UK Public Finances see a fiscal stimulus for bond holders and the EU

Today we advance on the latest data for the UK Public Finances. This adds to a week where they have already been in the news. After all they will be affected by the HS2 railway project especially if its costs overrun as we looked at on Tuesday. It is tempting to suggest it will take place in a time way beyond how far ahead politicians think but of course the raising of the state pension age to 68 beginning in 2037 was badged as saving this according to BBC News.

The government said the new rules would save the taxpayer £74bn by 2045/46. While it had been due to spend 6.5% of GDP on the state pension by 2039/40, this change will reduce that figure to 6.1% of GDP.

If you look at the state pension system it appears that you can take away jam tomorrow but not jam today. Only yesterday I looked at this and the pension prospects for millennials who will ( rightly in my view) fear further rises in the state pension age.

The better economic news this week on inflation and retail sales will help a little in the short-term but the truth was that after the EU leave vote 2017 was always going to be more of an economic challenge due to a lower value for the UK Pound £ leading to higher inflation and lower real wages. We have some economic growth but not much.

Looking ahead

A week ago the Office for Budget Responsibility looked at the UK public finances and attempted to forecast years and indeed decades ahead. For perspective let me remind you that the first rule of OBR club is that the OBR is always wrong! However there are a few issues to look at and this summary of our current position is a start.

But the budget is still in deficit by 2 to 3 per cent of GDP – as it was on the eve of the crisis – and net debt is more than double its pre-crisis share of GDP and not yet falling. As a result, the public finances are much more sensitive to interest rate and inflation surprises than they were.

That latter sentence suggests they have been reading the discussions on here. I remember a comment pointing out that the UK would struggle if gilt yields rose above 3% and I have pointed out the impact of this year’s rise in inflation on the debt costs of index-linked Gilts. On that subject the economics editor of the Financial Times has written another piece of propaganda about the Retail Price Index saying it gives much to high a number. You may note he uses clothing prices as apparent proof but the vastly more important housing market somehow gets forgotten. Mind you if I had been a vocal supporter of putting imputed rents into the botched CPIH maybe I would suffer from selective amnesia as well.

 I keep forgettin’ things will never be the same again
I keep forgettin’ how you made that so clear
I keep forgettin’ it all ( Michael McDonald )

Still my rule that forecasts will tell us the public finances will be fine in four years time continues to be in play.

Our March forecast showed it on course to reduce the deficit to 0.7 per cent of GDP by 2021-22, but predicated on plans for a further significant cut in real public services spending per person.

Today’s data

Some of the cheer from this week’s UK economic data disappeared as these numbers were released.

Public sector net borrowing (excluding public sector banks) increased by £2.0 billion to £6.9 billion in June 2017, compared with June 2016………….Public sector net borrowing (excluding public sector banks) increased by £1.9 billion to £22.8 billion in the current financial year-to-date (April 2017 to June 2017), compared with the same period in 2016.

So we see that the financial year so far has deteriorated and the cause was June. If we drill into the detail we see that my point about the cost of inflation is in play as debt interest costs rose from £3.7 billion to £4.9 billion. This has to be the cost of our index linked Gilts rising as the RPI does ( currently 3.5% annually ). So far this financial year we have paid an extra £3.3 billion and whilst there may be a small cost from conventional Gilts the may player again will be higher inflation.

Also there was something which Britney Spears would describe as a combination of toxic and hit me baby one more time.

In June 2017, the UK paid £1,249 million to the EU budget through GNI and VAT based contributions, which are made net of the UK rebate. This payment consisted of our standard monthly VAT and GNI based contribution of £991 million, along with a £258 million payment adjustment covering earlier years.

That was some £700 million higher than last year.

If we switch to the broad picture then the revenue situation looks pretty good and makes us mull economic growth.

In the current financial year-to-date, central government received £164.2 billion in income; including £119.6 billion in taxes. This was around 5% more than in the same period in the previous financial year.

But we have spent more and it can hardly be called austerity can it?

Over the same period, central government spent £185.7 billion; around 5% more than in the same period in the previous financial year

Oh and rather curiously Stamp Duty receipts are up from £3 billion to £3.4 billion so far this financial year.

The Bank of England and the national debt

At first the rise of the UK national debt looks troubling.

This £1.8 trillion (or £1,753.5 billion) debt at the end of June 2017 represents an increase of £128.5 billion since the end of June 2016.

It has the feel of surging until we note the impact of the Bank of England’s Sledgehammer so beloved of Mark Carney and Andy Haldane.

Of this £128.5 billion, £86.6 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility. Of this £86.6 billion, £69.3 billion relates to the Term Funding Scheme (TFS).

