The UK is being paid to borrow just as it borrows record amounts

Sometimes even when you expect something it still creates something of a shockwave. We knew that UK public spending was on speed and that tax receipts were going to be like one of those cartoon characters running off the edge of a cliff. But even so this had an impact.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in April 2020 is estimated to have been £62.1 billion, £51.1 billion more than in April 2019; the highest borrowing in any month on record (records began in January 1993).

Boom Boom Pow as the Black Eyed Peas would say. As we break it down we see it is a central government game as it also is pouring money into local authorities as we noted last time.

In April 2020, central government borrowed £66.2 billion, while local government was in surplus by £7.3 billion. This local government surplus partially reflects the increase in current transfers from central government to fund its COVID-19 measures.

If we look at spending we see this.

In April 2020, central government spent £109.3 billion, an increase of 38.3% on April 2019.

There was an increase of £1.6 billion in social benefits which ordinarily would be a big deal but this time gets swamped as the “other” category rises by £36.1 billion. We can start to break that down.

This month we have recorded the expenditure associated with the Coronavirus Job Retention Scheme (CJRS) for the first time. CJRS is a temporary scheme designed to help employers pay wages and salaries to those employees who would otherwise be made redundant……..In April 2020, central government subsidy expenditure was £16.3 billion, of which £14.0 billion were CJRS payments.

A fair bit of the amount below would have gone on the NHS.

Departmental expenditure on goods and services in April 2020 increased by £7.1 billion compared with April 2019, including a £1.2 billion increase in expenditure on staff costs and a £5.7 billion increase in the purchase of goods and services.

Also I did say they were pouring money into local government.

Central government grants to local authorities in April 2020 increased by £14.2 billion compared with April 2019, mainly to fund additional support because of the COVID-19 pandemic.

The only gain was from lower inflation

Interest payments on the government’s outstanding debt in April 2020 were £5.0 billion, a £1.2 billion decrease compared with April 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

Tax Receipts

This is an awkward category as it relies on past patterns and well you can guess the rest. But they have tried to come up with some suggestions.

In April 2020, central government receipts fell by £16.4 billion compared with April 2019 to £45.6 billion, including £29.6 billion in tax revenue.

They have tried to allow for the lower level of activity although sadly the numbers they have used have come from the Office for Budget Responsibility or OBR. For newer readers the first rule of OBR Club is that it is always wrong.

We do get some further clues from the Retail Sales numbers also released earlier.

The volume of retail sales in April 2020 fell by a record 18.1%, following the strong monthly fall of 5.2% in March 2020.

As you can see VAT receipts will be hit as will income tax payments from many shop workers. Also we got evidence that there was a lot of panic buying of food when the pandemic hit.

The fall of 4.1% for food stores was mainly due to a fall back from the strong growth of 10.1% in March 2020. Retailers provided feedback of panic buying in March, which caused a sales spike.

Also I hope that you are all sober when you are reading this.

In April, 13.6% of alcohol and tobacco stores reported having zero turnover, however, the volume of sales for these stores increased by 2.3%; a further rise from the strong growth of 23.9% in March.

As you can imagine a trend we have been noting for some years got another boost.

Online sales as a proportion of all retailing reached a record high of 30.7% in April 2020, exceeding the original record reported last month of 22.4%. All sectors reached their highest-recorded proportions except non-store retailing, which reached record proportions in February and March 2020, both at 83.2%.

As well as being sober I hope you are dressed reading this.

The sharp decline in April 2020 has resulted in the lowest levels seen in the volume of textile, clothing and footwear sales since the beginning of the series, when March 1988 was at a similar level.

Last Month

The uncertainty about the amount of tax receipts is highlighted by what has just happened to the March data.

Borrowing in March 2020 was revised up by £11.7 billion to £14.7 billion, largely due to a reduction in the previous estimate of tax receipts and National Insurance contributions and the recording of expenditure associated with the Coronavirus Job Retention scheme.

The main player here was this.

Additionally, the subsidies paid by central government in March 2020 have been increased by £7.0 billion to reflect the additional CJRS payments not previously recorded.

National Debt

This comes with some caveats but the ONS has tried to allow for an expected lower level of economic activity here so fair play.

The Bank of England’s contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund and Term Funding Schemes.

If we were to remove these temporary effects, debt at the end of April 2020 would reduce by £184.5 billion (or 9.6% percentage points of GDP) to £1,703.1 billion (or 88.1% of GDP).

Of course we know about the word “temporary” as regards Bank of England activities! However I have always thought it odd ( and frankly a bad design) where the Term Funding Scheme ended up inflating the national debt. Losses on it should be counted but there is collateral held so any net impact should be far lower than the gross.

The only flaw here is the use of an OBR scenario as I have explained above, but it is a worthy attempt none the less.

Comment

I thought I would now spin things around a little because if this was a film there would be no demand for any with titles like “Revenge of the Bond Vigilante’s”. Over the past week or two the UK has in fact increasingly been paid to borrow, so in fact we now inhabit a sort of anti matter driven Bond Vigilante universe. I have been noting for a while that the two-year UK Gilt yield has been on the edge and it has been slip-sliding away this week to -0.07%. It has been joined by the five-year which is now -0.02%.

Now let me shift to the causes of this as at first the Bond Vigilantes will be revving up on the start line.

In April 2020, the Debt Management Office (DMO) issued £51.7 billion in gilts at nominal value, raising £58.5 billion in cash. This represents an unprecedented increase in gilts issuance (at nominal value) compared with March 2020.

But the Bank of England has stepped in with its QE purchases.

