than in November 2022 and the highest November since monthly records began in 1993.

You may have spotted that these numbers should have led to a bigger fall in November borrowing. But there are other factors in there such as the Bank of England adding an extra £1.3 billion to the borrowing this year. That is another addition to the debit side on all its QE bond buying on which it so rarely gets challenged. I will return to that later as with the recent declines in bond yields its 2023 sales of bonds look awful. Or if you prefer it has added selling at the bottom to buying at the top.

Debt Interest

We can cover a lot of ground with this one and we can start with November.

In November 2023, the interest payable on central government debt was £7.7 billion, £0.1 billion more than in November 2022 and the highest November total since monthly records began in April 1997.

This became more of a factor as two influences came into play. First was the rise in inflation and specifically RPI inflation which pushed the expenditure on paying interest on them ( around a fifth of our debt higher). Then came the rises in bond yields which pushed the interest payments on the rest of our debt higher. As you can see above things stopped getting worse in November if you will indulge me for £100 million.

Part of the change has been this.

In November 2023, capital uplift was £3.0 billion and was largely determined by the 0.5% increase in the RPI between August and September 2023.

For those unaware most UK index-linkers have a three month lag to the inflation rate and thus changes are on their way. What I mean by that is that we already know the next two months and they were -0.2% and -0.1% so falls will happen soon and we may see more of that ahead. For example the latest energy price estimates for the April Energy Price Cap suggest a fall then.

Next up is the fact that issuing debt for the UK is now a lot cheaper than it was as recently as October. As I type this the benchmark ten-year yield is now 3.55% whereas it peaked at 4.7% in October. So the bond market rally you have been reading about means that going forwards it will be a fair bit cheaper to issue new debt and to refinance existing debt.

Bank of England QE Problems

I said I would return to this and we can look at it via the UK long Gilt future. It bought a lot of bonds in the range 135-140 and it has sold some in the second half of this year in the mid 90s. Actually down to a low of 92. So there are strategic losses here from as I put it earlier buying at the top and selling at the bottom.

Also there is the tactical issue of selling bonds down to an equivalent of 92 and then seeing a ten point rally as we are above 102 as I type this. Yet this so rarely seems to get questioned.

Or if you want the change in the situation put another way.

The borrowing of both of these subsectors is affected by payments totalling £33.2 billion made by central government to the BoE over the last eight months under the Asset Purchase Facility Fund (APF) indemnity agreement. This was £32.4 billion more than the £0.8 billion paid in the same period last year.

Comment

The situation with the UK Public Finances is one which sees quite a few views bandied about. For instance in the over a decade I have been reporting on these numbers there has been a lot of talk of austerity but especially in the more recent period we have seen some extraordinary fiscal deficits. That drum beat seems to be continuing as we have a government which claims to be austere but is in fact fiscally expansionary.

Next up is the issue of the first rule of OBR Club which is that the OBR is always wrong.

In March 2023, the Office for Budget Responsibility (OBR) forecast that borrowing would settle at £152.4 billion in the financial year ending March 2023. In its Economic and fiscal outlook – November 2023, the OBR reduced this estimate by £24.1 billion to £128.3 billion.

As you can see their skill set not only involves getting the present and future wrong as they add the past to it. But on a more fundamental level they predicted a severe recession for this year leading to reports of a “Black Hole” for the Public Finances. Government policy was changed in response to this and it was changed in the wrong direction. In a way we see it from this.

Public sector net debt excluding the Bank of England (BoE) was £2,418.6 billion at the end of November 2023, or around 88.3% of GDP, £252.8 billion (or 9.2 percentage points of GDP) less than the wider measure. This difference is largely a result of the BoE’s quantitative easing activities, including the gilt-purchasing activities of the Asset Purchase Facility (APF) Fund.

Actually in a theme of the times deciding on the national debt is not as clear cut as you might reasonably think but I think the headline of 97.5% is misleading. Probably it is more like 91-92%.

 

Prime Minister Sunak continues to sing along with Hey Big Spender

This morning has brought us up to date on the UK’s public sector finances. Although not fully up to date as the recent upgrades to the UK’s economic output or GDP are not on there. We can start with something which has been generally true in the Rishi Sunak era and I mean whether he has been Chancellor of the Exchequer or Prime Minister.

Public sector net borrowing excluding public sector banks (PSNB ex) in August 2023 was £11.6 billion, £3.5 billion more than in August 2022 and the fourth highest August borrowing since monthly records began in 1993.

It is hard to avoid the feeling that he sings along with Shirley Bassey.

The minute you walked in the joint
I could see you were a man of distinction
A real big spender
Good lookin’ so refined

There was another example of this yesterday.