So our national debt rises so they can subsidise the banks yet again!

Comment

Depending on your perspective you can argue that the UK has seen austerity in the credit crunch era as the annual deficits have shrunk or stimulus as each year has seen a deficit. Actually we have seen a hybrid where some have experienced austerity but others such as beneficiaries of the triple-lock on the basic state pension have gained. The “Forward Guidance” is that the deficit will be gone in around 4 years time but that remains true at whatever point in time you choose to pick.

Meanwhile June has seen a fiscal stimulus except there are two catches. Firstly the main component has gone to the holders of RPI linked Gilts which means their credit crunch has been a stormer. I wish I had continued to hold some as whilst it went very well I did not realise that even more was on its way. Let us hope they spend/invest the money in the UK. Of course it will be party time at the pension fund of the Bank of England. The other catch is more toxic as the fiscal stimulus goes to the European Union of which we will only get some back. Ouch!

Meanwhile do we have another potential signal for the state of play in the UK economy? From the BBC.

Air traffic controllers are warning that UK skies are running out of room amid a record number of flights.

Friday is likely to be the busiest day of the year, with air traffic controllers expecting to handle more than 8,800 flights – a record number.

Me on Core Finance

http://www.corelondon.tv/leaky-cpi-effects/

 

 

 

Of UK Austerity and the Queen’s Speech

Today in a happy coincidence we get both the future plans of the current government in the Queen’s Speech as well as the latest public finances data. It looks as though the atmosphere is for this at least according to the Financial Times.

But he (the Chancellor) is coming under growing pressure from some Tory MPs — who are reeling from the loss of the party’s majority in the House of Commons at the June 8 election — to learn lessons and increase public spending.

Why? Well this happened.

The opposition Labour party pulled off surprise gains in the UK general election by offering voters a vision of higher public spending funded by increased taxes on companies and the rich.

So there is likely to be pressure on this front especially as we will have a government that at best will only have a small majority.

Mansion House

The Chancellor Phillip Hammond also spoke at Mansion House yesterday and told us this.

And higher discretionary borrowing to fund current consumption is simply asking the next generation to pay for something that we want to consume, but are not prepared to pay for ourselves, so we will remain committed to the fiscal rules set out at the Autumn Statement which will guide us, via interim targets in 2020, to a balanced budget by the middle of the next decade.

Is that an official denial? Because we know what to do with those! But in fact setting a target of the middle of the next decade (so 2025) gives enormous freedom of movement in practical terms. You could forecast pretty much anything for then and the Office for Budget Responsibility or OBR probably has. If we look back over its lifespan we see that one error which is that forecasting wage inflation now would be 5% per annum as opposed to the current 2% has had enormous implications. Also we only need to look back to the 3rd of October to see the Chancellor giving himself some freedom of manoeuvre.

“As we go into a period where inevitably there will be more uncertainty in the economy, we need the space to be able to support the economy through that period,” he said. “If we don’t do something, if we don’t intervene to counteract that effect, in time it would have an impact on jobs and growth.”

As later today the media will no doubt be using OBR forecasts as if they are some form of Holy Grail lets is remind ourselves of the first rule of OBR club. That is that the OBR is always wrong.

A 100 Year Gilt

You might think that with all the political uncertainty and weakness from the UK Pound that the Gilt market would be under pressure. My favourite comedy series Yes Minister invariably had the two falling together. But nothing is perfect as that relationship is not currently true. It raises a wry smile each time I type it but the UK 10 year Gilt yield is blow 1% ( 0.98%) as I type this. In terms of recent moves the market was boosted yesterday by the words of Bank of England Governor Mark Carney who with his £435 billion of holding’s is by far its largest investor. In essence the likelihood of more purchases of that sort nudged higher yesterday and thus the market rallied and yields fell.

Also we live in a world summarised by this from Lisa Abramowicz of Bloomberg.

Argentina has defaulted on its external debt seven times in the past 200 years. It just sold 100-year bonds.

Actually it was oversubscribed I believe and I will let readers decide if they think a yield of 7.9% was enough. The UK however could borrow much more cheaply than that as according to the Debt Management Office the yield on our longest Gilt (2068) is 1.52%. Actually as we move from the 2040s to the 2060s the yield gets lower but I will not extend that and simply suggest we might be able to borrow for 100 years at 1.5% which seems an opportunity.

Actually quite a historical opportunity and we could go further as this from the Economist from 2005 ( h/t @RSR108 ) hints.