At the end of April 2020, the gilt holdings of the APF have increased by £43.7 billion (at nominal value) compared with the end of March 2020,

As you can see this effectively neuters a lot of it and let me bring you right up to date. This week the UK debt management office has been working hard and issued some £16.5 billion of UK Gilts but if it was a race the Bank of England has only been a few paces back as it bought some £13.5 billion. Also the Bank of England has been driving us into negative yields by for the first time buying them as it has done on at least 4 occasions this week.

So we borrow enormously and can do so at record low yields. So for now we are “lucky” according to the definition provided by Napoleon. On the pattern so far we may see our benchmark ten-year yield go negative as well ( currently 0.14%). One consequence of this is I expect cheaper fixed-rate mortgage deals as the five-year yield is my proxy for that and it has gone negative. If the banks are as “resilient” as we keep being told they will be slashing rates. Meanwhile back in the real world we may see some mortgage rates being trimmed.

Podcast

My thoughts on the IFS Green Budget for the UK

Today we find that the news flow has crossed one of the major themes that I have established on here. It is something we looked at yesterday as we mulled the debt and deficit issues in Japan where the new “consensus” on public finances has been met by Japan doing the reverse. So let me take you to the headlines from the Institute for Fiscal Studies for the UK.

A decade after the financial crisis, the deficit has been returned to normal levels, but debt is at a historical high. The latest estimate for borrowing in 2018–19, at 1.9%
of national income, is at its long-run historical average. However, higher borrowing during the crisis and since has left a mark on debt, which stood at 82% of national
income, more than twice its pre-crisis level.

There are several issues already of which the first is the use of “national income” as they switch to GDP later. Next concepts such as the one below are frankly quite meaningless in the credit crunch era as so much has changed.

at its long-run historical average

This issue gets worse if we switch from the numbers above which are a very UK style way oh looking at things and use more of an international standard.

general government deficit (or net borrowing) was £41.5 billion in the FYE March 2019, equivalent to 1.9% of GDP

general government gross debt was £1,821.9 billion at the end of the FYE March 2019, equivalent to 85.3% of GDP…  ( UK ONS)

As you can see the deficit is the same but the national debt is higher. In terms of the Maastricht Stability and Growth Pact we are within the fiscal deficit limit by 1.1% but 25.3% over the national debt to GDP target.

What will happen next?

The IFS thinks this.

Given welcome changes to student loan accounting, the spending increases announced at the September Spending Round, and a likely growth downgrade (even assuming a smooth Brexit), borrowing in 2019–20 could be around
£55 billion, and still at £52 billion next year. Those figures are respectively £26 billion and £31 billion more than the OBR’s March 2019 forecast. Both exceed 2% of national
income.

It is hard not to have a wry smile at the way my first rule of OBR ( Office for Budget Responsibility) Club which is that it is always wrong! You will not get that from the IFS which lives in an illusion where the forecasts are not unlike a Holy Grail. Next comes the way that the changes to student loans are used to raise the number. If we step back we are in fact acknowledging reality as there was an issue here all along it is just that we are measuring it now. So it is something we should welcome and not worry too much about. This year has seen growth downgrades in lots of countries and locales as we have seen this morning from the Bank of Italy but of course the IFS are entitled to their view on the consequences of any Brexit.

Next the IFS which has in general given the impression of being in favour of more government spending seems maybe not so sure.

A fiscal giveaway beyond the one announced in the September Spending Round could increase borrowing above its historical average over the next five years.
With a permanent fiscal giveaway of 1% of national income (£22 billion in today’s terms), borrowing would reach a peak of 2.8% of GDP in 2022–23 under a smooth-Brexit
scenario, and headline debt would no longer be falling.

Actually assuming they are correct which on the track record of such forecasts is unlikely then we would for example still be within the Maastricht rules albeit only just. You may note that a swerve has been slipped in which is this.

headline debt would no longer be falling

As an absolute amount it is not falling but relatively it has been as this from the latest official Public Finances bulletin tells us.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of August 2019 was £1,779.9 billion (or 80.9% of gross domestic product, GDP), an increase of £24.5 billion (or a decrease of 1.5 percentage points of GDP) on August 2018.

Next if we use the IFS view on Brexit then this is the view and I note we have switched away from GDP to national income as it continues a type of hokey-cokey in this area.

Even under a relatively orderly no-deal scenario, and with a permanent fiscal loosening of 1% of national income, the deficit would likely rise to over 4% of national income in 2021–22 and debt would climb to almost 90% of national income for the first time since the mid 1960s. Some fiscal tightening – that is, more austerity – would likely be required in subsequent years in order to keep debt on a sustainable path.

The keep debt on a sustainable path is at best a dubious statement so let me explain why.

It is so cheap to borrow

As we stand the UK fifty-year Gilt yield is 0.85% and the ten-year is 0.44% and in this “new world” the analysis above simply does not stand up. Actually if we go to page six of the report it does cover it.

Despite this doubling of net debt, the government’s debt interest bill has remained flat in real terms as the recorded cost of government borrowing has fallen. As shown in Figure 4.3, in 2018–19, when public sector net debt exceeded 80% of national income, spending on debt interest was 1.8% of national income, or £37.5 billion in nominal terms. Compare this with 2007–08, when public sector net debt was below 40% of national income but spending on debt interest was actually higher as a share of national income, at 2.0%.