UK PM SUNAK: GRANTS TO UPGRADE RESIDENTIAL GAS BOILERS WILL RISE TO 7,500 POUNDS, FROM 5,000 POUNDS || WE’RE GIVING PEOPLE FAR MORE TIME TO MAKE THE TRANSITION TO HEAT PUMPS ( @FirstSquawk)

As I live in a flat it does not apply to me anyway but this is a very expensive technology which needs a lot of other help such as insulation and new radiators. All he is doing is shifting some of the bill from the individual to the public purse.

What happened in August?

The receipts numbers were not entirely reassuring for our big spender.

Central government’s receipts were £76.6 billion, £3.1 billion more than in August 2022 and £1.2 billion more than the £75.4 billion forecast by the OBR. Of this £76.6 billion, tax receipts were £57.6 billion, £2.7 billion more than in August 2022, with income taxes and Value Added Tax (VAT) both increasing by £1.2 billion.

Yes they were higher but we are in an inflationary phase. If you want to be positive you could say they reflect the reflect the recent fading of inflationary pressure. This is repeated by the detail of the income tax figures.

This month, SA receipts were £1.5 billion, £0.8 billion less than in August 2022.

This brings the total SA receipts for July and August 2023 combined to £13.3 billion, £1.7 billion more than in the same two months in 2022 and £0.9 billion more than the £12.4 billion forecast by the OBR. ( SA is Self Assessment )

Expenditure is always going to be under pressure when you have a big spender in town.

In August 2023, central government’s total expenditure was £84.9 billion, £4.3 billion more than in August 2022 and £0.1 billion more than the £84.8 billion forecast by the OBR.

In particular here.

Net social benefits paid by central government in August 2023 were £23.5 billion, £2.7 billion more than in August 2022. In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.

After noting the numbers from Britain In Numbers yesterday that social benefits have been cut in real terms by 20% via the switch from the RPI to the CPI inflation measure I have to say I feel like giving this bit a free pass. Many of the recipients badly need the money.

Debt Interest

I thought I would pick this area of expenditure out as the times they are a changing. Let me start with the numbers.

In August 2023, the interest payable on central government debt was £5.6 billion, £3.1 billion less than in August 2022, and £2.2 billion below the OBR’s forecast of £7.8 billion. This was the third highest interest payable in any August since monthly records began in April 1997, behind those of August of 2021 and 2022.

So high in historical terms but improving and beneath it two things are going on. In line with the improving inflation statistics we see the impact reducing here.

Of the £5.6 billion interest payable in August 2023, £1.9 billion was mainly attributable to the 0.3% increase in the RPI between May and June 2023, affecting the uplift of the three-month lagged index-linked gilts.

But we are beginning to see the impact of higher conventional UK bond yields. I have pointed out quite a few times before that things have got a lot more expensive but that it also takes time to feed in. An example of this is that the Debt Management Office sold £2.75 billion of a 2053 Gilt on bond on Tuesday for a yield of 4.7%. In itself that is very small change in the debt interest position but we have been doing something similar week after week as the cost of doing so has got more expensive and thus it is becoming more material. Indeed the Bank of England is adding to the pressure by selling some of its holdings ( another £650 million was sold on Monday).

The Financial Year So Far

The big spender theme continues here.

In the financial year to August 2023, central government borrowed £90.5 billion, £36.9 billion more than in the same period a year earlier. A £21.0 billion increase in central government current receipts over this period was exceeded by a £27.5 billion increase in current expenditure.

Although in the year so far debt interest gas fallen as lower (RPI) inflation has been a stronger influence than higher conventional debt costs. In case you were thinking that does not add up you are correct as there is also this.

Central government’s net investment increased by £29.5 billion over the same period, with £24.1 billion being paid to the Bank of England (BoE) under the Asset Purchase Facility (APF) Fund indemnity agreement.

As ever there are plenty of moving parts as comparing with the year before has in this instance the problem that it in borrowing terms has improved considerably.

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 £10.8 billion, from £139.2 billion to £128.4 billion.

Aren’t you glad that is clear?

The first rule of OBR Club

At a time of such uncertainty it is nice to have something certain to cling to.

The OBR forecast that FYE 2023 borrowing would settle at £152.4 billion, £24.0 billion more than the current ONS estimate

And

Borrowing in the financial year-to-August 2023 was £11.4 billion lower than the £81.0 billion forecast by the Office for Budget Responsibility (OBR).

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

Comment

The essential issue is that there are always reasons for our government to spend more. Yet in the other side of the coin there has been a long-term squeeze applied to those on benefits. But our “big spender” Prime Minister helped create inflation with his spending which now requires more spending. Then there is the issue of the Bank of England applying a subsidy to the pandemic spending which is now proving to be a cost.

