Will fiscal policy save the US economy or torpedo it?

One of the features of the credit crunch era has been the shift in some places about fiscal policy. For example the International Monetary Fund was rather keen on austerity in places like Greece but then had something of a road to Damascus. Although sadly Greece has been left behind as it ploughs ahead aiming for annual fiscal surpluses like it is in a 2012 time warp. Elsewhere there have been calls for a fiscal boost and we do not need to leave Europe to see them. However as I have pointed out before there is quite a distinct possibility that President Donald Trump has read his economics 101 textbooks and applied fiscal policy into an economic slow down. Of course life these days is rarely simple as his trade policy has helped create the slow down and is no doubt a factor in this from China earlier..

Industrial output grew 5.0 percent in May from a year earlier, data from the National Bureau of Statistics showed on Friday, missing analysts’ expectations of 5.5% and well below April’s 5.4%. It was the weakest reading since early 2002. ( Reuters).

Also there has been another signal of economic worries in the way that the German bond future has risen to another all-time high this morning. Putting that in yield terms holding a benchmark ten-year bond loses you 0.26% a year now. Germany may already be regretting issuing some 3 billion Euros worth at -0.24% on Wednesday although of course they cannot lose.

US Fiscal Policy

Let us take a look at this from the perspective of the South China Morning Post.

The US budget deficit widened to US$738.6 billion in the first eight months of the financial year, a US$206 billion increase from a year earlier, despite a revenue boost from President Donald Trump’s tariffs on imported merchandise.

So we can look at this as a fiscal boost on top of an existing deficit. The latter provides its own food for thought as the US economy has been growing sometimes strongly for some years now yet it still had a deficit. In terms of detail if we look at the US Treasury Statement we seem that expenditure has been very slightly over 3 trillion dollars whereas revenue has been 2.28 trillion. If we look at where the revenue comes from it is income taxes ( 1.16 trillion) and social security and retirement at 829 billion and in comparison corporation taxes at 113 billion seem rather thin to me.

The picture in terms of changes is as shown below.

So far in the financial year that began October 1, a revenue increase of 2.3 per cent has not kept pace with a 9.3 per cent rise in spending.

If we look at the May data we see that the broad trend was exacerbated by monthly expenditure being high at 440 billion dollars as opposed to revenue of 232 billion. Marketwatch has broken this down for us.

Most of the jump can be explained by June 1 occurring on a weekend, which forced some federal payments into May. Excluding those calendar adjustments, the deficit still would have increased by 8%, with spending up by 6% and revenue up by 4%.

In terms of a breakdown it is hard not to think of the oil tankers attacked in the Gulf of Oman yesterday as I note the defence numbers, and I have to confess the phrase “military industrial complex” comes to mind.

What will recur are growing payments for Medicare, Social Security and defense. Medicare spending surged 73% — mostly because of the timing shift, though it would have rose 18% otherwise. Social Security benefits rose by 11% and defense spending rose 23%.

So we have some spending going on here and its impact on the deficit is being added to by this from February 8th last year.

The final conference committee agreement of the Tax Cuts and Jobs Act (TCJA) would cost $1.46 trillion under conventional scoring and over $1 trillion on a dynamic basis over ten years,

Thus policy has been loosened at both ends and the forecast of the Congressional Budget Office that the deficit to GDP ratio would be 4.2% this year looks like it will have to be revised upwards..

National Debt

This was announced as being 22.03 trillion dollars as of the end of May, of which 16.2 trillion is held by the public. Most of the gap is held by the US Federal Reserve. Just for comparison total debt first passed 10 trillion dollars in the 2007/08 fiscal year so it has more than doubled in the credit crunch era.

Moving to this as a share of the economy the Congressional Budget Office puts something of a spin on it.

boosting debt held by the public to $28.5 trillion,
or 92 percent of GDP, by the end of the period—up
from 78 percent now.

The IMF report earlier this month was not quite so kind.

Nonetheless, this has come at the cost of a continued increase in the debt-to-GDP ratio (now at 78 percent of GDP for the federal government and 107 percent of GDP for the general government).

Where are the bond vigilantes?