As you can see we are in fact paying less as in spite of the higher volume of debt it is so cheap to run. Assuming Gilt yields stay at these sort of levels that trend will continue because as each Gilt matures it will be refinanced more cheaply. Let me give you an example of this as on the 7th of last month a UK Gilt worth just under £29 billion matured and it had a coupon or interest-rate of 3.5%. That will likely be replaced by something yielding more like 0.5% so in round numbers we save £870 million a year. A back of an envelope calculation but you get the idea of a process that has been happening for some years. It takes place in chunks as there was one in July but the next is not due until March.

The role of the Bank of England

Next comes the role of the Bank of England which has bought some £435 billion of UK debt which means as we stand it is effectively interest-free. To be more specific it gets paid the debt interest and later refunds it to HM Treasury. As the amount looks ever more permanent I think we need to look at an analysis of what difference that makes. Because as I look at the world the amount of QE bond buying only seems to increase as the one country that tried to reverse course the United States seems set to rub that out and the Euro area has announced a restart of it.

Indeed there are roads forwards where the Bank of England will engage in more QE and make that debt effectively free as well.

There are two nuances to this. If we start with the “QE to infinity” theme I do nor agree with it but it does look the most likely reality. Also the way this is expressed in the public finances is a shambles as only what is called “entrepreneurial income” is counted and those of you who recall my £2 billion challenge to the July numbers may like to know that our official statisticians have failed to come up with any answer to my enquiry.

Comment

I have covered a fair bit of ground today. But a fundamental point is that the way we look at the national debt needs to change with reality and not stay plugged in 2010. Do I think we can borrow for ever? No. But it is also true that with yields at such levels we can borrow very cheaply and if we look around the world seem set to do so. I have written before that we should be taking as much advantage of this as we can.

https://notayesmanseconomics.wordpress.com/2019/06/27/the-uk-should-issue-a-100-year-bond-gilt/

Gilt yields may get even lower and head to zero but I have seen them at 15% and compared to that we are far from the literal middle of the road but in line with their biggest hit.

Ooh wee, chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

The caveat here is that I have ignored our index-linked borrowing but let me offer some advice on this too. At these levels for conventional yields I see little or no point in running the risk of issuing index-linked Gilts.

The UK public finances finally accept that many student loans will never be repaid

The present UK government seems to be much keener on public spending than its predecessor. From the Evening Standard.

Up to £1 billion of the aid budget will be made available to scientists inventing new technology to tackle the climate crisis in developing countries, Boris Johnson is to announce……..Putting an emphasis on technology’s potential to answer the climate emergency, he will also announce a further £220 million from the overseas aid budget to save endangered species from extinction.

Although of course as so often there is an element there of announcing spending which would have happened anyway. Also the government did avoid bailing out Thomas Cook which seems sensible as it looked completely insolvent by the end as Frances Coppola points out.

Dear@BBC

, you should not believe what you read in corporate press releases. The rescue plan for Thomas Cook was not £900m as the company said. It was £900m of new loans PLUS new equity of £450m PLUS conversion of £1.7bn of existing debt to equity (with a whopping haircut).

It is very sad for the customers and especially the workers. Well except for the board who have paid themselves large bonuses whilst ruining the company. Surely there must be some part of company law that applies here.

UK Public Finances

There have been a lot of significant methodological changes this month which need to be addressed. They add to the past moves on Housing Associations which had an impact on the National Debt of the order of £50 billion as they have been in and out of the numbers like in the Hokey Cokey song. Also there was the Royal Mail pension fund which was recorded as a credit when in fact it was a debit. Oh well as Fleetwood Mac would say.

Student Loans

For once the changes are in line with a view that I hold. Regular readers will be aware that much of the Student Loans in existence will not be repaid.

This new approach recognises that a significant proportion of student loan debt will never be repaid. We record government expenditure related to the expected cancellation of student loans in the period that loans are issued. Further, government revenue no longer includes interest accrued that will never be paid.

This brings us to what is the impact of this?

Improvements in the statistical treatment of student loans have added £12.4 billion to net borrowing in the financial year ending March 2019. Outlays are no longer all treated as conventional loans. Instead, we split lending into two components: a genuine loan to students and government spending.

Whether the £12.4 billion is accurate I do not know as some of it is unknowable but in principle I think that this is a step in the right direction.

Pensions

There are larger changes planned for next month but let me point out one that has taken place that will be impacted by Thomas Cook.

We now also include the Pension Protection Fund within the public sector boundary.

Other changes including a gross accounting method which means this in spite of the fact that the PPF above will raise the national debt or at least it should.

These changes have reduced public sector net debt at the end of March 2019 by £28.6 billion, reflecting the consolidation of gilts and recognition of liquid assets held by the public pension schemes.

I will delay an opinion on this until we get the full sequence of changes.

The Numbers

The August figures were better than last year’s

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in August 2019 was £6.4 billion, £0.5 billion less than in August 2018.

There was a hint of better economic performance in the numbers too.

This month, receipts from self-assessed Income Tax were £1.7 billion, an increase of £0.4 billion on August 2018. This is the highest level of August self-assessed Income Tax receipts since 2009……..The combined self-assessed Income Tax receipts for both July and August 2019 together were £11.1 billion, an increase of £0.7 billion on the same period in 2018.

At first the numbers do not add up until you spot that the expenditure quoted is for central government which is flattered by a £900 million reduction in index-linked debt costs. Something which inflationoholics will no doubt ignore. Also local government borrowed £1 billion more. So I think there was some extra spending it is just that it was obscured by other developments in August.

In the same period, departmental expenditure on goods and services increased by £1.8 billion, compared with August 2018, including a £0.5 billion increase in expenditure on staff costs and a £0.9 billion increase in the purchase of goods and services.

