What are the economics of Scottish independence?

Yesterday saw the First Minster of Scotland fire the starting gun for a second vote on independence from the UK for Scotland as the pace of possible change ratchets up yet another notch. With it came am intriguing view of how long a lifetime is these days! Although I am also reminded of the saying that “a week is a long time in politics”. However as ever I look to steer clear of the political melee and look at the economics. So how is the Scottish economy doing?

Economic growth

The Scottish government has published this data.

When rounded to one decimal place, at 2016 Q2 annual GDP growth in Scotland was 0.9 percentage points lower than in the UK. At 2016 Q3, annual GDP growth in Scotland was 1.2 percentage points lower than in the UK. Between 2016 Q2 and 2016 Q3, the gap between annual Scottish and UK GDP growth increased by 0.3 percentage points in favour of the UK (when rounded to one decimal place).

As you can see the recent performance has been around 1% per annum slower than the UK and may well be accelerating. With the UK economy overall having grown by 0.7% in the last quarter of 2016 that seems likely to have continued but of course there are always dangers in any extrapolation. If we look back we see that in the pre credit crunch period GDP growth was similar then Scotland did worse and then better as presumably the oil price boom benefited it ( although the oil sector itself is excluded). Then until the recent phase Scotland did mildly worse than the rest of the UK.

Looking ahead

The Scottish government plans to improve this and with an eye on future policy has set a European Union based objective.

To match the GDP growth rate of the small independent EU countries by 2017.

How is that going so far?

The latest data show that over the year to 2016 Q3 GDP in Scotland grew by 0.7% whilst GDP growth in the Small EU was 3.5% (measured on a rolling four quarter on four quarter basis). When rounded to one decimal place, this resulted in a gap of 2.8 percentage points in favour of Small EU. This compares to an annual increase in GDP to 2016 Q2 of 1.0% in Scotland, and an increase of 4.2% in the Small EU – resulting in a 3.3 percentage point gap in favour of Small EU (when rounded to one decimal place).

As you can see the gap here is much wider and leaves Scotland with a lot of ground to recoup. If you look at the list that may well get harder.

The small independent EU countries are defined as: Austria, Denmark, Finland, Ireland, Portugal and Sweden. Luxembourg has been re-included in the newest update due to a change in availability of data.

Ireland is proving a hard act to follow.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

It is an awkward fact that the 21% economic growth registered by Ireland in the first quarter of 2015 lifted the target away from Scotland and it continues to offer something hard to catch. Of course such large moves also challenge the credibility of the Irish data series.

What about employment?

Good but not as good as England currently.

Scotland’s employment rate of 73.6 per cent for Q4 2016, is the second highest across all UK countries, 1.3 percentage points below England. This indicates a worsening position compared with a year ago when Scotland had the highest employment rate across all UK countries, 0.2 percentage points above England (the second highest).

Natutral Resources

Crude Oil and Gas

Plainly Scot;and has considerable resources here although unless there are new discoveries these seem set to decline over time. There have also been big changes in the crude oil price as FullFact reported last October.

It is correct that crude oil prices are currently at around $50 a barrel. Back at the time of the first Scottish independence referendum in September 2014 oil was selling for just over US $90 a barrel.

Energy policy, and how oil revenue would be invested, was part of  the Scottish government’s vision for an independent Scotland……….”With independence we can ensure that taxation revenues from oil and gas support Scottish public services, and that Scotland sets up an Energy Fund to ensure that future generations also benefit from our oil and gas reserves. “

I think that FullFact were being very fair here as there were forecasts from Alex Salmond that the oil price would rise towards US $130 per barrel if my memory serves me right. Whereas it is now US $51 or so in terms of Brent crude oil. So the oil sector has seen something of a recession affecting areas like Aberdeen although there would have been gains for other Scottish businesses and consumers from lower prices.

The Fiscal Position

This has been affected both by the lower oil price and also by the recent trend to lower economic growth than the rest of the UK. The former was highlighted by this from the 2015-16 data.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

This led to these numbers being reported.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP).

Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).

This adds to an issue I reported on back in my Mindful Money days in November 2013.

So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS ( Institute for Fiscal Studies) considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.

As it turns out that source of revenue has ended at least for now and seems to be capped by the shale oil wildcatters for the next few years. All rather different to this.

But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland.

Of course there would be quite a debate over the share of the UK national debt that would belong to Scotland but the fiscal position is presently poor.

What currency?

This poses a few questions so let me repeat the issues with using the UK Pound.

1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.

2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.

3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.

4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.

5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?

6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.


Scotland plainly has economic strengths with its natural resources and financial services industry. However since the last vote there has been a deterioration in economic circumstances as we have seem growth fall below that of the rest of the UK. This has led to a problem with the fiscal deficit and it is hard not to think of the criteria for joining the European Union.

New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.

We do not know what the national debt would be but the fiscal deficit is around treble the 3% of GDP target per annum in the Euro accession rules. Of course Euro members have often ignored it but they have been much stricter on prospective entrants. Quite a Euro area style austerity squeeze would seem likely and that has been associated with recessions and quite severe ones at that.

Charlotte Hogg’s Resignation

Back on the 1st of March I pointed out the lack of competence on monetary policy she displayed in front of the UK Treasury Select Committee. Today it was announced that she offered to resign last week but Mark Carney would not take it. Now he has.