In 1751 Henry Pelham’s Whig government pulled together the lessons learnt on bonds to create the security of the century: the 3% consol. This took its name from the fact that it paid 3% on a £100 par value and consolidated the terms of a variety of previous issues. The consols had no maturity; in theory they would keep paying £3 a year forever.

I have a friend who has always wanted to own a piece of Consols to put the certificate on his wall so he would be pleased. Assuming of course they still do certificates…..

Today’s data

It was almost a type of Groundhog Day.

Public sector net borrowing (excluding public sector banks) decreased by £0.1 billion to £16.1 billion in the current financial year-to-date (April 2017 to May 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2008.

So the financial year so far looks rather like its predecessor. Although below the surface there were some changes as for example it is hard to put a label of austerity on this.

Over the same period, central government spent £123.5 billion; around 4% more than in the same period in the previous financial year.

In case you were wondering on what? Here it is.

Of this amount, just below two-thirds was spent by central government departments (such as health, education and defence), around one-third on social benefits (such as pensions, unemployment payments, Child Benefit and Maternity Pay)

This meant that tax revenue had to be pretty good.

In the current financial year-to-date, central government received £110.2 billion in income; including £79.1 billion in taxes. This was around 5% more than in the same period in the previous financial year.

In case you are wondering about the gap some £20 billion or so is National Insurance which is not counted as a tax.

How much debt?

The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of May 2017, which equates to 86.5% of the value of all the goods and services currently produced by the UK economy in a year (or gross domestic product (GDP)).

Actually some of this is due to the Bank of England something which we did not hear about yesterday from Governor Carney.

£86.8 billion is attributable to debt accumulated within the Bank of England, nearly all of it in the Asset Purchase Facility. Of this £86.8 billion, £63.3 billion relates to the Term Funding Scheme (TFS).

Comment

There is much to consider about austerity UK style. Ironically in the circumstances we would qualify under one part of the Euro area rules as our deficit is less than 3% of GDP. But of course that is a long way short of the horizon of surpluses we were promised back in the day. Please remember that later today as all sorts of forecasts appear, as the George Osborne surplus remained 3/4 years away regardless of what point in time you were at. As we have run consistent deficits is that austerity? For quite a few people the answer is yes as some have lost jobs or seen very low pay rises as we note it represented a switch. The switch concept starts to get awkward if we look at the Triple Lock for the basic state pension for example.

Moving onto other matters it was only yesterday that Governor Carney was boasting about the credit boom and I pointed out the unsecured portion. Well already the news has not gone well for him.

Provident Financial said recent collections performance had “deteriorated”, particularly in May. ( New York Times)

Presumably they mean the month and not Theresa. Also there was this in the Agents Report about the car market.

Increases in the sterling cost of new cars and decreases in the expected future residual values of many used cars had put some upward pressure on monthly finance payments on Personal Contract Purchase (PCP) plans.

If there was a canary in this coal mine well look at this.

Car companies had sought to offset this in a
number of ways, including increasing the length of PCP
contracts.

As the can gets solidly kicked yet again we wait to see if finance in this area is as “secured” as Governor Carney has assured us.

The Longest Day

The good news for us in the Northern Hemisphere is that this is the longest day although the sweltering heat in London it felt like a long night! So enjoy as for us it is all downhill now if not for those reading this Down Under. I gather it is also the Day of Rage apparently which may be evidenced when the Donald spots this.

Ford Motor Co (F.N) said on Tuesday it will move some production of its Focus small car to China and import the vehicles to the United States ( Reuters )

The General Election and its impact on the UK Public Finances

Firstly let me start today by expressing my deepest sympathies to those affected by last night’s dreadful attack at Manchester Arena. I do understand some of the feelings of those affected as I was just around the corner from the IRA Bishopgate bomb in the City many years ago. This time around though things are even worse with the apparent targeting of children at a music concert.

Today I wish to do a different form of travelling in time as it will be helpful to remind ourselves of the state of play some 7 years ago as we approached a General Election. From April 29th 2010.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

So is the standard of debate, manifesto and honesty any better this time around? In terms of scale maybe a little as we see the woeful efforts from back then.

The worst offender is the Liberal Democrats who have not explained where they will find £79 billion of spending cuts which is 5.4% of national income.The Conservatives plan spending cuts but have not explained where they will find £71 billion of them which is 4.8% of national income. Labour plan spending cuts but have not explained. Labour have £59 billion of spending cuts which they have not explained which is 4.1% of national income.

What about now?

We can permit ourselves an opening sigh of relief as the numbers are much lower now as this is what we thought was the situation back then.

Our fiscal deficit for the last year was £163 billion which is 11.6% of our economic output (Gross Domestic Product or GDP).