They have gone missing in action. The financial markets version of economics 101 would have the US government being punished for its perceived financial profligacy by higher bond yields on its debt. Except as I type this the ten-year Treasury Note is yielding a mere 2.06% which is hardly punishing. Indeed it has fallen over the past year as it was around 2.9% a year ago and last November went over 3.2%.

So in our brave new world the situation is one of lower bond yields facing a fiscal expansion. There is an element of worries about the economic situation but the main player here I think is that these days we expect the central bank to step in should bond yields rise. So the US Federal Reserve is increasingly expected to cut interest-rates and to undertake more QE style purchases of US government debt. The water here is a little murky because back at the end of last year there seemed to be a battle between the Federal Reserve and the President over future policy which the latter won. So much for the independence of central banks!

The economy

Let me hand you over to the New York Federal Reserve.

The New York Fed Staff Nowcast stands at 1.0% for 2019:Q2 and 1.3% for 2019:Q3. News from this week’s data releases decreased the nowcast for 2019:Q2 by 0.5 percentage point and decreased the nowcast for 2019:Q3 by 0.7 percentage point.

That compares to 2.2% annualised  for a month ago and 3.1% for the first quarter of the year. So the trend is clear.


As we track through the ledger we see that the US has entered into a new period of fiscal expansionism. The credit entries are that it has been done so ahead of an economic slow down and at current bond yields is historically cheap to finance. The debits come when we look at the fact that the starting position was of ongoing deficits after a decade long period of economic expansion. These days we worry less about national debt levels and more about the cost of financing them, although as time passes and debts rise that is a slippery slope.

The real issue now is how the economy behaves as a sharp slow down would impact the numbers heavily. We have seen the nowcast from the New York Fed showing a slowing for the summer of 2019. For myself I worry also about the money supply data which as I pointed out on the 8th of May looks weak. So this could yet swing either way although this from February 8th last year is ongoing.

The deep question here is can we even get by these days without another shot of stimulus be it monetary,fiscal or both?



The UK poverty problem is more than a story about austerity

Timing can sometimes be if not everything very important and so the release of the UN report on UK poverty by Phillip Alston on the day we get the latest data on the public finances is unlikely to be a coincidence. So let us get straight to it.

Although the United Kingdom is the world’s fifth largest economy, one fifth of its population (14 million people) live in poverty, and 1.5 million of them experienced destitution in 2017.

That is certainly eye-catching especially the use of the word destitution. However it was only on Monday that Andrew Baldwin reminded us that using purchasing power parity or PPP the UK is in fact the ninth largest economy rather than the fifth. So we note immediately that many of these concepts are more elusive than you might think. That issue particularly relates to the issue of poverty which is basic terms can be absolute or relative. With the relative definition we find that people can be better off but poverty gets worse. especially if the definitions are changed. I note that the Social Metrics Commission has done exactly that.

This new metric accounts for the negative impact on people’s weekly income of inescapable costs such as childcare and the impact that disability has on people’s needs……. The Commission’s metric also takes the first steps to including groups of people previously
omitted from poverty statistics, like those living on the streets and those in overcrowded housing.

The issue is complex and on a personal level my eyes went to one of the supporters of this which is the same Oliver Wyman which assured us that Anglo Irish Bank was the best bank in the world in 2006.  It was not too long before it was nationalised and made the largest loss in Irish corporate history.

The Detail

Be that as it may the report tells us this.

 Four million of those are more than 50 per cent below the poverty line and 1.5 million experienced destitution in 2017, unable to afford basic essentials. Following drastic changes in government economic policy beginning in 2010, the two preceding decades of progress in tackling child and pensioner poverty have begun to unravel and poverty is again on the rise. Relative child poverty rates are expected to increase by 7 per cent between 2015 and 2021 and overall child poverty rates to reach close to 40 per cent.

On the other hand if we go to the absolute poverty measure then we are told this.

“There are 1 million fewer people in absolute poverty today – a record low; 300,000 fewer children
in absolute poverty – a record low; and 637,000 fewer children living in workless households – a record low.” ( Prime Minister May)

As you can see there is an extraordinary difference between the two approaches.

UK Public Finances

We can look at the situation from this perspective so here we go.