If we switch to the fiscal year so far the picture looks broadly similar to what we have been seeing in previous months.

In the latest financial year-to-date, central government received £305.4 billion in receipts, including £226.0 billion in taxes. This was 2.1% more than in the same period last year……Over the same period, central government spent £325.1 billion, an increase of 4.1%.

The essential change here is that central government has spent an extra £9.1 billion on goods and services raising the amount spent to £121.5 billion in a clear fiscal boost.

The Past Is Not What We Thought It Was

Although it does not explicitly say it we were borrowing more than we thought we were, mostly due to the new view on student loans.

In the latest full financial year (April 2018 to March 2019), the £41.4 billion (or 1.9% of gross domestic product, GDP) borrowed by the public sector was around a quarter (26.1%) of the amount seen in the FYE March 2010, when borrowing was £158.3 billion (or 10.2% of GDP).

We know last year was affected by £12.4 billion but the effect is smaller the further we go back in time. For example on FYE March 2010 it was £1.5 billion.

The National Debt

This continues to grow in absolute terms but to shrink in relative terms.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of August 2019 was £1,779.9 billion (or 80.9% of gross domestic product, GDP), an increase of £24.5 billion (or a decrease of 1.5 percentage points of GDP) on August 2018.

However the Bank of England has had an impact here.

Debt at the end of August 2019 excluding the Bank of England (mainly quantitative easing) was £1,598.7 billion (or 72.7% of GDP); this is an increase of £37.4 billion (or a decrease of 0.6 percentage points of GDP) on August 2018.

For those of you wondering my £2 billion challenge to last month’s data on Bank of England transactions has not been resolved as this from Fraser Munroe of the Office for National Statistics from earlier highlights.

We should have some APF detail for you soon. Sorry for the delay.

Comment

We travel forwards although sometimes it feels as though we have just gone backwards. Although there is one constant which is the first rule of OBR club ( for newer readers it is always wrong).

These March 2019 OBR forecasts do not include estimates of the revisions made in September 2019 for student loans and pensions data. The OBR intends to reflect these changes in their next fiscal forecast.

In a way that is both harsh although they should have know of the plans and fair in that their whole process is always likely to be wrong and frankly misleading.

Next we are reminded that things we really should know in fact we do not.

The error mainly relates to the treatment of Corporation Tax credits, which are included within total Corporation Tax receipts as well as within total central government expenditure.

In terms of impact that peaked at £3.8 billion in 2017/18 declining to £1.9 billion in the last fiscal year. That is a lot in my opinion.

As to more fiscal spending well that just got harder as we conclude we were spending more anyway. But it remains very cheap to do so as the UK thirty-year Gilt yield is back below 1%.

 

 

Lower Gilt yields should drive the UK Budget Statement

These are extraordinary times and let me bring you up to date with this morning’s developments. Bond markets have surged again with that of Germany reaching an all-time high. One way of putting that is that there are discussions this morning of the futures contract going to 180 which provides food for thought when you have traded it at 80. In more prosaic terms Germany is being paid ever more to borrow with its ten-year yield -0.73%. Why? Well let me throw in another factor from @ftdata.

Why Germany’s bond market is increasingly hard to trade: Shortage of tradable Bunds reflects huge ownership by banks and central banks

This is having all sorts of impacts as for example the bond vigilantes were supposed to be all over Italy like a rash and instead its ten-year yield has fallen below 0.9%. It reminds me of this from Shakespeare.

All the world’s a stage,
And all the men and women merely players;
They have their exits and their entrances;
And one man in his time plays many parts,

That gives us an international context to the fact that the UK Gilt market has soared this morning such that it has created something of a new reality. This is very different to past political crises because if we were in an episode of Yes Prime Minister right now it would be talking about the Gilt market collapsing rather than soaring. For once up genuinely is the new down. If we look at tomorrow’s Budget Statement then it needs to address the fact that the UK can borrow for fifty-years at an annual interest-rate of 0.8% Whatever your views on fiscal policy we should do some and views on fiscal policy should be changed by this. Let me give you a comparison as back in the day the Office for Budget Responsibility suggested the medium-term UK Gilt would yield 4.5% and rising now so the fifty-year would be say 6%. In other words we have something of a new paradigm.

Why?

Much of this comes from the policy of the Bank of England and the rest comes from the tightening of fiscal policy. As the economy has recovered we have done this in terms of fiscal policy.

In the latest full financial year (April 2018 to March 2019), the £23.6 billion (or 1.1% of gross domestic product, GDP) borrowed by the public sector was less than one-fifth (15.4%) of the amount seen in the FYE March 2010, when borrowing was £153.1 billion (or 9.9% of GDP). ( UK ONS)

Whatever your view on the concept of austerity we are now borrowing much less. So the irony is that we borrowed a lot when it was expensive and much less as it has become much cheaper.

Next let me address the Bank of England. It can do all the open mouth operations it likes and offer its Forward Guidance about higher interest-rates. But markets and potential Gilt investors note that not only did it originally buy some £375 billion of UK Gilts its knee-jerk response to perceived trouble was to buy another £60 billion. So they expect more purchases in any crisis and whilst we are not in the same position of an outright shortage of sovereign debt as Germany we are not issuing much and the Bank of England would likely buy way more than that.

Thus the two factors above are driving the UK Gilt market higher and as it happens there is another addition. This is that some pension funds find they have to buy more Gilts to match their liabilities as the market rallies and at a time of low supply that just adds to the issue. You may choose to call this a bubble but whatever you call it a number of factors are elevating the market.