That compares with £48.7 billion last year. So we have in fact made quite a lot of progress although much more slowly than promised as we were supposed to be in surplus by now. Oh and in a sign of how reality changes over time we now think we borrowed £151 billion in the peak year.

As to the situation post election there is more smoke than clarity but I think whoever wins the Institute of Fiscal Studies have this right.

A balanced budget can apparently now wait until the middle of the next decade.

In political terms that is beyond the furthest star! As to the detail here is the IFS again.

Labour promised £75 billion a year in additional spending and £50 billion of additional taxes. The Liberal Democrats are also aiming for tens of billions of pounds in extra spending partially funded by more tax. Yesterday’s Conservative manifesto was much more, well, conservative………The Conservatives do not appear to have felt the need to spell out much detail. But they have left themselves room for manoeuvre.

The “room for manoeuvre” has been at least partly used over the issue of social care and what has become called the Dementia Tax.Which is currently unchanged or very changed and was always intended to have a cap or has a new one depending on your point of view. Personally I think the official denials of any change are the clearest guide. As to Labour there are clear plans to spend more of which an example from its Manifesto is below.

we will establish a National Investment Bank that will bring in private capital finance to deliver £250 billion of lending power.

This sounds rather like the Juncker Plan from the Euro area but we do not know how much public borrowing there will be or why private sector capital is not supporting such investment already? There are also plans for rail and water nationalisation which as the Guardian points out would work if the UK was/is a hedge fund.

At Severn Trent, for example, the dividend yield is 3.4% at the current share price. Borrowing at 1.5% to buy an asset yielding 3.4% is not the worst trade in the world. And the state, if it wanted to act like a supercharged private equity house, would be able to juice up returns by refinancing the companies’ debt at a lower rate.

In case some of you read the piece the author was somewhat confused about UK Gilt yields but somehow ended up near the right answer. We can presently borrow at 1.6% for fifty years ( for some reason they looked at 10 years) so the doubt in the issue is whether the public sector could get the same rate of return as the private sector. But the elephant in the room is the £60 billion or so required to buy the companies in the first place. They could of course just take them but that would presumably scupper the private capital for the National Investment Bank.

As to the NHS then there seems to be little variety about.

While precise comparisons are hard, there is strikingly little difference between Labour and the Conservatives in their funding promises for the NHS.

The Conservatives are promising a real increase of £8 billion over the next five years. That sounds like a lot but it won’t go far. Nor will Labour’s only slightly less modest offering.

Although the Liberal Democrats do offer something of an alternative.

Increasing spending on the NHS and social care, using the proceeds of a 1p rise in Income Tax.

Actually in a groundhog style way the latter part of that sentence does take us back our 7 years again as the musical theme for whoever is in government next comes from the Beatles.

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet

Today’s data

Let us open with the good news.

Since the previous bulletin, the provisional estimate of central government net borrowing for the full financial year ending March 2017 has been revised down by £3.5 billion

Much of this was from higher tax receipts which particularly in the case of VAT may hint we did a little better than previously thought.

current receipts were revised upwards by £2.4 billion; VAT receipts were revised up by £1.7 billion between January and March 2017, largely due to higher than forecast cash receipts in April 2017; and Income Tax and National insurance contributions received in March were revised upwards by £0.5 billion and £0.3 billion respectively

As to April itself it was not so good.

Public sector net borrowing (excluding public sector banks) increased by £1.2 billion to £10.4 billion in April 2017, compared with April 2016;

Tax receipts were higher but in a potentially worrying signal it was debt costs which moved the numbers as we spent an extra £2.1 billion in this area this April. We are not told why but I expect it to be the rise in inflation and in particular the rise in index or inflation linked Gilts driving this especially as they are linked to the Retail Price Index.

Comment

As we look back that is much that is familiar about the UK Public Finances in a General Election campaign. The reality is that our politicians do not think we are not capable of accepting or dealing with the truth so we get presented with what they think we will take rather than what they think might happen. There are more holes in the various manifestoes than in a Swiss cheese!

However since the 2010 election we have made a fair bit of progress in reducing the level of annual borrowing although the concept of balance or a surplus was a mirage at best. This means that you might like to sit down as you read the change in another set of numbers. First back then it was £1.03 trillion or 65.7% of GDP. And now.

The amount of money owed by the public sector to the private sector stood at just above £1.7 trillion at the end of April 2017, which equates to 86.0% of the value of all the goods & services currently produced by the UK economy in a year (or gross domestic product (GDP)).