Borrowing (public sector net borrowing excluding public sector banks) in April 2019 was £5.8 billion, £0.03 billion less than in April 2018; the lowest April borrowing since 2007.

So the monthly numbers were better albeit by the thinnest of margins so let us delve more deeply.

Borrowing in the latest full financial year (April 2018 to March 2019) was £23.5 billion, £18.3 billion less than in the previous financial year; the lowest full financial year borrowing for 17 years (April 2001 to March 2002).

As you can see we are now approaching a possible budget balance because the same rate of improvement this year would pretty much wipe the deficit out. This raises a wry smile because when the government was supposedly trying to do this it remained a mirage and was always around three years away on the forecasts. Except three years later it was three years away again! Yet the current government has regularly promised to end austerity and has in fact made quite a lot of progress towards a balance budget. Make of that what you will. In fact the situation has levels of complexity as the spending numbers make clear.

Over the same period, central government spent £740.7 billion, an increase of 2.5%.

Those are the numbers for the full financial year to March and they open the austerity debate again. It depends which inflation measure you use as to whether that is a cut in real terms (RPI) or a rise ( CPI). It also depends on how you define austerity as that too varies. Monthly numbers vary but the latest month suggests a minor reduction in it.

 while total central government expenditure increased by £1.8 billion (or 2.7%) to £66.5 billion.

Moving onto what has changed the deficit numbers ( what used to be called the PSBR) the most has been this development.

In the latest full financial year (April 2018 to March 2019), central government received £739.7 billion in income, including £559.0 billion in taxes. This was 4.9% more than in the previous financial year.

As you can see revenue has been strong and that gives us a hint that maybe the economy has been stronger than the GDP data has picked up and perhaps more in line with the employment and real wages numbers. One way of looking at the situation is to compare revenue with the national debt and if we do so using the international standard ( Maastricht) then it is 40%.

Whilst we are looking at revenue I am often critical of Royal Bank of Scotland so let me also post the other side of it.

On 14 February 2019, The Royal Bank of Scotland Group plc (RBS)announced the dividend price to be paid to shareholders on 30 April 2019. As a shareholder, the government received £0.8 billion


The report from the UN’s special rapporteur does remind us of problems as well as teaching me that the word rapporteur exists. Those familiar with my work will know that the fact that real wages are still nowhere near the previous peak is an issue. Added to this comes the enormous effort to keep house prices out of the inflation index and then the way that the costs of home ownership are represented by fantasy rents which are never paid. You might reasonably argue that home ownership is the distance of Jupiter away for the poor but the mess made of this area has affected even them as via problems with the balance between new and old rents it seems likely to me that the official rental data has recorded the wrong numbers as in too low.

Whilst the good professor has sadly resorted to a bit of politicking I thing he is on form ground pointing out issues like this.

Children are showing up at school with empty stomachs, and schools are collecting food and sending it
home because teachers know their students will otherwise go hungry…….In England,
homelessness rose 60 per cent between 2011 and 2017 and rough sleeping rose 165 per cent
from 2010 to 2018……. Food bank use increased almost
fourfold between 2012–2013 and 2017–2018,29 and there are now over 2,000 food banks in
the United Kingdom, up from just 29 at the height of the financial crisis.

The rough sleeping issue has increased in the area I live ( Battersea). I also agree that Universal Credit was a good idea that has been implemented incompetently.

Returning to the number-crunching it gets ever more complex to see through the fog as I fear HM Treasury plans to start making smoke.

In the financial year ending March 2019, £8.0 billion in dividends were transferred from the Bank of England Asset Purchase Facility Fund (BEAPFF) to HM Treasury.

Also moving to today’s inflation data which I will pick up on another time I noticed that computer games are hitting the news again, this time with a downwards effect. The official statistics are having real problems with such fashion items and @Radionotme has suggested that the trend to digital sales ( which he thinks are not reported) may also be an issue.

80 per cent of UK video game sales are now digital, new figures have revealed.

The Entertainment Retailers Association said of the £3.86bn generated by the video game market in the UK in 2018, £3.09bn was from digital and £770m was from physical sales. ( Eurogamer)



UK Retail Sales are booming again and are being driven by lower inflation

The beat of UK economic data goes on as our official statisticians do their best to flood us with it on certain days which sadly has the effect that some matters get missed. It is sadly to report that those at the top of the Office for National Statistics have rather lost the plot and if the evidence they gave to the recent parliamentary enquiry is any guide are prioritising chasing clicks rather than providing information. The labour market release which used to be fairly clear is now something of a shambles of separate releases.

