The UK Public Finances conform to the first rule of OBR club yet again

Not so long ago the UK Public Finances were headline news as we faced the consequences of the recession caused by the credit crunch and the cost of the various banking bailouts. We were promised that by now the situation would be fixed as we would have a surplus it terms of our annual deficit before it transpired that our previous Chancellor George Osborne was of the “jam tomorrow” variety and specifically always promised that success was 3/4 years away from whatever point in time you were at! This meant that what we might call the ordinary national debt has steady risen as whilst much of the bank debt is off our books we have borrowed overall. If we go back to the 2010 Budget forecast we were told this by the Office of Budget Responsibility ( OBR).

public sector net debt (PSND) to increase from 53.5 per cent of GDP in • 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

So we might expect the national debt to be 63.4% of GDP now. How is that going?

In November we expected public sector net debt (PSND) to peak at 90.2 per cent of GDP in 2017-18, with the August 2016 monetary policy package raising debt significantly in 201617 and 2017-18. We continue to expect debt to peak as a share of GDP in 2017-18, but at a slightly lower 88.8 per cent. As in November, we expect it to fall each year thereafter.

This is one of the factors in my first rule of OBR club ( it is always wrong…) and in a way it is quite touching that they always think that the national debt is about to shrink relative to the size of our economy.

Current issues

The first is that economic growth in the UK has continued but has slowed so that revenue growth may be under pressure. This was highlighted to some extent by yesterday’s retail sales data.

The underlying pattern in the retail industry is one of growth; for the three-months on three-months measure, the quantity bought increased by 0.6%…….Year on year, the quantity bought in the retail sector increased by 1.2%, with non-food (household goods, clothing stores) and non-store retailing all providing growth.

That suggests there is a fading of the consumer sector with implications for revenue although of course Value Added Tax is on value and not volume so will get a boost from this.

Store prices continue to rise across all store types and are at their highest year-on-year price growth since March 2012 at 3.3% (non-seasonally adjusted).

The general picture was summed up in yesterday’s monthly economic review.

GDP growth has slowed in the first two quarters of 2017, while the economy has grown 1.5% compared with the same quarter a year ago – the slowest rate since Quarter 1 2013.

Also in a week where there has been a lot of news on problems with economic statistics there was this.

we will move to using the new GDP publishing model in 2018, with the first estimate of monthly GDP (for the reference month of May) being introduced in July 2018

I admire the ambition here but not the brains. I particularly wait to see how the quarterly services surveys will give monthly results! Ironically the same monthly review suggested grounds for caution.

The latest figures include significant revisions due to improvements in the measurement of dividend income, which have led to an upwards revision of the households and NPISH saving ratio by an average of 0.9 percentage points from 1997 to 2016, with a revised 2016 estimate of 7.1% (revised up from 5.2%).

So places like the OBR can produce reports sometimes  hundreds of pages long on the wrong numbers?

Inflation

This is proving expensive because the UK has a large amount of index-linked Gilts which are linked to the Retail Price Index which is currently growing at an annual rate of 3.9%. The effect is described below.

Both the uplift on coupon payments and the uplift on the redemption value are recorded as debt interest paid by the government, so month-on-month there can be sizeable movements in payable government debt interest as a result of movements in the RPI.

Today’s data

The deficit numbers were in fact rather good in the circumstances.

Public sector net borrowing (excluding public sector banks) decreased by £0.7 billion to £5.9 billion in September 2017, compared with September 2016…….Public sector net borrowing (excluding public sector banks) decreased by £2.5 billion to £32.5 billion in the current financial year-to-date (April 2017 to September 2017), compared with the same period in 2016.

The main factor in the improvement is that revenue growth continues to be pretty solid.

In the current financial year-to-date, central government received £334.5 billion in income; including £250.5 billion in taxes. This was around 4% more than in the same period in the previous financial year.

You may have already guessed the best performer which was Stamp Duty on property which has risen from £6 billion in the same period last year to £7 billion this. By contrast Corporation Tax has been a disappointment as it has only risen by £100 million to £29 billion on the same comparison.