As to our debt position that will improve when the GDP revisions are fed in but the true position is between the two numbers below.

Public sector net debt (PSND ex) was £2,594.1 billion at the end of August 2023 and was provisionally estimated at around 98.8% of the UK’s annual gross domestic product (GDP)…….Excluding the Bank of England, public sector net debt was £2,358.7 billion or around 89.8% of GDP, £235.4 billion (or 9.0 percentage points) lower than the wider measure.

That is because I do not think that the Term Funding Scheme should be counted in that way, and it accounts for £167 billion of the difference.

 

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.

 

 

UK public-sector borrowing is impacted by inflation and the energy crisis

This morning the focus switched to the UK public finances release and it did provide some food for thought.

Public sector net borrowing (PSNB ex) in April 2023 was £25.6 billion, £11.9 billion more than in April 2022 and the second-highest April borrowing since monthly records began in 1993, with the growth in receipts being exceeded by the additional costs of the energy support schemes, increases in benefit payments and higher debt interest payable.

The first thing  to note is the size of the number which the Black-Eyed Peas would summarise as.

Boom, boom, boom
Boom, boom, boom

It is the largest number since March 2021 and shows a pretty sharply rising trend since February. If we look at the explanation we see the energy crisis followed by the consequences of inflation which of course have been impacted by the energy crisis as well.

Tax Receipts

If we move onto the detail then I am immediately reminded of our look at the numbers last month.

I have taken a look at the tables and the March receipts are disappointing pretty much across the board. This seems rather odd as we have had plenty of other signals suggesting that the economy has been picking up.

I did make a mental note as I promised to do which meant that this rather leapt off the page today.

While central government’s receipts fell by £2.7 billion to £69.7 billion compared with April 2022,

There is a partial technical reason for this.

Compulsory social contributions fell by £1.3 billion to £12.9 billion compared with April 2022. This was largely because a temporary higher rate for the Health and Social Care Levy was introduced in April 2022 and later removed from 6 November 2022.

But even so, the number is disappointing.

Combined, central government tax receipts and compulsory social contributions were broadly flat compared with April last year.

Actually in the complex world of the public finances there is also the end of QE receipts, or rather a sharp fall.

Between January 2013 and July 2022, HM Treasury received regular payments from the Bank of England Asset Purchase Facility Fund (APF) under the indemnity agreement. These payments have now stopped. As a result, central government interest and dividend receipts in April 2023 were estimated to be £1.0 billion, a reduction of £2.8 billion compared with April 2022.

If I was not suspicious already then the lack of the usual table showing receipts would have been another warning. Checking the data series shows a range of numbers that frankly look weak. For example the VAT number was only up by 0.4% on a year ago whereas in the year to March it was up by 11.4% so where has the inflation effect gone before we get to anything else? The numbers for Income Tax ( up 7.8%) and Corporation Tax ( up 7.6%) are more like what I would have expected.

 

The Economy?

The receipts numbers above are consistent with a slowdown in the economy and frankly, in something of an irony, the sharp recession the Bank of England forecast last November. Yes the one on which it has been U-Turning ever since! If we switch to this morning’s PMI release you could say it goes with this.

Divergent trends continued between the manufacturing
and service sectors in May. The former posted a decline in output for the third month running, which survey
respondents often attributed to subdued order books and
customer destocking. Some firms also linked lower factory
production to the extra bank holiday in May.

At this point just looking at manufacturing you might think we have an explanation although even it has a bit of an attempted get out clause with the extra bank holiday.

But the other side of the coin is apparently strong.

The UK economy enjoyed another month of strong growth
in May, with the expansion continuing to be driven by
surging post-pandemic demand in the service sector,
notably from consumers and for financial services, with
hospitality activities buoyed further by the Coronation. The
surveys are consistent with GDP rising 0.4% in the second
quarter after a 0.1% rise in the first quarter.

The only downbeat part of this is noting that a mere 0.4% quarterly growth is considered to be “strong growth” these days. But the economy is growing according to the measures we have but the tax figures have missed this for two months now.

Expenditure

If we look for an explanation of higher expenditure then we can start with what the former Chief Economist of the Bank of England Andy Haldane called “Inflation, Inflation,Inflation”

In April 2023, the interest payable on central government debt was £9.8 billion, £3.1 billion more than in April 2022, as rises in the Retail Prices Index have increased the interest payable on index-linked gilts. This represents the third-highest interest payable in any month on record, behind the £20.0 billion in June 2022 and the £18.0 billion in December 2022.