We should be grateful that the cost of borrowing is so low as this has provided an enormous windfall over the period to our public finances. Odd that the Bank of England does not explicitly present that as a gain from its £435 billion of Gilt purchases is it not?

The Greek crisis continues on its road to nowhere

Yesterday on my way to looking at the UK Public Finances I pointed out that Greece had a national debt to GDP ratio of 179% at the end of 2016. This came with some cheerleading from the Institutions ( they used to be called the Troika until the name became so damaged) and some of the media about a budget primary surplus of 4.2% of GDP although if we put debt costs back in the surplus shrinks to 0.7%. You may recall that the PSI or Private-Sector Involvement of 2012 was supposed to bring the debt position under control but the ongoing economic depression blew that out of the water as the economy tanked and debt rose.

A consequence of this situation is that as we head to the heights of summer Greece will need yet more funding as it has debt repayments to make. Actually repayments is too strong a word as the debt will in fact be rolled from one Euro area institution to another. Bloomberg updates us on the issue.

The heavily indebted Mediterranean nation needs the next installment of about 7 billion euros ($7.6 billion) to repay lenders in a few months

It always turns out like this as this is a road we have been down more than once.

The IMF says two conditions must be met before it co-finances the country’s ongoing third bailout. First, Athens must agree to a set of credible reforms, particularly of its pension and tax systems. Second, the IMF insists that the euro area ease Greece’s debt burden.

This is all so familiar as we are always told there has been great success on reform yet somehow more is always needed! Also the debt burden needs easing yet again.

Debt relief

The problem here comes from the number below.

The latest figures show Greece’s debt stands at 179 percent of its gross domestic product, or about 315 billion euros….. Currently the country owes about 216 billion euros to the European Stability Mechanism, the euro-area bailout fund (and its predecessor), as well as to other euro-area countries.

At the beginning of the saga Greece faced high interest costs as the theme was as US Treasury Secretary Timmy Geithner pointed out was one of punishment. This only made things worse as the economy shrunk further so the PSI was enacted. The flaw was that the ever-growing amount of debt held by the Euro area and IMF was excluded from any write-down as we muse the first rule of ECB club which is that it must always be repaid. As this ballooned an alternative more implicit rather than explicit debt relief programme was put in place . From the ESM ( European Stability Mechanism).

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

It calculates the savings for Greece as follows.

Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.

You may note that Greece is always “saving” money and yet the debt burden gets worse. A clue to that is the section on economic progress which trumpets the current account, fiscal deficit and something which apparently the IMF needs to be told.

Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.

Somehow it misses out what now must be called the Great Economic Depression which has ravaged the Greek economy. Also is this one of the reforms?

The government is preparing to honor a pledge to offer permanent status to civil servants in key posts of the public sector, Kathimerini understands, with legislation boosting their rights expected to head to Parliament soon.

 

Also a board member showed the confusion with this sentence in a speech on the 6th of March.

As the Eurogroup chairman Jeroen Dijsselbloem said, there is no immediate liquidity squeeze over the next months, but that does not mean that Greece does not need money.

Er?

The medicine

In spite of where we stand this remains the same as the FT points out.

Greece agreed this month to adopt measures that would improve its primary budget surplus – before paying debt servicing costs – by 2 per cent of gross domestic product.

It is a bit like the old-fashioned treatment of bleeding the patient where it was reported a success but sadly the patient died isn’t it? As usual the rhetoric is being revved up and last night Prime Minister Tsipras was doing exactly that although I note he has passed the responsibility for the changes to the next government.

The measures would be divided roughly equally between cuts in pensions due to be made in 2019 followed by a sharp reduction of the income tax threshold in 2020. But they could be implemented earlier if the budget surplus target veers off-track.

What is the economic outlook for Greece?

The background is favourable as the overall picture for the Euro area is good. However the business surveys do not seem to have picked this up. From the Markit PMI.

At 46.7 in March, down from 47.7 in February, the latest figure signalled a seventh successive deterioration in Greek manufacturing sector conditions. The rate of decline accelerated from the previous month, and was marked overall. Underlying the latest contraction was a sharp fall in new order intakes

There is a clear difference here with the official data which tells us this for January and February combined.

3.7% (rise) in the Manufacturing Production Index.

The official view is pretty much what it has been for the last five years.

Looking forward, the Bank of Greece expects GDP to grow by around 2.5% in 2017, although a downward revision of the December 2016 forecasts is likely due to the negative carry-over effect of the sharp decline in output in Q4 2016 (attributed mainly to the decline in gross fixed capital formation and government consumption). Downside risks to the economic outlook exist related to delays in the conclusion of the second review of the Programme, the impact of increased taxation on economic activity and reform implementation.

