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

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

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

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

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

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

Current issues

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

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

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

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

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

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

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

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

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

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

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

Inflation

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

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

Today’s data

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

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

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

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

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

The National Debt

Here it is.

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

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

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

Comment

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

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

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

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

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

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

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

 

 

 

 

 

 

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Are improving UK Public Finances a sign of austerity or stimulus?

One of the features of the credit crunch era is that it brought the public finances into the news headlines. There were two main reasons for this and the first was the economic slow down leading to fiscal stabilisers coming into effect as tax revenues dropped. The second was the cost of the bank bailouts as privatisation of profits turned into socialisation of losses. The latter also had the feature that establishments did everything they could to keep the bailouts out of the official records. For example my country the UK put them at the back of the statistical bulletin hoping ( successfully) that the vast majority would not bother to read that far. My subject of earlier this week Portugal always says the bailout is excluded before a year or so later Eurostat corrects this.

The next tactic was to forecast that the future would be bright and in the UK that involved a fiscal surplus that has never turned up! It is now rather late and seems to have been abandoned but under the previous Chancellor of the Exchequer George Osborne it was always around 3/4 years away. This meant that we have had a sort of stimulus austerity where we know that some people and at times many people have been affected and experienced cuts but somehow the aggregate number does not shrink by much if at all.

If we move to the economy then there have been developments to boost revenue and we got a clear example of this yesterday. Here is the official retail sales update.

Compared with August 2016, the quantity bought increased by 2.4%; the 52nd consecutive month of year-on-year increase in retail sales.

As you can see we have seen quite a long spell of rising retail volumes providing upward momentum for indirect taxes of which the flagship in the UK is Value Added Tax which was increased to 20% in response to the credit crunch. Actually as it is levied on price increases too the development below will boost VAT as well.

Store prices increased across all store types on the year, with non-food stores and non-store retailing recording their highest year-on-year price growth since March 1992, at 3.2% and 3.3% respectively.

There is one cautionary note is that clothing prices ( 4.2%) are a factor and we are at a time of year where the UK’s statisticians have got themselves into a mess on this front. In fact much of the recent debate over inflation measurement was initially triggered by the 2010 debacle on this front.

Public Sector Pay

One area of austerity was/is the public-sector pay cap where rises were limited to 1% per annum, although we should say 1% per annum for most as we saw that some seemed to be exempt. However this seems to be ending as we start to see deals that break it. In terms of the public finances the Financial Times has published this.

 

The IFS has estimated that it would cost £4.1bn a year by 2019-20 if pay across the public sector were increased in line with inflation from next year rather than capped at 1 per cent……….Figures published in March by the Office for Budget Responsibility, the fiscal watchdog, suggest that if a 2 per cent pay rise were offered to all public sector workers rather than the planned 1 per cent cap, employee numbers would need to be reduced by about 50,000 to stay within current budgets.

Today’s Data

The UK data this week has been like a bit of late summer sun.

Public sector net borrowing (excluding public sector banks) decreased by £1.3 billion to £5.7 billion in August 2017, compared with August 2016; this is the lowest August net borrowing since 2007.

This combined with a further upgrade revision for July meant that we are now slightly ahead on a year on year basis.

Public sector net borrowing (excluding public sector banks) decreased by £0.2 billion to £28.3 billion in the current financial year-to-date (April 2017 to August 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2007.

Revenue

There was good news on the income tax front as the self-assessment season was completed.

This month, receipts from self-assessed Income Tax were £1.3 billion, taking the combined total of July and August 2017 to £9.4 billion; an increase of £0.4 billion compared with the same period in 2016. This is the highest level of combined July and August self-assessed Income Tax receipts on record (records began in 1999).

So we had an increase of over 4% on a year on year basis. This seems to be the state of play across overall revenues.

In the current financial year-to-date, central government received £280.4 billion in income; including £209.4 billion in taxes. This was around 4% more than in the same period in the previous financial year.

There is one area which continues to stand out and in spite of the talk and comment about slow downs it remains Stamp Duty on land and property. So far this financial year it has raised some £5.9 billion which is up £0.9 billion on the same period in 2016. A factor in the increase will be the rise in Stamp Duty rates for buy-to lets.