Fiscal Rules

These are one of the fantasies of our times. Gordon Brown had one as did George Osborne and Phillip Hammond. Let us remind ourselves of the latter via the Resolution Foundation.

Deteriorations in the public finances and economic outlook, alongside spending commitments the Prime Minister has already made, lead us to conclude that far from any further headroom to spend, the Treasury is already on course to break the ‘fiscal mandate’ of borrowing less than 2 per cent of GDP in 2020-21. In addition, with spending
commitments building in subsequent years, it’s likely that borrowing will only further overshoot this limit in the years after 2020-21.

Kudos to them for remembering what the UK fiscal rules are. But the catch is that nobody including the politicians issuing them takes them seriously, in the UK anyway. As recently as the 21st of last month I was pointing out this on here.

As you can see in the fiscal year so far the UK government has opened the spending taps. Whilst the report does not explicitly point this out much of the extra spending has been in the areas mentioned above, as we see expenditure on goods and services up by £7.2 billion and staff costs up by £2.4 billion.

As you can see spending has risen although that was by the previous version of the current government. However the underlying trends and forces have not changed much if at all.

National Debt

This is something of a mixed bag as if you think we have a problem measuring the fiscal situation ( Hint we do..) it gets worse here. Let me give you an example of this via the Office for Budget Responsibility.

Public employment-related pension schemes and the Pension Protection Fund will be moved within the public sector boundary. This would reduce public sector net debt in 2018-19 by £30.9 billion (1.4 per cent of GDP), reflecting the gilts and liquid assets they hold. The liabilities of these schemes are not ‘debt liabilities’ – they are accrued pension rights – so do not add to the liabilities side of public sector net debt.

Yes you do have that right. A liability and maybe a large one will improve the numbers in the same way that the Royal Mail pension scheme did a few years ago. With that context here is the current situation.

Debt (public sector net debt excluding public sector banks) at the end of July 2019 was £1,807.2 billion (or 82.4% of gross domestic product, GDP), an increase of £29.6 billion (or a decrease of 1.3 percentage points of GDP) on July 2018.

As you can see debt has been rising but in relative terms it has been falling as the economy has grown faster than it. There will be other reductions next month via the pension scheme misrepresentation above but also due to past revisions to GDP.

Above is the number which will be used tomorrow. If you wish to compare us internationally then add around 3% to it.

Comment

The context is clearly that the UK can afford to borrow. Let me specify this to avoid misunderstandings. We can choose to invest in infrastructure or elsewhere and lock in very cheap 50 year borrowing costs. Back on July 29th I suggested that we could borrow £25 billion easily and it would be more than that now,maybe much more. Personally I would also do something about the benefits freeze which has hit many of our poorer citizens.

As for other factors then do not place much faith in precision here. Regular readers will know I have challenged our national statisticians over the £2 billion fall in Bank of England QE remittances in July. Neither out statisticians nor HM Treasury can explain this and frankly I an explaining it to them! Without going into detail in my opinion at least £1.6 billion is without explanation and is singing along with Men At Work.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake

Is it a bad time to remind you that the way the Bank of England constructed its QE operations ( mostly the Term Funding Scheme ) has added around £180 billion to the recorded level of the national debt?

Now let me return to the issue of a pension recalculation improving the public-sector numbers. How is that going in the private-sector?

Pension deficits at 350 of the UK’s largest listed companies widened by £16bn in August, as the increasing prospect of a #NoDealBrexit drove down gilt yields, according to analysis from Mercer. ( @JosephineCumbo )

 

The UK government has opened the spending taps

Today we open with some good news as the UK Office for National Statistics has been burning the midnight oil and has come up with this.

The total package of current price GDP improvements increases the size of the economy in 2016 by approximately £26.0 billion, around 1.3% of GDP……Average growth of volume GDP over the period from 1998 to 2016 has been revised up 0.1 percentage point to 2.1% per year.

Actually they have also decided the credit crunch impact was not quite as bad as previously thought.

The peak-to-trough fall of the 2008 economic downturn in GDP has been revised from 6.3% to 6.0% and the UK economy is now estimated to have returned to its pre-downturn levels one quarter earlier in Quarter 1 2013.

Those who can remember back then will recall that it was a period when the labour market data signalled an upturn in the economy a year or so before the output or GDP data. You may recall there were fears of a “triple-dip” back then and from back then ( January 2013) here is Howard Archer in The Guardian.

While we believe the economy is essentially flat at the moment, it is worrying to note that GDP in the fourth quarter of 2012 was 3.3% below the peak level seen in the first quarter of 2008. We suspect that GDP will not return to the level seen in the first quarter of 2008 until the first half of 2015 – a gap of seven years.

As you can the perception is very different now. This takes us back to all of yesterday when we noted that the opening of 2018 in Germany is now thought to be very different to what we think now.

Also there was something to make supporters of nominal GDP targeting follow the advice of Iron Maiden and run for the hills.

 In the decade leading up to the financial crisis, average nominal GDP growth remains unchanged at 5.0%, while there has been a slight upward revision from 3.6% to 3.7% in the period following the financial crisis.

For those unaware there are more than a few around who argue that targeting a nominal GDP growth rate of 5% would produce something of an economic nirvana. The theory is that if we then get the inflation target of 2% per annum then economic growth would be 3%. Or if you prefer Hallelujah we are saved! Meanwhile they got it and the economy then collapsed. You could not make it up. The more subtle point is to wonder if the Bank of England was actually targeting this? This seems unlikely as let’s face it they so rarely hit any target on a consistent basis. Oh and I do not expect this to deter supporters of nominal GDP targeting as there are other problems as you may have already spotted which they choose to look away from.