The situation regarding bank deposits in Greece is complex because the definition has changed however I note that the ECB gave Greece an extra 400 million Euros of Emergency Liquidity Assistance last month. So the money which left in 2015 has remained abroad. The latest bank lending survey of the Bank of Greece tells us this.

The demand for total loans remained also unchanged during the first quarter of 2017

Comment

This saga has been an economics version of Waiting for Godot. The price of Godot never arriving has been this.

The seasonally adjusted unemployment rate in January 2017 was 23.5% compared to 24.3% in January 2016 and the upward revised 23.5% in December 2016…….

Yes it has fallen a bit but if we compare to the pre credit crunch low of 7.9% you get an idea of the scale of the issue. Also this now defines long-term unemployment especially for the young ( 15-24 ) where nearly half ( 48%) are unemployed.

As the band strikes up a familiar tune and we see claims of reform and progress I think this from Elvis is appropriate for Greece.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

We can’t go on together
With suspicious minds
And we can’t build our dreams
On suspicious minds

 

 

A better year for the UK Public Finances ends with a disappointing March

Today we move onto the UK Public Finances but before we do so it is time for some perspective and as so often these days it is Greece that provides it. Let me explain with this from the Financial Times.

Greece’s primary budget surplus – which measures the country’s public finances when excluding debt repayments – hit 4.2 per cent last year, swinging dramatically from a deficit and far outperforming a creditor target of 0.5 per cent for 2016.

This provides two issues of which the first is the way that such data is manipulated, all our finances would be in great shape if we could exclude major repayments and outgoings! If we move to the total numbers we see how misleading this is and on the way learn how much Greece pays on its debt.

Separate figures from Eurostat today showed Greece’s overall public finances were also in healthy shape, boasting a surplus of 0.7 per cent.

My point is that the number above poses a challenge to the view that surpluses on public finances are unreservedly a good thing. On their own they are often a good sign but we need to look at other signals such as the cost.

an economy which has shrunk more than 25 per cent since 2008.

The latest improvement in the public finances that the Institutions are so keen on has come at this price as the Greek statistics agency tells us.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016,

The basic lesson of Euro area austerity and the drive for a series of budget surpluses is that it led to a collapse of the economy that is ongoing. A sign of that is the way that the national debt to GDP ( Gross Domestic Product) ratio had risen to 179% at the end of 2016. Indeed if we return to the FT nothing appears to have been learnt.

As it stands, Greece is committed to hit a 3 per cent surplus target for a decade after the end of its rescue in 2018.

A perspective on the UK

A major difference in the UK experience has been that we have seen economic growth. Yes quarterly economic output was initially hit hard as quarterly GDP fell from a pre credit crunch peak of £433.7 billion to £406.3 billion but it has risen since to £470.5 billion. Whilst we saw out budget finances plunge into a substantial deficit the growth has helped us reduce that and in a type of timing irony we reduced it to the Maastricht Treaty maximum of 3% of GDP in 2016. This led to us finally having a smaller deficit than France which was driven by our better economic growth performance. Moving onto our national debt it was at 89.2% of GDP using the European measuring rod.

So the overall experience has been of an improvement except of course it has been much slower than that promised as we were supposed to have a budget surplus by now. Much of that was caused by the fact that the 2 UK governments back then ( Labour and then the Coalition) lived in a fantasy world where the UK economy would grow at 3% per annum whereas 2011 and 12 for example were well below that. Remember the phase when there were concerns about a “triple dip”? Added to that whilst there have been cuts and people affected overall UK austerity has meant more of a reduction in the rate of growth of government spending as opposed to outright cuts.

The fiscal year to 2017

This morning’s update confirms much of the above and let me jump to a signal which we look at as a measure of economic growth.

In the latest full financial year, central government received £674.1 billion in income; including £507.0 billion in taxes. This was around 6% more than in the previous financial year.

So we see that the situation here indicates economic growth although we need to subtract a bit over 1% for the pension related changes to some National Insurance contributions rates. So far so good.

If we move to expenditure then as we note that year started with very little inflation there were increases in real terms.

Over the same period, central government spent £698.6 billion; around 2% more than in the previous financial year.

The combination of the two led to better news for the UK as shown below.

This meant it had to borrow £52.0 billion; £20.0 billion less than in the previous financial year (April 2015 to March 2016).

Meaning that we are now comfortably within the Maastricht criteria for this.

Initial estimates indicate that in the financial year ending March 2017 (April 2016 to March 2017), the public sector borrowed £52.0 billion or 2.6% of gross domestic product (GDP).