The growing debt problem faced by Italy

Yesterday saw one of the themes of this website raised by a rather unusual source. The European Commission released this document yesterday.

Today’s 27 Country Reports (for all Member States except Greece, which is under a dedicated stability support programme) provide the annual analysis of Commission staff of the situation in the Member States’ economies, including where relevant an assessment of macroeconomic imbalances.

Greece is omitted presumably because it is all to painful and embarrassing although of course one of those presenting this report Commissioner Pierre Moscovici keeps telling us it is a triumph. Reality tells us a different story as this from Macropolis illustrates.

The employment balance stayed negative in January 2017, with net departures climbing to 29,817 from 9,954 a year ago, data from the Labour Ministry’s Ergani information system revealed on Tuesday.

But as we note that 13 countries in the European Union were investigated for imbalances or just under half with 12 found to have them ( oddly the troubled Finland was excluded) the Commission found itself in an awkward spot with regards to Italy. Here is the label it gave it.

excessive economic imbalances.

Which led to this.

a report analysing the debt situation in Italy

So let us investigate.

Italy’s National Debt

Firstly we get a confession of something regularly pointed out on here.

in particular low inflation, which made the respect of the debt rule particularly demanding;

No wonder the ECB is pressing on with its QE (Quantitative Easing) program and as I pointed out only yesterday seems set to push consumer inflation above target which will help the debtors. Also in that section was something awkward as you see it is a statement of Italy’s whole period of Euro membership.

the unfavourable economic conditions,

We have an old friend returning although of course pretty much everyone has ignored it even Germany.

namely: (a) whether the ratio of the planned or actual government deficit to gross domestic product (GDP) exceeds the reference value of 3%; and (b) whether the ratio of government debt to GDP exceeds the reference value of 60%, unless it is sufficiently diminishing and approaching the reference value at a satisfactory pace.

Yep the Stability and Growth Pact is back although these days in the same way as the leaky Windscale became the leak-free Sellafield it is mostly referred to as the Fiscal Compact. The real issue here for Italy though is the debt numbers are from a universe far,far away.

Italy’s general government deficit declined to 2.6 % of GDP in 2015 (from 3% in 2014), while the debt continued to rise to 132.3% of GDP (from 131.9 % in 2014), i.e. above the 60% of GDP reference value. For 2016, Italy’s 2017 Draft Budgetary Plan7 projects the debt-to-GDP ratio to peak at 132.8%, up by 0.5 percentage points from the 2015 level. In 2017, the Draft Budgetary Plan projects a small decline (of 0.2 percentage points) in the debt-to-GDP ratio to 132.6%.

We get pages of detail which skirt many of the salient points. So let me remind them. firstly a debt-to-GDP target of 120% was established back in 2010 for Greece to avoid embarrassing Italy (and Portugal). Since then both have cruised through it which poses a question to say the least for this.

Italy conducted a sizeable fiscal adjustment between 2010 and 2013, which allowed the country to exit the excessive deficit procedure in 2013

So as soon as it could Italy returned to what we might call normal although whilst it runs fiscal deficits they are lower than the UK for example. Whilst the EU peers at them they are not really the causal vehicle here. Regular readers of my work will not be surprised to see my eyes alight on this bit.

the expected slow recovery in real GDP growth

This is the driving factor here as we note that even in better times the Italian economy only grows by around 1% a year ( 1.1% last year for example) yet in the bad times it does shrink faster than that as the -3.2% annual growth rate of the middle of 2012 illustrates. The Commission describes it like this.

Italy’s GDP has not grown compared to 15 years ago, as against average annual growth of 1.2% in the rest of the euro area.

Putting it another way the economy seems set to get back to where it was at the opening of 2012 maybe this spring but more likely this summer. In such an environment any level of borrowing will raise not only the debt level but also its ratio to GDP. Thus the pages and pages of detail on expenditure would be much better spent on looking at and then implementing economic reform.

A fiscal boost

This has come form the policies of Mario Draghi and the ECB.

taking advantage of the fiscal space created by lower interest expenditure, which declined steadily from the peak of 5.2% of GDP in 2012 to 3.9% in 2016.

Of course debt costs have lowered across the world but the ECB has contributed a fair bit to this gain of over 1% per annum in economic output. I doubt Italy’s politicians admit this as they rush to spend it and bathe themselves in the good will.

Monte dei Paschi

Another old friend so to speak but it does illustrate issues building for Italy as the Commission admits. Firstly to the debt numbers explicitly.

For instance, in 2017, both the deficit and debt figures could be revised upwards following the EUR 20 billion (or 1.2 % of GDP) banking support package earmarked by the
government in December 2016.

But also implicitly as we mull current and future economic performance.

At the current juncture, following the protracted crisis, banks are burdened by a large stock of non-performing loans and may not be able to fully support the

We left MPS itself on the 30th of December as it was socialised and in state ownership. You might reasonably think it would have been solved over the New Year break. Er no as this from the Financial Times today highlights.

Rome’s proposal to recapitalise MPS has been in limbo since December because the ECB, the bank’s supervisor, and the European Commission, which polices state aid, have different views on their responsibilities and the merits of taxpayer bailouts.

There was always going to be trouble over whether this turned out to be a bailout, a bailin or a hybrid of the two. Has any progress at all been made?

The two-month stand-off leaves fundamental questions over the rescue proposals, including the level of state support allowed, the amount of losses that creditors will suffer and the depth of restructuring needed to make the bank viable.