It is hard to know where to start here with the list of establishment failures. There is the Bank of England which decided to treat inflation as “Transitory” and made no effort to try and stop it at source, a mistake for which we are all paying. Next up us the establishment effort to claim renewable power as cheap whilst bill soar.

The strike price of Offshore Wind CfDs has been soaring in line with inflation too to over £200/MWh in some cases. Source: LCCC ( @Kiwi7)

The debt interest figures have taken quite a pasting on what has been quite an Orwellian road ( “expensive is cheap”). Below is a literal consequence of the energy crisis.

In April 2023, central government spent £3.9 billion on subsidies, £1.8 billion more than in the April 2022. This growth was largely because of the cost of the Energy Price Guarantee for households and the Energy Bills Discount Scheme, which replaced the Energy Bill Relief Scheme for businesses across the UK from April 2023.

Followed by an implied one as inflation hits the numbers here too.

Net social benefits paid by central government in April 2023 were £25.4 billion, £4.5 billion more than in April 2022. This increase was in part because of inflation linked benefits uprating, along with the £2.2 billion Department for Work and Pensions (DWP): Means tested benefits cost-of-living payments, recorded this month.

Comment

The tax receipt numbers are a little confusing when the trajectory of the UK economy has improved. Even the International Monetary Fund has been forced to admit that this morning.

IMF says UK will no longer suffer a recession this yr. Nor will it be the weakest economy in the G7 (Germany likely to be weaker). BIG turnaround from its previous forecasts which predicted -0.3% change in GDP this yr. New 2023 forecast: 0.4%. Still weak but much better. ( @EdConwaySky)

But regular readers know that rules I work by which is that we take the actual numbers even if we are wondering about later revisions.

Speaking of problems with actual numbers.

Since our March 2023 publication, we have revised down our initial estimate of PSNB ex in the financial year ending (FYE) March 2023 by £2.1 billion to £137.1 billion, now £15.3 billion less than the £152.4 billion forecast by the Office for Budget Responsibility (OBR).

Yes the first rule of OBR Club that the OBR will always be wrong worked again.

Finally let me finish with something I noted at the end of last week. From my twitter feed on Friday.

UK ten-year bond yield reaches 4% Klaxon ( mostly not us per se as other bond yields are rising too)

It has risen over 4.1% now and we may soon have worries about the cost of conventional debt.

 

The UK Public Finances are counting the cost of the energy crisis

This morning has brought us up to date on how much the UK borrowed in the last fiscal year ( until March).

PSNB ex in the financial year ending (FYE) March 2023 was initially estimated at £139.2 billion (or 5.5% of gross domestic product (GDP)), £18.1 billion more than in the FYE March 2022 and the fourth-highest FY borrowing since records began in 1946.

The main factor in play here was the energy crisis which led to waves of what has turned out to be expensive government subsidies.

the initally estimated £41.2 billion cost of the combined energy support schemes and other one-off costs.

As you can see the energy crisis gave the numbers a large shove higher and that is only the explicit costs. There will have been implicit ones on tax revenue as businesses were affected and also via the cost of living crisis. So we are discussing an impact of the order of £50 billion. If we stay with the energy crisis we do not seem to have learnt much at all as this from the Financial Times yesterday highlights.

Construction of the UK’s largest solar and battery storage plant has begun after the company developing it won the highest government subsidy yet for a sun-powered energy scheme.

Let me start with the good side of solar as I note we have recently generated 9.09 GW of electricity beating last year’s peak of around 8.6 GW. But even the simple quote above has a big problem.If it is as cheap as we keep being told ( and indeed supposedly getting cheaper). Why does a new project need the “highest government subsidy yet”? Also the description below is a nonsense as what will the 100,000 homes do at night?

Once operational, it is forecast to generate enough renewable power each year to meet the needs of about 100,000 UK homes.

Battery technology as it stands only allows us to smooth the power supply. So we will arrive a future winters very little better off as solar provide little then and of course when we need it least. So we have a cost to the public finances via a subsidy but provides little potential gain for the future winter risks.

Receipts and Taxes

These were boosted by the inflationary phase we have been experiencing.

Of these, tax receipts increased by £67.3 billion (10.7%) to £696.0 billion with growth strong in Value Added Tax (up £17.8 billion or 10.7%, being influenced by inflation and substitutionary affects during the energy crisis)

I would have thought the substitutionary effects would be negative as higher energy payments caused less spending elsewhere. But we see quite a few examples of inflation boosting receipts.

Income Taxes (up £26.0 billion or 10.8%, being boosted by record self-assessed taxes) and Corporation Tax (up £10.6 billion or 14.7%, being boosted by the Energy Profits Levy from June onwards).