Let me present the improvement in a way that is against one of the media themes of these times. The theme that we do not tax companies faces a reality that half of the annual improvement came from higher Corporation Tax revenue. Of course there are tax dodging companies around…….

What about March itself?

The latest monthly data was more of a disappointment.

Public sector net borrowing (excluding public sector banks) increased by £0.8 billion to £5.1 billion in March 2017, compared with March 2016;

There were several factors at play here and let me start with one which will be in the back ground as we see inflation rise. That is that debt costs in March rose by £700 million due presumably to higher RPI ( Retail Price Index) based repayments. In addition to this Income Tax revenues fell and VAT receipts only nudged higher.

Care is needed on the monthly data but we may be seeing another sign of UK economic growth fading a bit here. This is of course consistent with other data such as the way that annual retail sales growth fell to 1.7% in March.

National Debt

The UK uses its own measure of this which in an episode of the television series, Surprise! Surprise! gives an answer lower than the international standard.

Public sector net debt (excluding public sector banks) was £1,729.5 billion at the end of March 2017, equivalent to 86.6% of gross domestic product (GDP); an increase of £123.5 billion (or 3.0 percentage points as a ratio of GDP) on March 2016.

On its measure the Bank of England with its bank friendly policies is responsible for a debt burden of some 5.9% of GDP.

Comment

This has been a long journey for the UK economy and we have already travelled beyond the promised end point which was a budget surplus. On this road we have seen economic growth but also rises in our national debt. Whilst the establishment talk has been of headwinds there is very little talk of the role played but the very low-level of government bond yields which have been reinforced by £435 billion of purchases by the Bank of England. This was reinforced in 2015/16 by the lower rate of inflation which kept our index/inflation linked debt costs low. The inflation gains are currently being reversed.

As to the position now we face the probability of growth fading a bit in 2017 as real incomes are hit by higher inflation. This will slow any further improvement in the public finances which is a shame after a relatively good year. Let me finish by putting our national debt in perspective because is we use the official number it is some 2.6 years of tax revenue.

 

 

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
recovery.

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.

Comment

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

http://tiptv.co.uk/boes-deflection-strategy-not-yes-man-economics/

The UK Public Finances are another source of embarrassment for Mark Carney

Today sees the latest data on the UK Public Finances which so far have meandered on in the same not entirely merry way as before the EU leave vote. This is in stark contrast to the modeling provided by HM Treasury.

In the ‘shock scenario’ presented in the short-term analysis, in 2017-18, real GDP would be 2.9% lower than baseline, but potential GDP would have declined by 2.1% compared to the baseline.

Believe it or not this was the more moderate scenario and as we have not entered that fiscal year it could of course happen but so far we have seen nothing like that.Of course we should have done as the UK economy was supposed to immediately shrink by up to 1%. The consequence was that the fiscal or budget deficit would rise by £24 billion in 2017/18 and the more extreme “severe shock” would see it rise by £39 billion.

There is a particularly worrying postscript to this in that it was personally signed off by former Bank of England Deputy Governor Professor Sir Charles Bean who of course made a right charlie of himself. Well he is now at the Office of Budget Responsibility producing more growth and borrowing forecasts. There is a particular irony in the lack of responsibility and indeed the rewards for failure on display here.

The Financial Times brings up forecasts of a dire future almost as quickly as it has to offer mea culpae for the previous ones being wrong.

The EU’s Brexit negotiators expect to spend until Christmas solely discussing Britain’s divorce from the bloc, denying London any trade talks until progress is made on a €60bn exit bill and the rights of expatriate citizens.

The Bank of England

The Governor of the Bank of England Mark Carney is of course familiar with the concept of providing “alternative facts” and he was on that road at this month’s Inflation Report.

First, the Chancellor’s Autumn Statement eased fiscal policy over the coming years. This explains about half of our forecast upgrade.

Actually there was an announced change but of course that relies on you believing the forecasts of George Osborne. For example the UK budget was originally supposed to be in surplus right now which of course faded not to the grey of Visage but remained solidly in red ink. So it was the sort of claimed change which probably ends up at the same destination. The flight boards may say a diversion Helsinki but somehow the flight lands at the original destination Copenhagen. At the time of typing this Andrew Tyrie of the Treasury Select Committee is really skewering the Bank of England Chief Economist Andy Haldane on this subject by pointing out that this stimulus is apparently much more stimulative than others of the same size and asking why?