The creditor issue is one that resonates because ordinary Italian depositors were persuaded to buy the banks bonds in a about as clear a case of miss selling as there has been. The trouble is that the guilty party the bank’s management cannot pay on the scale required and nor can the bank inspite of it being in “optimal condition” according to Finance Minister Padoan.

Indeed some may be having nightmares about the return of a phrase that described so much economic destruction in Greece.

An Italian official said talks were on track.


This is a situation which continues to go round in circles. Europe concentrates on fiscal deficits and now apparently the national debt but ignores the main cause which is the long-term lack of economic growth. There is a particular irony that at every ECB policy press conference the Italian Mario Draghi reads out a paragraph asking for more economic reform and the place where it happens so little is his home country.

The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost investment, productivity and potential output growth in the euro area.

Yet when the European authorities get involved we see as in the MPS saga that they “dilly and dally” as Claudio Ranieri might say. Exactly the reverse of what they expect from the Italian government and people. The next issue for the banking sector is that for all its faults the UK for example began dealing with them in 2008 whereas Italy has looked the other way and let it drag on. That poor battered can is having to be picked up.

My suggestion would be an investigation into what is now called the unregulated economy to see how much has escaped the net. Maybe people do not want to do so because they fear that it has increased but what is there to be afraid of in the truth?

Tip TV Finance


The UK National Debt rises to pay for yet another bank subsidy

The credit crunch era has seen two opposing schools of thought on the public finances. One side labelled as austerity is where the deficits which appeared and rose are then cut back and the other side labelled as stimulus was happy to let deficits flow anticipating that they would create economic growth in the future to solve the problem. Actually these were mostly theories as practice remained different as for example the UK looked to restrain the growth of public expenditure rather than actually reduce it. The one place where austerity was clearly applied was on Greece and that went badly as it was already slipping into depression and received a further push downwards,

More recently fiscal stimulus came back en vogue. To some extent this began back in 2013 with this mea culpa of sorts from the IMF (International Monetary Fund).

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

In 2016 we saw more and more calls for fiscal stimulus from the IMF and other global institutions with something of a U-Turn on Japan. From Reuters.

The International Monetary Fund said Tuesday Japan should coordinate fiscal stimulus with further central bank easing measures that could include rate cuts and more asset purchases.

Although maybe not quite a U-Turn.

Japan needs to show it will regain fiscal discipline with gradual increases in the consumption tax and an explicit cap on social security spending, he said.

So actually rather confused but the mood music did switch towards stimulus of a fiscal nature as we looked at the plans of both US Presidential candidates and the UK.  But whilst it is still very early days for President Trump some of the pressure for a fiscal boost seems to have eased so bond markets have rallied. The UK has seen one or two small piecemeal schemes but these have seemed ad hoc political moves rather than any sort of coherent plan. Although yesterday’s industrial strategy did repeat a past promise of more spending. From the Financial Times.

A government promise made in November to increase infrastructure investment by 60 per cent from £14bn in 2016 to £22bn in 2021 was reiterated in the document.

But the hints of more fiscal expansionism seem otherwise to have faded somewhat.

Today’s data

We see a familiar marginal improvement in the monthly data.

Public sector net borrowing (excluding public sector banks) decreased by £0.4 billion to £6.9 billion in December 2016, compared with December 2015.

If we look into the detail of the numbers we see that there was a 2.2% increase in spending but that it was lower than this.

Central government receipts in December 2016 were £53.8 billion, an increase of £2.9 billion, or 5.6%, compared with December 2015.

The particular areas which were strong are shown below.

Social (National Insurance) contributions increased by £1.0 billion, or 10.1%, to £10.6 billion….. Income Tax-related payments increased by £0.7 billion, or 5.8%, to £13.3 billion……Corporation Tax increased by £0.4 billion, or 12.4%, to £4.0 billion.

It doesn’t seem that much of an improvement considering the strength of those receipts does it? Also it relies somewhat on the increase in some National Insurance rates.

Some Perspective

We get a better idea of the trends if we look at the performance in the UK fiscal year to date.

In the financial year-to-date (April to December 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £63.8 billion; a decrease of £10.6 billion, or 14.3% compared with the same period in 2015.

So an improvement but along the lines of edging forwards especially as we note that the economy continued to growth through this period. We see some confirmation of the fact that the economy has been growing by the tax receipt figures.

Central government receipts for the financial year-to-date (April to December 2016) were £476.8 billion, an increase of £21.9 billion, or 4.8%, compared with the same period in the previous financial year.

As we look into the numbers we see that income tax receipts rose by 2.6% and Value Added Tax ( a consumption tax) rose by 3.2% broadly confirming the economic growth. There is also a ying and yang to the numbers as an area for which government’s are often criticised  performed well.

Corporation Tax increased by £3.3 billion, or 9.9%, to £36.2 billion

I suppose there is an irony in such news coming on the day that we find out that less Corporation Tax will be paid by BT after its corruption problems in Italy which seem to have risen to £530 million from £145 million. But the real yang to the ying above is the sort of last hurrah we are seeing for Stamp Duty receipts.

Stamp Duty on land and property increased by £0.8 billion, or 9.4%, to £9.5 billion

With the prospects for UK house prices and activity the surge looks set to end. Actually Stamp Duty full stop has been in a boom.