Expenditure

This rose at a slower rate which depending on the measure you use close to or blow the inflation rate.

Over the same period, central government spent £302.7 billion; around 3% more than in the same period in the previous financial year.

The subject of inflation remains a topic in another form as the UK’s inflation or index linked debt is getting expensive. This is due to the rises in the Retail Price Index which will be the major factor in UK debt interest rising by £3.8 billion to £26.3 billion in the financial year so far. So much so there is an official explainer.

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

The next area where there has been something of a surge raises a wry smile. Contributions to the European Union have risen by £1 billion to £4.6 billion this financial year so far.

Comment 

We can see the UK’s journey below.

Current estimates indicate that in the full financial year ending March 2017 (April 2016 to March 2017), the public sector borrowed £45.6 billion, or 2.3% of gross domestic product (GDP). This was £27.6 billion lower than in the previous full financial year and around one-third of that borrowed in the financial year ending March 2010, when borrowing was £152.5 billion or 10.0% of GDP.

We seem so far this year to be borrowing at the same rate as last year. So you could easily argue we have had a long period of stimulus ( fiscal deficits). Yet only an hour after today’s numbers have been released we seem to have moved on.

Chancellor should have room to ease austerity in November Budget, says John Hawksworth

Oh and remember the first rule of OBR ( Office of Budget Responsibility) Club? From the Guardian.

Back in March, the OBR forecast that the budget deficit would rise to around £58 billion this year, but the latest data suggest that it may be similar to the £46 billion outturn for 2016/17.

So let us enjoy a week where the data has been better as we mull the likely consequences of a minority government for public spending. Meanwhile here are the national debt numbers and as I pointed out earlier they omit £300 billion ( RBS).

Public sector net debt (excluding public sector banks) was £1,773.3 billion at the end of August 2017, equivalent to 88.0% of gross domestic product (GDP), an increase of £150.9 billion (or 4.8 percentage points as a ratio of GDP) on August 2016.

Oh and £108.8 billion of the increase is the “Sledgehammer” QE of Mark Carney and the Bank of England. On that subject here is Depeche Mode.

Enjoy the silence

Me on Core Finance TV

http://www.corelondon.tv/central-banks-infinity-beyond/

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Fiscal policy was on the march at Jackson Hole

Over the weekend many of the world’s central bankers were guests of the Kansas Federal Reserve in Jackson Hole Wyoming. In terms of location I believe it was chosen because a previous chair of the US Federal Reserve Paul Volcker was a keen fisherman. However this late August symposium has become one which influences the economic winds of change as central bankers discussed easing policy in response to the credit crunch and in more recent times a speech was given on what were perceived to be the wonders of Forward Guidance. Michael Woodford was very clever in suggesting to a group who wanted to believe that they could influence events via mere speaking or what has become called Open Mouth Operations.

I shall argue that the most effective form of forward guidance involves advance commitment to definite criteria for future policy decisions.

They are still at that today to some extent although the definite criteria theme has mostly been ignored especially in the UK where it went wrong for the Bank of England almost immediately.

What about now?

The problem for the central bankers is that to coin a phrase that monetary policy may be “maxxed out” or as it is put more formally below.

despite attempts to set economies on normalization paths after the Great Recession and the Global Financial Crisis, the scope for countercyclical monetary policy remains limited: benchmark interest rates have continued to hover near or even below zero.

This is from a paper presented on Saturday by Alan Auerbach and Yuriy Gorodnichenko of the University of California Berkeley. In their conclusion they go further.

Although economists do not believe that expansions die from old age, the prolonged U.S. expansion will end sooner or later and there is serious concern about the ability of policymakers in the United States and other developed countries to fight the next economic downturn. Indeed the ammunition of central banks is much more limited now than before the Great Recession and it is unlikely that expansionary monetary policy can be as aggressive and effective as it was during the crisis.

Actually if monetary policy had been effective the paper would not be necessary as the various economies would have responded and we would be on a road where interest-rates were say 2/3% and central bank balance sheets were shrinking, In reality such interest-rates to quote Star Wars are “far, far away”.

Fiscal policy

If monetary policy has less scope for action then our central planners face being irrelevant so they will be grasping for an alternative and fortunately according to our two valiant professors it is at hand.