Also I note that these revisions support my view that the service sector is larger than our statisticians have told us.

Service industries has been revised upwards in both the pre- and post-crisis periods, and accounts for 90% and 85% of total GVA growth in these periods respectively.

If we now move onto today’s news then we see that the consequence of the UK economy being recorded as larger is that our national debt to GDP ratio has been lower than we thought it was. We will have to wait for the full chained volume data set to discover exactly how much.

Also I can specify now something I mentioned before which was the boost to UK GDP by switching from using the RPI to the CPI as it was in the 2011 Blue Book which had average upwards revisions to GDP of 0.23%.

Today’s Data

Let me get straight to the crucial point which is that the spending taps have been opened by the UK government.

Central government receipts in July 2019 decreased by £0.4 billion (or 0.5%) compared with July 2018, to £67.9 billion, while total central government expenditure increased by £4.1 billion (or 6.5%) to £67.6 billion.

Please ignore the receipts numbers for now as I will explain later. But as you can see expenditure has risen again as we saw this in June. Here is some further detail on this.

In the same period, departmental expenditure on goods and services increased by £1.6 billion, compared with July 2018, including a £0.7 billion increase in expenditure on staff.

We need a deeper perspective and it is provided by this.

In the latest financial year-to-date, central government received £246.5 billion in income, including £182.5 billion in taxes. This was 2.3% more than in the same period last year.

Over the same period, central government spent £260.3 billion, an increase of 5.3%.

As you can see in the fiscal year so far the UK government has opened the spending taps. Whilst the report does not explicitly point this out much of the extra spending has been in the areas mentioned above, as we see expenditure on goods and services up by £7.2 billion and staff costs up by £2.4 billion.

This has had a consequence for the deficit as we look at the July and then the fiscal year to date numbers.

Borrowing (public sector net borrowing excluding public sector banks) in July 2019 was in surplus by £1.3 billion, a £2.2 billion smaller surplus than in July 2018; July 2018 remains the highest July surplus since 2000………….Borrowing in the current financial year-to-date (April 2019 to July 2019) was £16.0 billion, £6.0 billion more than in the same period last year; the financial year-to-date April 2018 to July 2018 remains the lowest borrowing for that period since 2002.

Care is needed here because this is much lower than we saw in the past crisis but none the less after a lot of false dawns the UK government seems to be actually fulfiling its promises to spend more.

Receipts

I did promise to address this as they were heavily affected this July by the QE programme of the Bank of England.

This month interest and dividend recipts were down £1.5 billion compared to July 2018. This fall was largely because of a £2.0 billion reduction in dividend transfer from the Bank of England Asset Purchase Facility Fund (BEAPFF) to HM Treasury.

So if we are looking for the impact of the UK economy on the numbers it showed some growth not a fall.

If we were to exclude these transfers, then central government receipts would decrease by £0.6 billion to £67.3 billion in July 2019 and decrease by £2.6 billion to £65.7 billion in July 2018.

Actually there has been an issue this fiscal year as well.

So far in this financial year-to-date (April to July 2019), £3.5 billion in dividends have transferred from the BEAPFF to HM Treasury, compared with £5.9 billion in the same period last year.

So as you can see without this receipts were positive in July and growth in the fiscal year so far was better than the 2.3% quoted. It is curious that the Bank of England numbers are ebbing and flowing because they have the same £435 billion holdings so I will investigate later.

Comment

We see that the UK government has indeed opened the spending taps. How much of it is Brexit driven is hard to say but at least some of it must be. Can we afford it? With a thirty-year Gilt yield just above 1% ( 1.03%) then we certainly can in terms of repayments. The catch is in terms of the national debt and the amount of capital borrowed but in relative terms that has been falling recently.

Debt (public sector net debt excluding public sector banks) at the end of July 2019 was £1,807.2 billion (or 82.4% of gross domestic product, GDP), an increase of £29.6 billion (or a decrease of 1.3 percentage points of GDP) on July 2018.

Whether any extra spending would be well spent is an entirely different matter. But we find ourselves in a position where this time around it is cheap to borrow.

Meanwhile of course these numbers are for a government that has now been mostly removed…..

 

 

 

The UK could borrow £25 billion or indeed more very cheaply if it wished

It would appear that one of the main features of the credit crunch era which has been turbo-charged in 2019 so far has escaped the chatting and think tank classes. This is the situation where the UK can borrow on extraordinarily cheap terms. As I type this the two-year and five-year Gilt yields are of the order of 0.46% and the benchmark ten-year is at 0.67%. The only other time we have ever seen yields down here is when Governor Mark Carney was cracking the whip over the Bank of England in late summer and autumn 2016 demanding that they buy Gilts at nearly any price. That kamikaze phase even pushed us briefly to negative yields as the market let him buy at eye watering prices.

This was on my mind as I read this from the Institute for Government which has written what it calls an explainer on whether the UK can do this.

During the election campaign, Johnson said that it “is certainly true is at the moment (that) there is cash available.  There’s headroom of about £22bn to £25bn at the moment.”

The whole concept is predicated on a complete fantasy.

This figure for headroom refers to the gap between the latest official forecast for borrowing in 2020/21 and the maximum amount that is consistent with meeting Philip Hammond’s fiscal mandate – that borrowing should be no more than 2% of GDP in 2020/21, after adjusting for the ups and downs of the economic cycle (which is typically referred to as “cyclically-adjusted” or “structural” borrowing).

