It turns out that the UK government has been borrowing less than we thought

As we look at the latest numbers for the UK fiscal situation we cannot avoid this thought for the post election situation which was expressed by Shirley Bassey some years ago.

Hey big spender,
Spend a little time with me
Wouldn’t you like to have fun, fun, fun
How’s about a few laughs, laughs
I could show you a good time
Let me show you a good time!

Yesterday produced an example of that on the tax front as Prime Minster Boris Johnson proposed cuts in National Insurance contributions in the same manner as the personal allowance for income tax was raised. This would start with a rise to £9500 in the National Insurance threshold and might go as high as £12.500 to align it with income tax. The initial cost would be around £3 billion a year.

Housing has also come to the front line with Labour promising to build a lot more homes.

In 2017, they promised 100,000 council or housing association homes a year. Now it’s 150,000 between them…..Labour’s £75bn plans will be paid for using half of its £150bn Social Transformation Fund – a pot it says it will use to “repair the social fabric” in the country, if they win a majority in 12 December’s general election. ( BBC)

On the other side of the coin there is less explicit spending from the Conservatives but a clear implicit burden for the taxpayer from these.

The party will promise to introduce a new mortgage with long-term fixed rates, and only needing a 5% deposit, to help renters buy their first homes.

And it will create a scheme where local first-time buyers will be able to get a 30% discount on new homes in their area.

State mortgages? Also a type of help to buy on steroids. So extra liabilities for taxpayers which should be a debit somewhere in the public finances.

The Liberal Democrats offer this.

On Wednesday, the Liberal Democrats launched their manifesto, promising to build 300,000 homes a year by 2024, including 100,000 social homes.

The problem with all of these is twofold. We seem to be building more houses now anyway so how many more do we need? The issue seems to be more of one of them being in the wrong place rather than a total shortage. Also we have had lots of schemes to build more houses which have been full of hot air including one which built none at all. Whoever gets in power there will be more spending in this area it seems.

The Liberal Democrats

Last time around their manifesto was not available but we see now that actually they plan to be relatively fiscally responsible.

A good government should responsibly manage the nation’s finances: taking advantage of opportunities to borrow to invest in key infrastructure while making sure that day-to-day spending does not exceed the amount of money raised in taxes…….Ensure overall national debt continues to decline as a share of national income.

The “day to day” bit looks a continuation of the swerves we see to look like you are being restrained when you are spending but the national debt plan does imply a brake. Compared to the plans of the Tories and Labour quite a brake actually.

Where things get confused is here, because we would under their plan to stay in the European Union just carry on so the “bonus” is what precisely?

Use the £50 billion Remain Bonus to invest in services and tackle inequality, giving a major boost to schools and combatting in-work poverty.

On the other hand they do move from fantasy to reality with their plan to raise the basic rate of income tax by 1 pence. That is I believe for improvements to education in theory although of course it just goes in the same pot. But at least it is reasonably clear.

How much are we taxed?

Here are the calculations of the Resolution Foundation.

Total revenue as a share of GDP has risen to its highest level since 1985-86 but remains very close to its post-war average of 37 per cent. Tax revenue excluding other receipts has hit its highest share of GDP since 1981-82.

Today’s Data

This should bring us back to reality although there are issues with the version of reality presented to us as regular readers will be aware. There is yet another example of that today and let me illustrate with something you might have been expecting.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in October 2019 was £11.2 billion, £2.3 billion more than in October 2018; this is the highest October borrowing for five years (since October 2014).

If we stay with the October figures then yet again the phrase “as expected” can be used.

Departmental expenditure on goods and services increased by £2.3 billion, compared with October 2018, including a £1.0 billion increase in expenditure on staff costs and a £1.0 billion increase in the purchase of goods and services.

That is consistent with what we have been seeing with a hint of spending ahead of the supposed Brexit date at the end of October. Indeed overall the spending was higher overall because we see that there was a cut.

Interest payments on the government’s outstanding debt decreased by £0.5 billion, compared with October 2018, largely resulting from movements in the Retail Prices Index (RPI), to which index-linked bonds are pegged.

But I am afraid if you look deeper there is a swerve as hinted at below.