Of course Governor Carney is on the road to changing the UK public finances for the worse in two respects. As we move forwards the inflation he is so keen on “looking through” will raise the cost of financing index-linked bonds. As these are linked to the Retail Price Index which is rising at an annual rate of 2.6% the bill is on its way. Also part of the “Sledgehammer” of policy action last August was the Term Funding Scheme which has raised the national debt which shows a clear lack of forethought. You need to make your way to Appendix 9 but there it is some £31.37 billion of additional debt so that the Bank of England can subsidise the banks yet again.

Today’s data

We open with the traditional January surplus.

Public sector net borrowing (excluding public sector banks) was in surplus by £9.4 billion in January 2017, a £0.3 billion larger surplus than in January 2016; this is the highest January surplus since 2000.

There was some good news in the receipts column.

Self-assessed Income Tax and Capital Gains Tax receipts increased by £2.0 billion to £19.8 billion in January 2017 compared with January 2016; this is the highest January on record (monthly recording of self-assessed tax receipts began in April 1999).

Of course it should be the best on record as it is inflated by economic growth and of course inflation over time. However the rises in the tax-free Personal Allowance over the past 2 government’s will have dampened this somewhat.

Something familiar

This is the ongoing issue of ch-ch-changes to the methodology stirring up all the grit from the bottom of the pot so that the water goes from clear to murky.

In this month’s bulletin we have introduced a new methodology for the recording of Corporation Tax and Bank Corporation Tax Surcharge receipts.

It is hard not to groan a little although of course it is badged as an improvement.

Previously, we have used cash receipts for these taxes as a proxy for accrued revenue. An improved methodology derives accrued revenue figures by adjusting cash receipts to more accurately reflect the time at which the economic activity relating to the tax receipts took place.

It is in fact a type of seasonal adjustment.

The impact of introducing the new methodology is to distribute the tax revenue more evenly over individual months in the year.

Actually it also makes the amount in recent years higher. Do they not know how much was collected?

A deeper perspective

This is provided by the financial year so far.

Public sector net borrowing (excluding public sector banks) decreased by £13.6 billion to £49.3 billion in the current financial year-to-date (April 2016 to January 2017), compared with the same period in the previous financial year;

This is essentially because of a good performance on the revenue front.

In the current financial year-to-date, central government received £553.7 billion in income; including £416.8 billion in taxes. This was around 5% more than in the previous financial year-to-date.

Also contrary to the hints of a fiscal boost we received last autumn and still be trumpeted by the Bank of England this morning there has been some restraint in public expenditure.

Over the same period, central government spent £581.2 billion; around 2% more than in the previous financial year-to-date.

Care is needed here but this is quite close to the current official inflation measure ( CPI 1.8%), the same as what next month will be the new measure at the top of the release ( CPIH 2%), and below the number used for index-linking for that sector of the UK Gilt market ( RPI 2.6%). Of course much of the period here was  where inflation was lower but its rise may well tighten policy in real terms. This would be consistent with what we are hearing from the NHS and councils although the former always needs more money.

The National Debt

If he was still Chancellor of the Exchequer George Osborne would be shouting this from the rooftops.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,589.2 billion at the end of January 2017, equivalent to 80.5% of gross domestic product (GDP); an increase of £43.6 billion (or a decrease of 0.6 % points as a ratio of GDP) since January 2016.

He was so keen to be able to declare the latter part of that quote but sadly for him he was the past before it arrived. Poor George, although if we look at his fees for speeches maybe not so poor George. The more eagle-eyed amongst you will have spotted the “improvement” which helped.

Public sector net debt (excluding public sector banks) was £1,682.8 billion at the end of January 2017, equivalent to 85.3% of gross domestic product (GDP); an increase of £91.7 billion (or 1.9 % points as a ratio of GDP) since January 2016.

Actually the internationally comparable figure was 87.6% of GDP as of last March.

Comment

As ever much is going on. If we start with the Bank of England then it has not so much moved the goalposts as built its Ivory Tower on the wrong pitch. As the Ivory Tower is fixed in the ground then reality has to change so it has spent so much of this morning talking about a theoretical concept called U* unemployment which does some of the trick. They were discomfited trouble when Andrew Tyrie simply asked them when this had happened before? I did not expect Mark Carney to know as of course the UK did not exist before June 2013 but the blank embarrassed faces of the others were a sight to behold. Sadly nobody asked about why so many female members were leaving the Monetary Policy Committee this year?

The public finances continue to improve albeit more slowly than we would have hoped. There are dangers ahead from the cost of index-linked Gilts as inflation continues to rise and the impact of this inflation on the wider economy. But there are other issues as for example an area near to me in Battersea Park often becomes a trailer park in the search for more revenue, although sadly I understand that the benefit goes more to a private company ( Enable ) than the council itself.