Firstly no sniggering at the back please when you read “the latest official forecast for borrowing in 2020/21” as we recall that the first rule of OBR Club is that the OBR is always wrong! Next comes the “fiscal mandate” which in the ordinary course of events would have a half-life that would not reach 2021 which is of course even more likely now that the man called Spreadsheet Phil has fallen on his sword.

Oh and that is before we get to “structural” borrowing which means pretty much whatever you want it too. But finally we get a grain of truth.

Mr Hammond has bequeathed his successor a level of borrowing that is low by historical standards. The Office for Budget Responsibility’s March forecast suggested borrowing would be 0.9% of GDP (or £21bn) next year, virtually all of which would be structural.

The reliance on the number-crunching of the serially unreliable OBR is odd but there is a kernel of truth in there which is that we are currently not borrowing much. Last year it was 1.1% of GDP and the debt to GDP ratio has been falling as the economy has grown faster than the debt.

This brings me back to the piece de resistance which is that we can borrow incredibly cheaply and if we look at in terms of the infrastructure life cycle the thirty-year Gilt yield is a mere 1.33%. So we could if we chose borrow quite a large sum on very cheap terms. As to how much well into the tens of billions and maybe a hundred billion. Just in case readers think I am breaking my political neutrality I have made similar points to my friend Ann Pettifor who is an adviser to the Labour Party with the only difference being that markets would trust a Corbyn led government less. How much less is hard to say as we know that any yield ( the Greek ten-year is around 2%) tends to get hoovered up these days.

If we move to the other side of the coin which is how such funds would be spent the picture then sees some dark clouds. They are called Hinkley C, HS2 and the Smart Meter debacle although I think the latter was foisted onto out electricity bills.

Oh and before I move on real yields are much more complicated than often presented. After all none of us know what UK inflation will be over the next 30 years, but it seems more than likely that the yields above will not only be negative but significantly so.

Consumer Credit

We can continue our number crunching with this from the Bank of England this morning.

The annual growth rate of consumer credit continued to slow in June, falling to 5.5%. Annual growth has fallen steadily since its peak in late 2016, and particularly over the past year reflecting a fall in the average monthly net flow of consumer credit. Since July last year, the net flow has averaged £1.0 billion per month, compared with £1.5 billion per month in the year to June 2018.

Let me translate this a little. The annual rate of growth has fallen since they pumped it up with their “Sledgehammer QE” of August 2016. This was a change in claimed strategy as of course Governor Carney has regularly told us that “This is not a debt fueled recovery” ( BBC August 2015). Of course according to Governor Carney the August 2016 move saved around 250,000 jobs although even his biggest fans have to admit he has had a lot of problems in the area of unemployment forecasting.

Whilst 5.5% is slower than compares not only to an extraordinary surge but is for example nearly double wage growth, quadruple likely GDP growth and around five times real wage growth. Also the actual amount at £218.1 billion has grown considerably.

Mortgages

There seems to be a serious media effort going on to support the UK housing market. Here is @fastFT from earlier.

Rise in mortgage borrowing points to stabilisation in UK house market.

Does it? Here is the actual Bank of England data.

Net mortgage borrowing by households was £3.7 billion, close to the average of the previous three years. This followed a slightly weaker net flow of £2.9 billion in May. The annual growth rate of mortgage lending remained stable at 3.1%, around the level that it has been at since 2016.

The trouble for House price bulls is that those are the sort of levels which saw house price growth across the UK grind to a near halt. A similar situation exists for what seems to be coming down the chain.

Mortgage approvals for house purchase (an indicator of future lending) increased by around 800 in June to 66,400 and the number of approvals for remortgaging rose slightly to 47,000. Notwithstanding these small rises, mortgage approvals remained within the narrow ranges seen over the past three years.

Comment

I have looked at things in a different light today showing how numbers are twisted, manipulated and if that does not do the trick get simply ignored like the level of bond yields. Some of this sadly starts at the official level where we get what are in practice meaningless concepts like structural borrowing or this from Bank of England Governor Mark Carney in August 2015 via the BBC.

“The timing of a rise in interest rates is drawing nearer,” Bank of England governor Mark Carney says at the start of the Inflation Report press conference. He also says speculation about when interest rates begin to rise is a good thing and a sign of growing economic confidence.

Let me finish by referring to a campaign I have been running for seven years or so now which is over the impact of the Funding for Lending Scheme. Remember all the promises about small business lending?

and the growth of SME borrowing rose to 0.8%, its highest since August 2017.

Also as we note lending to SMEs at £167.8 billion has fallen far below unsecured credit is it rude to wonder how much of the £67.6 billion lent to the real estate sector ended up in the buy-to let bubble?

Podcast

 

 

 

 

UK Statistics are in quite a mess as the Public Finances highlight

Today we complete a week filled with UK economic data with the public finances and so far it has been a good week. Before we get to it there has been news about the state of UK statistics from the Public Affairs Committee or PAC of the House of Commons. As a major part of this has been the ongoing shambles over the Retail Price Index or RPI and I gave evidence to the PAC on this issue. So what do they think?

There has been much criticism of the position that UKSA ( UK Statistics Authority) has taken at many stages during the last nine years and the position is not resolved. The Economic Affairs Committee of the House of Lords was critical of UKSA’s failure to correct errors in RPI, stating that, “In publishing an index which it admits is flawed but refuses to fix, the Authority could be accused of failing in its statutory duties.” Evidence to this inquiry from the RPI CPI User Group was similarly critical, stating: “It is a measure of the UKSA failure as an independent regulator that such an inquiry was necessary in the first place and produced such a damning report.

It seems that much of my message has got through.