Stamp Duty on shares increased by £0.5 billion, or 23.7%, to £2.8 billion

So not a bad set and I have put the 9.2% increase in National Insurance contributions at the end because they were also driven by a rise in contribution rates for some.

By contrast central government expenditure rose by 1.4% of which the fastest rising component was this.

debt interest increased by £2.4 billion, or 6.7%, to £38.1 billion; of this £38.1 billion,

That is too soon to be the rise in Gilt yields having an impact and is much more likely to be the impact of the rise in the cost of UK Index-Linked Gilts which pay out relative to the Retail Price Index.

National Debt

The numbers continue to rise.

Public sector net debt (excluding public sector banks) was £1,698.1 billion at the end of December 2016, equivalent to 86.2% of gross domestic product (GDP); an increase of £91.5 billion, or an average of £251 million each day over the last year.

There was something new in the rise however as the Bank of England move in August helped push the national debt higher. Here is the impact of the Term Funding Scheme or TFS.

By the end of December 2016, the Bank of England had made £20.1 billion of loans through the Term Funding Scheme.

Thanks Mark Carney! Raising the national debt to subsidise the banks.

Also as we move forwards we need to note that the international standard for what is the size of the national debt is different so here are the UK numbers on that basis.

general government gross debt was £1,652.0 billion at the end of March 2016, equivalent to 87.6% of gross domestic product (GDP); an increase of £47.9 billion on March 2015.


It is easy to forget that we were supposed to be basking in a fiscal surplus now under the original plans of the coalition government back in the summer of 2010. The colder harder reality is that whilst we have made considerable progress in reducing the deficit it remains a substantial sum. As time passes the danger rises of us seeing another slow down and perhaps recession and upwards pressure going back on the numbers.A challenge will be posed at 2017 develops by the rise of consumer inflation.

Meanwhile the national debt continues to rise. In terms of debt costs that has not been much of an issue so far because of the extraordinary falls in UK Gilt yields. But they are now back to similar levels to when the Bank of England began its new QE operations and of course index-linked Gilts are becoming more expensive to finance due to the rise in inflation. It has been quite a while since government’s have felt a squeeze from this area as the QE era has brought them plenty of windfalls, and this of course just illustrates another area where QE is like a spider’s web.

Mind you compared to some forecasts we have ended 2016 in pretty good shape! So we should perhaps be grateful for that….

What do the UK Public Finances tell us about the Autumn Statement?

Today brings the UK’s latest public finance data which allow us to see the state of play before tomorrow’s Autumn Statement by the Chancellor. The Financial Times could not wait and told us this at the end of last week.

Philip Hammond will admit to the largest deterioration in British public finances since 2011 in next week’s Autumn Statement when the official forecast will show the UK faces a £100bn bill for Brexit within five years.

Actually some of the changes are nothing to do with Brexit as we learn as we move on from the click bait style headlines.

The Office for National Statistics has changed the way it measures corporation tax receipts, leaving a hole of almost £5bn in borrowing in 2019-20…….Since the Budget, the government has announced less stringent work capability tests for the disabled and a slower introduction of universal credit, which jointly add almost £5bn to borrowing over five years.

But more fundamentally I note this.

The deterioration in the outlook — which is still a forecast and highly uncertain

Let me introduce to you the first rule of OBR club as it is mainly the forecasts of the Office for Budget Responsibility which are being used here.

The OBR is always wrong

The new member Professor Sir Charles Bean has already established his full credentials to join such a club. As you see our establishment grandee Charlie was brought in to sign off HM Treasury’s report that UK GDP would be in the range of -0.1% to -1% in the quarter after an EU leave vote. Instead our very own Mr.Bean saw it grow by 0.5%.

Also I have regularly written on here that I never believed George Osborne ever had any intention of achieving this.

Instead of a surplus in 2019-20, as his predecessor George Osborne had promised,

If we move to what we can actually predict then higher inflation from the lower value of the UK Pound poses a danger for UK economic growth in 2017. Although of course it may also boost tax revenues as for example VAT is collected in nominal and not real terms, or fiscal drag in action.

What will be announced?

One area that seems to have attracted the support of the Prime Minister is a cut in the tax on companies or Corporation Tax. The UK already has cut the rate in recent years to 17% and she hinted at a cut to match the rate indicated by President-Elect Trump of 15%. This seems to be an area where there has been something of a race to the bottom as I note that Hungary has announced a rate of 9%. I think we are likely to get more promises here rather than a cut to 15% but let’s see.

Already we have seen the Prime Minister announce this.

substantial real terms increases in government investment worth £2 billion per year by 2020 for research and development,

We have seen a steady stream of such announcements although I note the by 2020. Also I note that these days R&D spending goes straight into the GDP numbers without any regard for whether it actually produces anything.

As to the total I expect a few grand announcements but for the actual impact to be relatively small, that seems to have been the pattern so far anyway.

Gilt Market Problems

Care is needed here as the levels at which the UK can borrow remain historically very low. The relevant rate here is the 30 year yield which is just over 2% (2.03%) compared to the double-digits I have worked with. But it has risen recently as it tracks global yield changes and so may have calmed the fiscal easing plans of Theresa May’s government.

Also it has posed a problem for the “Sledgehammer” of Bank of England Chief Economist Andy Haldane as some yields have gone higher than before the EU leave vote. That never happened in his Ivory Tower forecasts where the extra over £30 billion of QE bond buying saw him emerge triumphant. Oh and the recent Bank of England claims that distributional effects of QE were nothing to do with it collide with this from Credit Suisse via the Guardian today.