Spending

At first this seems to show we are cutting back as the growth is less than inflation.

Central government current expenditure was £967.0 billion in the FYE 2023, an increase of £74.0 billion (8.3%) compared with FYE 2022, reflecting the impact of rising inflation and energy costs.

But I note they use central government and current expenditure to massage the numbers. As to breaking down to the detail I am sure readers will have been expecting something like this.

The interest payable on debt increased to £106.6 billion, £34.0 billion (46.9%) more compared with FYE 2022, as the rises in the Retail Prices Index have increased the interest payable on index-linked gilts.

There is another factor in play which will build up over time which is the cost of ordinary or conventional Gilts which these days cost a bit less than 4% rather than the 1% or so during the pandemic. This takes time to build up but is more expensive of course when we borrow a lot which we just have. In terms of future costs the borrowing over the last year will be more expensive than the pandemic borrowing for that reason. Also there is a link to yesterday’s topic which was QE.

Payments totalling £5.0 billion were made to the Bank of England Asset Purchase Facility Fund (as a part of the indemnity agreement)

We are a bit harsh on ourselves in international terms by counting this so if we compare ourselves internationally it should be ignored.

What about March?

There is a disappointing level of detail here.

Public sector receipts were £88.8 billion, £2.0 billion (2.3%) more than in March 2022, though this rise in income was insufficient to offset the £18.3 billion (19.9%) rise in total public sector spending, which reached £110.3 billion in March 2023.

I have taken a look at the tables and the March receipts are disappointing pretty much across the board. This seems rather odd as we have had plenty of other signals suggesting that the economy has been picking up. So as many of the numbers are estimates maybe they have been underestimated. So let us make a mental note and move on.

Student Loans

These have been a problem area for the public finances as no-one ever seems to really get a grip on them. There have been some government policy changes which have led to this.

This month, we have recorded a capital transfer of £10.0 billion from households to central government, accrued to December 2022, the month in which the changes to regulations were made. This reflects the increase in value of the loan stock for existing Plan 2 student loans as a result of these policy changes.

This adds to the changes in the previous fiscal year.

A reduction of the expected losses of the Covid loan guarantees scheme and the impact of student loan policy changes, totalling £7.2 billion were recorded in March 2022 adding to the year-on-year increase.

This leaves me with the impression that they have no real idea…

Public-Sector Net Worth

We have a new series which has been introduced with this release.

Public sector net worth, excluding public sector banks, was a deficit of £605.8 billion at the end of March 2023. This compares with a £531.1 billion deficit at the end of March 2022.

I suggest taking this number with not only a pinch of salt but the whole salt cellar. Just because you have a number does not mean it is accurate. Does anyone believe these numbers will be accurate?

Wider balance sheet aggregates such as PSNW require robust data on non-financial assets and financial instruments such as equity, derivatives and pension liabilities, which were not used to derive the fiscal measures historically.

We can take the pension numbers further.

 in relation to funded public sector pension schemes

What about unfunded pension schemes.then?

It is hard not to forget the Royal Mail pension scheme which was a sizeable liability for UK taxpayers but was recorded as an asset of around £20 billion.

Comment

There are a lot of strands to today’s report. If I start with the energy issue it remains a danger. Looking ahead to the summer and autumn things will be much netter than feared for the public finances and for the economy overall. But some still cold days next winter would shake that. Next up is one of my themes which is simply that we keep having crises that require fiscal support, but never really address as to why this is so? The first move in fixing anything is admitting you have a problem.

Next up is the Office for Budget Responsibility where my first rule ( that it is always wrong) has worked again.

PSNB ex in the FYE March 2023 was £13.2 billion less than forecast by the Office for Budget Responsibility (OBR);

Indeed their performance was much worse than that because if we go back to last November they predicted this.

Taking forecast and policy changes together,
the deficit rises from £133.3 billion (5.7 per cent of GDP) last year to £177.0 billion (7.1 per cent of GDP) this year.

Remember all the talk of a “fiscal black hole” which was based on this? Well it was a fantasy and this matters because policy was set on it. Our rather hapless Chancellor Jeremy Hunt did this as a response.

Hunt defended the decision to increase corporation tax to 25 per cent in the last Budget,  ( FT)

Now out tax raising Chancellor seems already to have lost the faith.

“The tax burden is too high, we would like to bring it down,” he said at the government’s Business Connect forum in London.

The media hardly helps if this is any guide. So missing a fantasy number means we can do this?

Jeremy Hunt gets £13bn tax cut boost ahead of general election ( Daily Telegraph )