Concerns have been raised about the Treasury and the Bank of England’s influence over UKSA regarding inflation measures.

That’s polite for they dictate them. Also the designation merry-go-round has been a farce.

UKSA designated RPI as a National Statistic in 2010,286 but cancelled the designation in 2013…… Ed Humpherson later de-designated CPIH, ONS’s preferred measure, as a National Statistic……..CPIH was re-designated as a National Statistic in July 2017 following action by ONS.

As the PAC points out nothing ever seems to happen.

In evidence to our inquiry Sir David Norgrove stated that UKSA was planning to respond to the House of Lords Economic Affairs Committee report in April 2019. This did not happen.

Sadly I can also vouch for this sort of thing as I wrote to the House of Lords on the 26th of February about this issue and if I ever get a formal reply I will let you know. Also I am awaiting a response from the ONS to the points I made at the Royal Statistical Society on the 13th of June last year. I think you get the message.

View

In general this is a good report which follows on from the report on the RPI by the Economic Affairs Committee and I welcome them both. However there have been nine years of failure here by the UK Statistics Authority where it has proven incapable of getting any sort of a grip. In fact it has made things worse. My experience of giving it evidence was that my time was wasted as it was going through the motions and ignored and or did not understand my points about the large revisions to the Imputed Rent numbers.

Also there is a danger that the establishment parrots the same old lines as for example this.

Chris Giles told us “Index-linked gilts, student loans and rail fares are all pegged to the RPI” and said that “the continued use of an index known to be wrong, takes money from recent graduates, commuters and taxpayers, and hands it as a windfall to longstanding owners of index-linked government bonds”.

Chris who is economics editor of the Financial Times has done some good work highlighting the failings of the UKSA. But it is also true that he has led a campaign against the RPI and previously ( now abandoned) in favour of CPIH. This means that the fact that CPI and CPIH are systemically wrong in the area of owner-occupied housing frequently gets ignored. It has also contributed to the wasted nine years as the establishment represented by HM Treasury were more than happy to get on board with a campaign to get lower inflation numbers otherwise known as CPIH.

After all HM Treasury could de-link student loans and rail fares from the RPI today if it wished. In my opinion they do not do so for two reasons the first is greed and the second is that they want the RPI to garner bad publicity.

Public Finances

There is a link here because over the years we have observed quite a few strategic issues with the UK Public Finances. Two large ones come to mind of which the biggest has been the hokey-cokey with the Housing Associations which have been excluded, included and the excluded again. This has had an impact on the National Debt of between £50 and £60 billion. Then there was the Royal Mail situation where a pensions liability of the order of £17 billion was initially recorded as a surplus of £10 billion.

Added to that I note that this is on the way.

While the change is mainly focused on presentation, we expect public sector net debt (PSND) at the end of March 2019 to decrease by £30.5 billion as a result of the consolidation of pension schemes’ gilt holdings and liquid assets.

On a stand alone basis that may be fair enough but the collective issue is of a large almost entirely ignored liability which increases the numbers here.

Today’s Data

We learnt that the run of better data had come to a close with some signs that the closing of Prime Minister May’s term of office has led to an opening of the spending taps.

Borrowing (public sector net borrowing excluding public sector banks) in June 2019 was £7.2 billion, £3.8 billion more than in June 2018; the highest June borrowing since 2015……..Borrowing in the current financial year-to-date (April 2019 to June 2019) was £17.9 billion, £4.5 billion more than in the same period last year; the financial year-to-date April 2018 to June 2018 remains the lowest borrowing for that period since 2007.

As to why there are several factors at play and in these times it is hard not to have a wry smile at this.

This reduction in credit accounts for around half of the observed £405 million year-on-year June increase in EU contributions.

There was something of a curiosity as well.

Interest payments on the government’s outstanding debt increased by £2.1 billion compared with June 2018, due largely to movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

I have to confess that this development seems confusing. Because this time last year not only was the annual rate of RPI higher but the pattern was higher, so I will have to check how much the numbers are lagged by as this seems to be the factor at play.

Also there was some actual what we might call negative austerity.

Over the same period, there was a notable increase in expenditure on goods and services of £1.2 billion.

To that we can perhaps add this announcement via the BBC earlier.

Two million public sector workers are reportedly set to get a £2bn pay rise.

The Treasury will unveil the biggest public sector pay rise in six years as one of Theresa May’s final acts as prime minister,the Times reported.

Soldiers are set to get a 2.9% rise while teachers and other school staff will get 2.75%, police officers, dentists and consultants 2.5% and senior civil servants 2%.

This next bit seems to be unlikely though.

It is thought the money will come from existing budgets.

Comment

Today’s theme is one of reinforcing the Quis custodiet ipsos custodes line. Or if you prefer who guards the guardians? The UK Statistics Authority and Office for National Statistics regale us with rhetoric about “improvements” but misses the bigger issues and often makes them worse. Added to the problems I have highlighted earlier comes a click bait culture where it is increasingly hard to find the data you want. Also we get opinions on the data which is not the job of the ONS, as its role should be to provide the numbers. The situation with the UKSA is so bad I think it would be better to take the advice of Orange Juice.

Rip it up and start again
Rip it up and start again
I hope to God you’re not as dumb as you make out
I hope to God
I hope to God

Meanwhile I opened by saying so fat this week the economic data has been good but today we did get a possible flicker of a slowing from the tax data.

Central government receipts in June 2019 increased by £0.8 billion (or 1.5%) compared with June 2018, to £58.7 billion,

That night be a monthly quirk but it is lower than inflation.