Credit Suisse finds top 1% of richest Britons own 24% of nation’s assets

Today’s data

As you can see below the numbers were rather good.

Public sector net borrowing (excluding public sector banks) decreased by £1.6 billion to £4.8 billion in October 2016, compared with October 2015.

If we drill down to the detail then the higher receipts (5% if you strip out receipts from Bank of England QE) exceeded higher spending (2.2%) but we could put it more simply as headline writers were trolled by this.

Corporation Tax increased by £1.7 billion, or 23.6%, to £9.0 billion

So if we look at the expenditure growth we see that the suspicion that the new government was deliberately spending more has faded a bit.

The trends

They were improved by the October numbers but we remain in a situation where progress has become rather slow.

In the financial year-to-date (April to October 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £48.6 billion; a decrease of £5.6 billion, or 10.3% compared with the same period in 2015.

Of course the first rule of OBR club told us that the UK was not going to borrow £55 billion but it is only October so we seem set to cruise by with some momentum. Overall receipts are doing well and the October surge meant that Corporation Tax is some 8.8% up. But some care is needed as higher employee national insurance contributed to it being up 8%. Also how long can this keep rising?

Stamp Duty on land and property increased by £0.5 billion, or 8.0%, to £7.1 billion

Slightly more surprisingly Stamp Duty receipts on shares rose strongly as well.

On the other side of the coin spending grows but more slowly and as I pointed out last month it is hard not to have a wry smile as this driving UK government spending higher.

along with subsidies and contributions to the EU,

Should current trends persist then the factor below will become a bigger issue.

debt interest increased by £1.6 billion, or 5.6%, to £30.7 billion;

So far the change will representing higher inflation from the Retail Price Index and its impact on index-linked Gilts.

The National Debt

There is also an irony here as George Osborne went to so much trouble ( including manipulating the numbers) to get this.

This month, debt as a percentage of GDP fell by 0.5 percentage point compared with October 2015. This is the fifth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than net debt excluding public sector banks.

Poor old George as all his planning provides a warm glow for his successor. Mind you I mean poor old George figuratively as of course at around £30,000 a speech ( BBC figures) he seems to be doing rather well.


If we look back we see that throughout the credit crunch the UK Public Finances have disappointed. So we should not be surprised that 2016 has set out in that pattern although October’s numbers have helped to improve the picture. If we look deeper then there is a hint of concern for the UK economy here.

Income Tax-related payments increased by £1.8 billion, or 2.0%, to £90.0 billion

Maybe the changes to Personal Allowance have held in back a bit but it looks a little weak to me. Of course as we move to the national debt it is the massive trend to lower bond (Gilt) yields which have made all of this affordable.

Moving to the Autumn Statement I am expecting more heat than action which is not of course that different from normal! But due to the change of government there will be something they consider to be eye-catching.

One Million Hits

It is always nice to cross such thresholds and I never dreamt of such numbers when I started. Actually it is the comments section which has been the real success here.I do not mean just the numbers although 13,700+ is something to be proud of, I also mean the quality which continues to be outstanding. It helps keep me going when I note many blogs falling by the wayside so as Jams ( Just About Managing) seems set to be the acronym of the Autumn Statement let me offer some Techtronic.

Pump up the jam, pump it up
While you feet are stompin’
And the jam is pumpin’
Look at here the crowd is jumpin’
Pump it up a little more
Get the party going on the dance floor
Seek us that’s where the party’s at
And you’ll find out if you’re too bad



France continues to see its economy struggle

It is time for us to cross the Channel or La Manche if you prefer and take a look at the economy of France. The UK media seldom get past what is happening around Calais these days although the Financial Times is keen to point out the efforts France is making to get business from the UK.

France will this week step up efforts to attract business from London in the wake of the Brexit vote by appointing a team of corporate leaders and politicians to drive the campaign.

I may well see them as you see French is certainly the secondary and sometimes the primary language in Battersea Park these days. The Ecole at South Kensington has been added to by I believe a couple of others in Battersea. Even the FT finds itself having to admit by default why so many moved the other way.

The inflexibility of the French labour code, along with high taxes, is one of the main reasons some financial groups say they will be reluctant to move to Paris.

Relative Stagnation

Another issue has been the travails of the French economy. Initially it rebounded from the impact of the credit crunch but then it struggled and stagnated. Whilst it evaded the main issues of the Euro area crisis there plainly was some impact as France found economic growth hard to achieve. The latest official numbers tell us that for half of 2016 the economy pretty much stood still.

In Q3 2016, gross domestic product (GDP) in volume terms* recovered: +0.2%, after -0.1% in Q2.

If we look into the numbers whilst there was a return to growth it relied on a very large swing in inventories which of course cannot go on for ever.

In Q3, changes in inventories contributed to GDP growth by +0.6 points, after -0.8 points in Q2.

Domestic demand was only marginally higher ( it added 0.1% to GDP) which has to be a disappointment when you consider that the ECB ( European Central Bank) has an official interest-rate of -0.4% and QE. Actually there is another troubling issue where the French look rather like the UK.

All in all, foreign trade balance contributed negatively to GDP growth (-0.5 points after +0.6 points).

If we look into this more deeply we see this.