The National Debt

Here it is.

The amount of money owed by the public sector to the private sector stood at nearly £1.8 trillion at the end of September 2017, which equates to 87.2% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Oh and thanks Mark Carney and the Bank of England as yet another bank subsidy turns up in the figures.

£100.3 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility; including £84.6 billion from the Term Funding Scheme (TFS).

Comment

We see that for all the many reports of woe the UK economy continues to bumble along albeit more slowly than before. We can bring in that theme and also the first rule of OBR club as I expect another wave in November.

The OBR is likely to revise down potential productivity growth in its November forecast, weakening the outlook for the public finances.

As they have been consistently wrong they are also likely to change course at the wrong point so this may be the best piece of news for UK productivity in a while! Actually I think a lot of the problem is in how you measure it at all in the services sector? In fact any resources the ONS has would be much more usefully spent in this area than producing a monthly GDP figure.

For those of you who measure the economy via the tax take then a 4% increase in the year so far is fairly solid. There will be a boost from inflation on indirect taxes but so far not so bad. Also we can look at revenue versus the National Debt where £726 billion last year compares with our national debt of about 1800 billion or around 40%

Meanwhile there was some good news for the UK economy from Gavin Jackson of the Financial Times.

The UK has 6.5 per cent of the global space economy!

Plenty of room for expansion (sorry). Intriguingly it may be led by Glasgow which would be a return to past triumphs.

 

 

 

 

 

 

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Greece reaches a Euro area target or standard

Yesterday saw an announcement by the European Commission back on social media by a video of the Greek flag flying proudly.

The Commission has decided to recommend to the Council to close the Excessive Deficit Procedure (EDP) for Greece. This follows the substantial efforts in recent years made by the country to consolidate its public finances coupled with the progress made in the implementation of the European Stability Mechanism (ESM) support programme for Greece.

It sounds good although of course the detail quickly becomes more problematic.

Greece has been subject to the corrective arm of the Stability and Growth Pact since 2009. The deadline to correct its excessive deficit was extended several times. It was last set in August 2015 to be corrected, at the latest, by 2017.

That reminds us that even before the “Shock and Awe” of spring 2010 Greece had hit economic trouble. It also reminds us that the Euro area has seen this whole issue through the lens of fiscal deficits in spite of calamitous consequences elsewhere in both the economy and the country. I also note that “the corrective arm” is a rather chilling phrase. Here is the size of the change.

The general government balance has improved from a deficit of 15.1% in 2009 to a surplus of 0.7% in 2016

Greeks may have a wry smile at who is left behind in the procedure as one is at the heart of the project, one has been growing strongly and one is looking for the exit door.

If the Council follows the Commission’s recommendation, only three Member States would remain under the corrective arm of the Stability and Growth Pact (France, Spain and the United Kingdom), down from 24 countries during the financial crisis in 2011.

Let us wish Greece better luck than when it left this procedure in 2007. Also let us note some very curious rhetoric from Commissioner Dombrovskis.

Our recommendation to close the Excessive Deficit Procedure for Greece is another positive signal of financial stability and economic recovery in the country. I invite Greece to build on its achievements and continue to strengthen confidence in its economy, which is important for Greece to prepare its return to the financial markets.

Another positive signal?

That rather ignores this situation which I pointed out on the 22nd of May.

The scale of this collapse retains the power to shock as the peak pre credit crunch quarterly economic output of 63.3 billion Euros ( 2010 prices) fell to 59 billion in 2010 which led to the Euro area stepping in. However rather than the promised boom with economic growth returning in 2012 and then continuing at 2%+ as forecast the economy collapsed in that year at an annual rate of between 8% and 10% and as of the opening of 2017 quarterly GDP was 45.8 billion Euros.

Achievements? To achieve the holy grail of a target of a fiscal deficit on 3% of GDP they collapsed the economy. They also claimed that the economy would return to growth in 2012 and in the case of Commissioner Moscovici have claimed it every year since.