With tight constraints on central banks, one may expect—or maybe hope for—a more active response of fiscal policy when the next recession arrives.

The problem with this the familiar theme of the “bond vigilantes” turning up.

It is certainly conceivable (see e.g. Aguiar et al. 2017) that a significant fiscal stimulus can raise doubts about the ability of a government to repay its debts and, as a result, increase borrowing costs so much that the government may find its debt unsustainable and default.

This of course was last seen on a major scale in the Euro area crisis particularly in Greece, Ireland, Portugal and Spain. Of course the European Central Bank intervened by buying bonds and later followed another part of Michael Woodford’s advice by introducing a larger and more widespread QE or bond buying program. So we have seen central banks intervening in fiscal policy via a reduction in bond yields something which government’s try to keep quiet. We have individual instances of bond yield soaring such as Venezuela but the last few years have seen central banking victories and defeats for the vigilantes. In another form that continued this morning as I note that a North Korean ballistic missile passed over Japan but the Nikkei 225 equity index only fell 87 points presumably influenced by the way that the Bank of Japan buys on down days.

What about more overt fiscal policy?

Apparently this can work.

We find that in our sample expansionary government spending shocks have not been followed by persistent increases in debt-to-GDP ratios or borrowing costs (interest rates, CDS spreads). This result obtains especially when the economy is weak. In fact, a fiscal stimulus in a weak economy may help improve fiscal sustainability along the metrics we study.

Indeed this for them is essentially a continuation of past work.

This constraint on monetary policy coincides with a resurgence in activist fiscal policy (Auerbach and Gale, 2009), which has moved from a focus on automatic stabilizers to a stronger reliance on discretionary measures, reflecting not only necessity but also growing evidence of the effectiveness of such policy to fight recessions (e.g., Auerbach and Gorodnichenko, 2012, 2013).

Also I am reminded that we should never believe something until it is officially denied.

Given the nature of the sample analyzed, our results should not be interpreted as an unconditional call for an aggressive government spending in response to a deteriorating economy.

The UK

Jonathan Portes who is an advocate for fiscal policy has written this in Prospect Magazine.

The answer is very technical—£100 billion or so of the extra debt relates to the Bank of England’s Asset Purchase Facility. Briefly, the BoE makes loans to banks and buys corporate bonds, in return for cash (“central bank reserves”).

He suggests that as this has been mostly ignored( not on here) we could borrow for other purposes.

Comment

There is a fair bit to consider here as I note that North Korea has done its bit as bond markets have risen today and yields fallen. For example the UK ten-year Gilt yield has dropped to 1% giving us food for thought with inflation at either 2.6% ( CPI) or 3.6% ( RPI). A clear factor in the expected push for fiscal policy is that bond yields are so low as conventional UK Gilt yields do not go above 1.7% and other countries such as Germany Switzerland and Japan can borrow for much less. Against such bond yields theoretical analysis is always likely to look good so the first issue is whether they would be maintained in a fiscal expansion. Or to put it another way are central banks being asked here for a type of QE to infinity?

Next is the issue of how a fiscal stimulus is defined as for example countries which have stopped borrowing and run a surplus like Germany and Sweden are relatively rare. Most have continued to borrow and run annual fiscal deficits albeit usually declining ones. Thus the ballpark seems to have shifted to increasing deficits rather than having one at all which is the sort of “junkie culture” road that monetary policy went down. If we look back to a past advocate of fiscal stimulus John Maynard Keynes he was also someone who suggested that when the growth came there would be a period of payback.

What we also find ourselves mulling is the difference between the specific and the general. I am sure that everyone can think of a project that would provide plenty of benefits and gains but as we move to a more generalist position we find ourselves facing a reality of Hinkley Point and HS2. To be fair our two professors do acknowledge this.

Bridges to nowhere, “pet” projects and other wasteful spending can outweigh any benefits of countercyclical fiscal policy.

As a conclusion the Ivory Tower theory is that fiscal policy will work. There are two catches the first is that if they were even regularly right we would not be where we are. The next is that on some measures we have been trying it for quite some time.

In reality the establishment seems likely to latch onto this as we have discussed before.

 

 

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