In Q3 2016, imports recovered sharply (+2.2% after -1.7%), particularly due to purchases of raw hydrocarbons and transport equipment. At the same time, exports accelerated moderately (+0.6% after +0.2%)

Overall this means that the French economy grew by 1.2% in 2015 and so far in 2016 is growing at an annual rate of 1.!%. The ECB has thrown the equivalent of a monetary kitchen sink looking at Euro area economic  growth and so will be noting that this is the sort of economic growth which has caused trouble for both Italy and Portugal.

National Debt

When you lack economic growth the lesson taught us by Italy and Portugal is that the national debt sings along to the Electric Light Orchestra.

higher and higher it’s a living thing

The latest numbers for France tell us this.

At the end of Q2 2016, the Maastricht debt amounted to €2,170.6 billion, a €31.7 billion increase in comparison to Q1 2016. It accounted for 98.4% of GDP, 0.9 points higher than the Q1 2016’s level.

It is edging towards 100% which these days is mostly symbolic as of course the bond buyers of the ECB are chomping away on French government bonds like Pac men and women. They have bought some 202.5 billion  Euros worth and rising so far. This means that the ten-year yield is a mere 0.5% or so and the five-year is -0.28%.

In 2015 France’s fiscal deficit was 3.6% of its GDP. If we go back to my subject of yesterday it is yet another economy which contrary to the establishment line has been receiving a fiscal boost. However it has stability and growth pact rules applying in the opposite direction and so far in 2016 has trimmed borrowing a little. By the way rules needs to go into my financial lexicon for these times.

As you can see various problems emerge here. France continues to run a deficit and if economic growth fails to pick up the national debt to GDP ratio will start “slip,sliding away” . If you think about it this poses a real problem for the ECB as should it begin to “taper” its QE then presumably French bond yields would rise and it would make its fiscal deficit worse. This is one of the reasons why I think any taper is not on the immediate horizon.

Also debt full stop may well turn out to be an issue for France as marketwatch pointed out back in May.

while France’s equivalent (total) debt is around 280% of GDP, up 66% (since 2007). This tally ignores unfunded pension and health-care obligations, as well as contingent commitments to euro zone bailouts.

Latest News

We get a bit of ying and yang here as yesterday’s news on the automotive sector was disappointing. From Reuters.

PARIS — French new-car registrations fell 4 percent in October to 155,202 after sales at domestic automakers Renault and PSA Group both dropped, the CCFA industry association said today.

This seemed to be concentrated in the French manufacturers.

Renault’s sales declined by 9.2 percent last month, while PSA’s registrations fell 5.8 percent. Renault’s sister company Nissan saw its volume fall 18 percent.

In better news the Markit PMI business survey has shown a pick-up for French manufacturing.

The latest survey data signalled an improvement in the French manufacturing sector, underlined by a solid expansion in production. New orders also increased for the first time this year, albeit at a more subdued pace.

Although care is needed as 51.8 is growth but not a lot of it and compares with 53.5 for the Euro area as a whole.

House Prices

There is a clear divergence here with the UK and is illustrated by the official numbers below.

Year-on-year, house prices increased in Q2 2016 (+0.8%), for the second consecutive quarter. New dwellings prices grew a little more (+1.0% y-o-y) than second-hand dwellings prices (+0.7%).

This is made clearer by the overall house price index being set at 100 in 2010 and being 100.4 now!


There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal. Now is it the changes in the UK housing market that have made much of the difference where there is some economic growth but in my opinion we also count inflation as growth.

There are a lot of similarities as Jeremy Smith of Prime Economics pointed out in April 2015.

The total population size is almost the same…….For 2014, the OECD puts France at $2,525,962m, and the UK at $2,552,152m (in current prices and current PPP, or purchasing power parity)……..Or take the structure of the economy – the UK and France each has a manufacturing sector which is 10-12% of the total economy (production as a whole is 15%) while the service sector for each is 79%……And last but not least in similarities, both have gaping trade in goods deficits, which added together come to roughly the equivalent of Germany’s trade surplus!

The differences are the housing market and in particular house prices and the exchange rate system with the UK having its own and France sharing the Euro. But perhaps the biggest difference is the labour market with the UK having an unemployment rate of 4.9% and France 9.9%. From that come all sorts of issues for productivity and wages.

Greece sees its economic depression continue with ever more debt

This morning has seen yet another outbreak of a theme which has been positively shameful so far. That is the barrage of establishment and official rhetoric proclaiming an economic recovery in Greece or Grecovery for short. In some ways it was even present back at the original bailout agreement in May 2010 when the “shock and awe” turned out to be about this.

Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

This morning’s Grecovery outbreak has been reported by The Greek Analyst.

Tsipras says is “entering growth stage,” calls on creditors 2 deliver debt relief.

The Prime Minister is also reporting that a 1.7 billion Euro tranche of debt relief will be provided today by the Euro area.

What about debt relief?

The Euro area partners are providing some of this to Greece via the way that their official vehicle the ESM or European Stability Mechanism lends to it so cheaply. Its President Klaus Regling pointed this out on the 10th of this month.

– because our loans have long maturities and very low interest rates, less than 1% for instance from the ESM. This provides savings for the Greek budget of over €8 billion every year in saved debt service payments, and that corresponds to about 4.5% of Greek GDP.

The problem for Greece is that it is piling up foreign debt albeit in the same currency as it uses in this instance. It would like to issue its own but this seems to be something which remains just around the corner. After all Greece can borrow at 1% and at what rate do you think markets would lend to it at?