A return to financial markets?

Whilst politically this may sound rather grand this has more than a few economic issues with it. Firstly there is the issue of the current stock of debt as highlighted by this from the European Stability Mechanism on Monday.

Holding over 51% of the Greek public
debt, we are by far Greece’s biggest creditor a long-term partner

I note that the only reply points out that a creditor is not a partner.

The ESM already disbursed €39.4 bn to and combining EFSF it adds up to € 181.2 bn.

That is of course a stock measure so let us look at flow.

I am happy to announce the ESM
has today effectively disbursed €7.7 bn to Greece

I am sure he is happy as he has a job for life whether Greek and Euro area taxpayers are happy is an entirely different matter especially as we note this.

Of this disbursement, €6.9 bn will be used for debt servicing and €0.8 bn for arrears clearance

Hardly investment in Greece is it? Also we are reminded of the first rule of ECB ( European Central Bank ) club that it must always be repaid as much of the money will be heading to it. This gives us a return to markets round-tripping saga.

You see the ESM repays the ECB so that Greece can issue bonds which it hopes the ECB will buy as part of its QE programme. Elvis sang about this many years ago.

Return to sender
Return to sender

There is also something worse as we recall this from the ESM.

the EFSF and ESM loans lead to substantially lower financing costs for the country.

Okay why?

That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

Indeed and according to a speech given by ESM President Regling on the 29th of June this saves Greece a lot of money.

We have disbursed €175 billion to Greece already. This saves the Greek budget €10 billion each year because of the low lending costs of the ESM. This amounts to 5.6 percent of GDP, and allows Greece the breathing space to return to fiscal responsibility, healthy economic developments and debt sustainability.

No wonder the most recent plans involved Greece aiming for a fairly permanent budget surplus of 3.5% of GDP. With the higher debt costs would that be enough. If we are generous and say Greece will be treated by the markets like Portugal and it gets admitted to the ECB QE programme then its ten-year yield will be say 3% much more than it pays now. Also debt will have a fixed maturity as opposed to the “extend and pretend” employed so far by the ESM.

What if Greece joining the ECB QE programme coincides with further “tapers” or an end to it?

If you wish to gloss over all that then there is this from the Peterson Institute for International Economics.

http://www.ekathimerini.com/219950/opinion/ekathimerini/comment/time-for-greece-to-rejoin-global-markets

Is austerity really over?

There are issues with imposing austerity again so you can say it is now over. I looked at this on the 22nd of May.

The legislation contains more austerity measures, including pension cuts and a higher tax burden that will go into effect in 2019-20 to ensure a primary budget surplus, excluding debt servicing outlays, of 3.5 percent of gross domestic product.

It was noticeable that one of the tax rises was in the amount allowed to be earned before tax which will hit the poorest hardest. But according to Kathimerini yesterday the process continues.

The government is slashing state expenditure by 500 million euros for next year……..The purge will mainly concern health spending, while credit for salaries and pensions will be increased.

Comment

The background economic environment for Greece is as good as it has been for some time. Its Euro area colleagues are in a good phase for growth which should help exports and trade. According to Markit this is beginning to help its manufacturing sector.

Having endured a miserable start to 2017, the latest survey data is welcome news for Greek manufacturers as the headline PMI pointed to growth for the first time since August last year.

If we look for another hopeful signal it is from this as employment has been a leading indicator elsewhere.

The number of employed persons increased by 79,833 persons compared with April 2016 (a 2.2% rate of increase) and by 23,943 persons compared with March 2017 (a 0.6% rate of increase).

The catch is that in spite of the barrage of official rhetoric about reform that Greek economy has gone -1.1% and +0.4% in the last two quarters with the latter number being revised up from negative territory. But the worrying part is that elsewhere in the Euro area things are much better when Greece should be a coiled spring for economic growth. Let me give you an example from the building industry where it is good that the numbers are finally rising. But you see annual building was 80 million cubic meters in 2007 and 10 million yes 10 million in 2016. That is an economic depression and a half….