Borrowing in the current financial year-to-date (April 2019 to October 2019) was £46.3 billion, £4.3 billion more than in the same period last year; this is the highest April-to-October borrowing for two years (since 2017), though April-to-October 2018 remains the lowest in such a period for 12 years (since 2007).

So much of the extra borrowing was October which made me thing hang on! We have been told for a while spending has been higher and last month the year so far was £5.9 billion higher.So we should be £8.2 billion higher now not £4.3 billion. The difference is found below.

PSNB ex in the current financial year-to-date (April to September 2019) has been revised down by £3.9 billion compared with figures presented in the previous bulletin (published as corrected on 29 October 2019) as a result of updated central government data.

 

 we find out that  the problems have been mostly with expenditure.

Over the same period, we have reduced our previous estimate of central government current expenditure by £2.5 billion. Reductions in previous estimates of the purchase of goods and services, social assistance and “other” current grants of £3.2 billion, £0.6 billion and £0.6 billion, respectively, were partially offset by a combined upward revision to previous estimates of staff costs and grants to local government of £1.4 billion and £0.5 billion.

Seeing as that is the expenditure which we are told has gone up this month the situation looks a bit of a mess.

Also we never seem to be able to quite shake off issues with the banks whatever subject we look at.

The previous estimate of interest and dividends receipts has been increased by £0.7 billion, largely because of a £0.8 billion misrecording of the Royal Bank of Scotland (RBS), paid in April 2019, being captured in cash receipts but not in central government net borrowing. Further, updated bank levy data increased tax receipt estimates by £0.2 billion.

Comment

So there you have it a clear case of value from my style of work as in actually looking at the numbers and data. You will find loads of reports in the media that we have spent more whereas overall we have spent less than we thought! Or if you prefer today’s revisions mean that the UK’s fiscal stimulus has so far been smaller than we have been told. In a way that about sum’s up the years I have been looking at this area.

Looking ahead we do seem set to spend more whoever forms the next government and in some cases much more. We can borrow more presently at cheap rates ( 1.21% for the 50 year Gilt yield) but as to taxation I intend to wait and see as in recent times governments have not found it easy to actually raise it. The last big move I can recall was the post crash rise in Value Added Tax and some taxes have the issue illustrated by Ireland and the way big companies use it.

 

 

 

Fiscal expansionism is on the menu for the UK

Today has opened with UK future fiscal policy taking some headlines. This is the result of various factors of which the most obvious is that we are in an election campaign with politicians competing to win the fiscal equivalent of kissing the most babies. But there is more to it than that as we have been observing over the past few years. Underlying the situation has been a shift in the general establishment view bring expansionary fiscal policy back into favour. This was reflected last week by the valedictory speech of outgoing ECB President Mario Draghi.

In other regions where fiscal policy has played a greater role since the crisis, we have seen that the recovery began sooner and the return to price stability has been faster. The US had a deficit of 3.6% on average from 2009 to 2018, while the euro area had a surplus of 0.5%.

That baton was rapidly taken up by his successor Christine Lagarde who was perhaps hoping that people would forget she was responsible for disastrously introducing exactly the reverse in Greece and Argentina.

Christine Lagarde has asked Germany and the Netherlands to use their budget surpluses to fund investments that would help stimulate the economy. The soon-to-be president of the ECB said there ‘isn’t enough solidarity’ in the single currency area. ( Financial Times)

Back in the UK

The Resolution Foundation gives us a new perspective on the post credit crunch era and a new definition of austerity.

The austerity programme delivered since 2010 has produced an unprecedentedly long pause in the real-terms spending growth that has characterised the majority of the post-WWII period. Total managed expenditure (TME) increased by just £5 billion (or 0.6 per cent) between 2010-11 and 2018-19, with this eight-year flatlining eclipsing the six-year pause recorded in the 1980s and far outstripping any other previous period of austerity.

As you can see austerity is defined as government spending not growing in real terms or very little. Looking at their chart the 1980s actually looks more severe so I am not sure about “far outstripping” although there is a difference here.

Government spending per person is set to
come very slightly under £13,000 in 2019-20 (in 2018-19 prices), which remains 3.6 per cent down on the 2010-11 peak of £13,465.