One possible route where the Euro area could continue to provide help would be via the bond buying QE of the ECB. However that seems to have faded away as well probably due to what is implied by this from Mr. Regling.

but it depends if we get the missing information, the missing data, to be sure that the target on net arrears clearance has really been met by the end of September

For all the promises of reform and steps forward taken this all look rather, same as it ever was.

The debt continues to pile up

The official story was that the debt to GDP ratio would decline to 120% by 2020 but last week’s report to Eurostat told us this.

The deficit of General Government for 2015, in accordance with ESA 2010, is estimated at 13.2 billion euro (7.5% of Gross Domestic Product), while the gross consolidated General Government debt at year-end 2015 is estimated at a nominal value of 311.7 billion euro (177.4% of Gross Domestic Product).

Actually a fall in the total debt burden was reported there but sadly it has risen since to 315.3 billion Euros as of June according to Eurostat. So whilst the interest-rate paid has been slashed the overall or capital burden has continued to rise.

If we move to the fiscal deficit the numbers were affected by yet more banking bailouts to the tune of 7.71 billion Euros. That seems to be an eternally emptying pot doesn’t it? But you may also note that even after over 5 years of austerity there was still a fiscal deficit of around 6 billion Euros.


This can be summarised simply by reminding ourselves that the economy of Greece was supposed to grow from 2012 onwards and then looking at the actual numbers.

2012  GDP 191.2 Billion Euros

2013 GDP 180.7 Billion Euros

2014 GDP 177.9 Billion Euros

2015 GDP 175.7 Billion Euros

That is about as clear a definition of an economic depression as you can get. Greece was hit by the credit crunch then the Euro area crisis then the botched bailout and then of course saw the run on its banks last year.

Ordinarily a recovery out of this should be both strong and sharp or what is called a V-shaped recovery. However the latest (PMI) business survey was sadly more of the same.

The performance of Greece’s manufacturers during September followed the trend of inconsistency that has so far defined 2016. Again, the sector slipped back into contraction after declines in production and new orders were reported, with goods producers citing a combination of deteriorating demand conditions and a lack of liquidity at firms as the prominent factors behind the latest falls

The monetary position

There is a troubling issue to address and this is the amount of Emergency Liquidity Assistance still being provided by the ECB. Whilst this has fallen it is still at 51.8 billion Euros which reminds us of the E or Emergency part.

If we look at Greek bank deposits (household and business) we see that they nudged higher in August to 123. 9 billion Euros. But this compares to a past peak of above 164 billion Euros in the autumn and early winter of 2014. So a clear credit crunch which has loosened a little but not much.

House Prices

If we move to assets backing bank lending then there is little good news for the banks from this reported by Kathimerini yesterday.

The biggest drop in house prices since the outbreak of the crisis has been recorded in the northern and northeastern suburbs of Attica, and to a somewhat lesser extent in the south of the region, with rate declines exceeding 50 percent against an average drop of 40-45 percent across Athens, according to Bank of Greece figures since 2009.

The impact of the economic depression has been added to by rises in property taxation as part of the austerity measures. Looking at the new index provided by the Bank of Greece I see that the most recent numbers for the second quarter of this year show new properties falling in price by 0.6% and older ones by 0.5% making them 2.5% and 2.3% cheaper than a year before respectively.

If we move to a deeper perspective then the numbers are chilling. The older properties index was based at 100 in 2007 made 101.7 in the third quarter of 2008 and is now 58.5. That is another sign of an economic depression especially as we note that annual growth has been negative every reading since 2009 began.


This had been a bright spot for the Greek economy but these latest numbers do not help. From Kathimerini.

August saw a major decline in tourism revenues, which dropped 9.2 percent on an annual basis, according to data released on Friday by the Bank of Greece. This has brought the losses for the economy in the first eight months of 2016 to 750 million euros year-on-year.


The Greek economic depression continues to inflict suffering and pain on its people as Keep Talking Greece has pointed out this morning.

230,000 children live in households without any income and 39.9% of Greece’s population cannot afford basic goods and services, like food and heating.

According to the latest report published by the Greek Statistics Authority (ELSTAT)

Whilst the Euro area has seen growth return and maybe edge higher if today’s business survey is accurate Greece seems to have been left behind one more time. The industrial turnover figures for August did show a rise of 0.2% on a year before but the previous number had shown a decline of 18%.

Even Japonica who are the biggest investors in Greek government debt admit this.

From 2001 to 2015, Greece added only 10 cents in GDP for each additional euro of debt, compared to EZ peer average 45 cents.

Actually according to them Greece has very little debt at all.

Greece 2015 YE Balance Sheet Net Debt, correctly calculated in accordance with international accounting or statistics rules is 41% and 58% of GDP, respectively.

Meanwhile the best way out for Greece is as I have argued all along as Sheryl Crow reminds us.

A change would do you good
A change would do you good



What is the economic and fiscal situation in Scotland?

Yesterday brought us some new information on the economic situation in Scotland as the government there published its latest public finance data and updated us on the economic growth situation. So let us go straight to the GDP data.

In quarter 1 2016 the output of the Scottish economy was flat (0.0 per cent change), following growth of 0.3 per cent in quarter 4 2015. Equivalent UK growth was 0.4 per cent……Scottish GDP per person was also flat during the first quarter of 2016.