On that basis there has been so more genuine austerity. Let me welcome their use of the GDP deflator as the inflation measure which has a couple of flaws ( it can be erratic and is prone to revisions) but is better than the woeful CPIH.

Looking Ahead

The current government has announced ch-ch-changes already.

The current plans result in spending rising
to 40.6 per cent of GDP; still well down on the immediate postcrisis peak of 46.6 per cent, but slightly above the ratio recorded just before the crisis struck, and well up on the 37.4 per cent of GDP logged between 1985-86 and 2007-08.

So austerity is over and they think more might come from any Conservative victory as Chancellor Javid is a fan of this.

In more concrete terms, during his bid for the Conservative
Party leadership back in the summer he outlined plans for a
£100 billion (multi-year) “National Infrastructure Fund” targeted outside London.

So as you can see the trajectory looks upwards.

They point out that Labour looks even more ambitious.

Its 2017 election manifesto included more than £70
billion in new spending pledges, comprising £48.6 billion of dayto-day spending (covering both departmental spend and social security payments) and £25 billion of capital (as part of a pledge to deliver a ten-year £250 billion “National Transformation Fund”).

They are not entirely sure it will repeat this but think it will in terms of spending totals.

But the party has outlined a range of additional
ambitions in recent months that imply that it intends to set out a 2019 manifesto pledge that is similar in scale to the 2017 one.

If we switch to comparing with the size of the economy we are told this.

Our modelling suggests that a ‘Conservative’ approach that
delivers on the Spending Round commitments on current
spending and thereafter maintains the value of that expenditure as a share of GDP, alongside delivering a £20 billion annual boost to the capital budget (on the assumption that something along the lines of the proposed “National Infrastructure Fund” is delivered over five years), would lift TME to 41.3 per cent of GDP
by 2023-24.

And the alternative.

Following a Labour approach that tops up the post-Spending Round baseline to the tune of £49 billion of current spending and £25 billion of capital spending by 2023-24, lifts TME to 43.3 per cent of GDP. That would take us back to 1982-83, and would stand as the ninth highest spending total in the entire post-war period.

So both will be opening the fiscal taps the difference simply being how much.

We then arrive at an issue which leaves the Resolution Foundation in something of a class of one ( h/t Brian Clough).

Even before accounting for any post-election spending surge, the fiscal rules look set to be broken, leaving the UK effectively without a fiscal anchor.

Maybe it bothers you if you live in the political world but as we have observed over the past decade they end up singing along with Earth Wind and Fire.

Every man has a place, in his heart there’s a space,
And the world can’t erase his fantasies
Take a ride in the sky, on our ship fantasii
All your dreams will come true, right away

Comment

The conventional view is to then ask how this can be afforded or paid for? We are all familiar with the question how will this be funded? But times are different now driven by factors such as this.

Bank of America sees a risk that yields on some Treasuries will go negative by 2021 as the Fed cuts rates all the way to zero ( Bloomberg )

In such a scenario then the UK would if market relationships stay as they are have its whole yield curve go negative, or if you prefer be paid to borrow at all maturities.

That may or may not happen but we do know that we can borrow very cheaply right now. The UK benchmark ten-year Gilt yield is a mere 0.7% and even if we borrow for fifty years the yield is only 1.1%. Thus borrowing as a means of financing deficits is quite plausible in a world where there is a hunt for yield. The only issue is how much we would be able to borrow? With a sub-plot that hopefully we would borrow over the very long-term to trim the future risks of doing so. Just to be clear I am not advocating large extra borrowing just observing that circumstances have changed. That reinforces even further my point about fiscal rules.

Also it would be helpful to note the plans of the Liberal Democrats and the nationalist parties. The SNP in Scotland seem set to have some role to play and whilst winning seems unlikely for the Lib Dems they could quite easily find themselves in a coalition government again.

The rub as Shakespeare would put it is that we now seem hooked on stimulus and as the monetary injections fail to give much of a hit we are now searching for a new high. This brings us back to economic growth as it lack of it and of course in the “green era” whether we should have any at all?

Podcast

 

NB

The fiscal numbers quoted by Mario Draghi were on this basis.

Average cyclically adjusted primary balance as a percentage of potential GDP