So an underperformance compared to the rest of the UK which in fact is something that can also be seen if we look back over the previous year.

Compared to the same period last year (i.e. quarter 1 2016 vs quarter 1 2015), the Scottish economy grew by 0.6 per cent. Equivalent UK growth was 2.0 per cent.

If we look back we see that the Scottish economy had a similar pattern to the rest of the UK in that economic growth pushed up to between 2% and 3% and in fact for a while did better. But since the beginning of 2015 economic growth has been slip-sliding away which has a cause you are probably already thinking of but please indulge me and hold your horses as there are complications.

Scotland’s economic structure

This is different to the rest of the UK as shown by the numbers below.

Scotland’s economy is broken down into four weighted industry categories. The breakdown for 2013 is services (75 per cent), production (18 per cent), construction (6 per cent), and agriculture, forestry and fishing (1 per cent).

So agriculture is a little higher but the main change compared to the UK numbers below is more production and  a smaller services sector.

The current 2013 – based weights are: services 78.8%; production 14.6%; construction 5.9%; and agriculture 0.7%.

You might be thinking that the production numbers should be even higher but the numbers we are given are on this basis.

This publication presents results for what is commonly referred to as the “onshore economy”, which means they exclude oil and gas extraction activity in the North Sea.

I have looked these up as they are in the overall UK numbers.

Within the production sub-industries, output from mining and quarrying, including oil and gas extraction, decreased by 2.3%;

However on an annual basis the picture was much brighter.

Mining and quarrying, including oil and gas extraction, increased by 5.3%,

For those wondering how this can be with the oil price where it is I have checked before and the numbers have been affected by past maintenance shut-downs.

Whilst the explicit oil and gas output numbers are removed there are still implicit effetcs from the industry as towns like Aberdeen depend to a large degree on it. Over the past year the break down of Scottish economic growth is shown below.

The growth in Scottish GDP in this period was due to the tail end of growth in the construction industry plus growth in the services industry (particularly distribution, hotels and catering), tempered by contractions in the production industry (particularly manufacturing).

I would be interested in readers thoughts and explanations of the construction boom. In terms of the numbers it seems to have been affected by the ESA 10 methodological changes which pushed it higher.

Construction output saw extremely strong growth in 2014 and 2015 and drove much of GDP growth over this period

The Fiscal Position

Yesterday saw the publication of the GERS dataset which estimates the revenue and public spending situation for Scotland. If we start with the revenue situation there is something glaring in the numbers.

Including an illustrative geographic share of North Sea, Scottish public sector revenue was estimated as £53.7 billion (7.9 per cent of UK revenue). Of this, £60 million was North Sea revenue.

As you can see the North Sea is not ignored here and the last sentence is not a misprint.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

Ouch! This means that the individual position is as follows.

Scotland’s public sector revenue is equivalent to £10,000 per person, £400 less than the UK average, regardless of the inclusion of North Sea revenue.

Just to show how times change this is what we were told about 2011/12.

In 2011-12, oil and gas production in Scottish waters is estimated to have generated £10.6 billion in tax revenue, 94% of the UK total…….Total tax revenue (onshore and offshore) in Scotland was equivalent to £10,700 per person in 2011-12, compared to £9,000 in the UK as a whole.


The situation here is of higher public expenditure per person compared to the rest of the UK which is an example of regional policy in action.

Total expenditure for the benefit of Scotland by the Scottish Government, UK Government, and all other parts of the public sector was £68.6 billion. This is equivalent to 9.1 per cent of total UK public sector expenditure, and £12,800 per person, which is £1,200 per person greater than the UK average.

The Fiscal Deficit

The situation here is that Scotland is receiving the large fiscal stimulus that is being recommended by some for the rest of the UK although to be fair there have been very few suggesting one of the size below. Also at current oil prices it is noticeable how little difference North Sea Oil & Gas makes.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP)….Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

This compares to an overall UK position of.

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).


If we stick to the economics we see an economy that is suffering from a fall in price of a natural resource that it produces. Whilst the GDP data excludes the oil & gas sector explicitly there are clear implicit effects and the fiscal position has been hit hard. However it has been shielded to some extent by its membership of the UK. This comes in various forms. Firstly the regional policy I mentioned earlier. Next we have the fact that it does not have its own currency as a Sottish Pound would presumably have been hit hard or at least a lot harder than the UK Pound has been post Brexit!Indeed there would have been very wide swings in the value of a Scottish Pound. Also a stand-alone fiscal deficit of that size would see the debt vigilantes looking to party even in these hard times for them. I do realise there are so many ironies here but as part of the UK Scotland can borrow much more cheaply than it would on its own. Oh and Bank of England policy seems much better suited to the Scottish economic situation assuming you believe that more monetary easing is a stimulus. Finally there is the size of the fiscal deficit itself which is a substantial stimulus.

Meanwhile as a sign of ch-ch-changes I would like you to join me in a journey in Doctor Who’s TARDIS back to March 2013 when we were told “the balance of risk being on the upside” for oil prices by the Scottish Government leading to this.

analysis published by the OECD in March 2013 suggests that rising demand in East Asia and continued tight supply could result in oil prices rising above $150 by 2020…….could result in oil and gas production in Scottish waters generating £57 billion in tax revenue between 2012-13 and 2017-18

Let me remind you of the words of the late and great Yogi Berra.

The future ain’t what it used to be.