Let us however buck the trend by looking at the numbers which give us an international comparison for our national debt and deficit. Regular readers will be aware that the UK ONS has its own methodology which is neither international nor understood much as I recall Stephanie Flanders when she was BBC economics editor suddenly realising some of the reality. Let me illustrate with the numbers.

At the end of December 2018, UK general government gross debt was £1,837.5 billion, equivalent to 86.7% of gross domestic product (GDP) . This represents an increase of £51.4 billion since the end of December 2017, although debt as a percentage of GDP fell by 0.4 percentage points from 87.1% over the same period. This fall in the ratio of debt to GDP implies that GDP is currently growing at a greater rate than government debt.

That quote does a fair job of explaining how the debt is now rising at a slower rate than economic output meaning it is rising in absolute terms but falling in real ones.

If we move to the annual deficit we see this.

In 2018, UK general government deficit was £32.3 billion, equivalent to 1.5% of gross domestic product (GDP) ; the lowest annual deficit since 2001. This represents a decrease of £5.8 billion compared with borrowing in 2017.

In the financial year ending March 2018, the UK government deficit was £43.3 billion (or 2.1% of GDP), a decrease of £3.0 billion compared with the previous financial year.

As you can see the pattern is familiar of a falling deficit and if we start with the deficit there is something of an irony as we note this.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

Although in debt terms we are way over.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

Rather confusingly the ONS points us towards the January so let us look at the deficit in tax year terms.

Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So only a small difference here but the debt figures show a much wider one in absolute terms.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP))

The two main differences are the switch from net to gross debt and the switch from public finances to central government which means a difference of around 4% of GDP.

But we see that the numbers still show a considerable improvement.

Retail Sales

The present upbeat springlike mood got an extra boost this morning from this.

The monthly growth rate in the quantity bought in March 2019 increased by 1.1%, with food stores and non-store retailing providing the largest contributions to this growth. Year-on-year growth in the quantity bought increased by 6.7% in March 2019, the highest since October 2016, with a range of stores noting that the milder weather this year helped boost sales in comparison with the “Beast from the East” impacting sales in March 2018.

The weather probably helped as noted and in case you were wondering the numbers are seasonally adjusted for Easter. But as I noted value growth of 7.3% that meant that a rough guide to inflation is 0.6% or my January 2015 theme has worked one more time.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time. ( January 29th 2015)

This poses quite a problem for central bankers as they want to push inflation back to and in some cases ( as we have recently analysed) above 2% per annum. This would weaken retail sales and other measures as the reduce real wages by doing so. Or if you prefer they would be ignoring the reality of “sticky wages” and preferring Ivory Tower theory. Maybe that is why they seem keener on targeting climate change than inflation these days as we are deflected away from their main job.

As this series is erratic on a monthly basis we need to run a check looking further back but when we do so the answer changes little.

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth throughout the first three months of the year. All store types except department stores and household goods stores increased in the quantity bought in the three months to March 2019, when compared with the previous three months.

It seems that the UK consumer has not waited to spend the benefits of higher real wages. At least for once we may not be observing a debt financed splurge although this does on the downside pose a worry about the trade figures, especially if this morning’s PMI survey suggesting economic growth has slowed again in the Euro area is accurate.

Putting this into song it is time for the Spencer Davis Group.

So keep on running
Keep on running,


As we approach Easter on Maundy Thursday we see that much of the UK economic data is in tune with the spring and the warm sunny weather that has arrived in London. This week has seen mostly steady inflation with continuing wage and employment growth and now has retail sales on a bit of an apparent tear. This is reinforced by the delayed debt and deficit data that matches international standards. Of course the economic output or GDP data is much more sanguine as we wait to see which will be right.

All of these numbers have their flaws. If we take an even-handed view we see that the omission of the self-employed from the wages numbers is a handicap but on the other side the omission of frankly a fair bit of modern life with things like Whatsapp being free and not being in GDP is a rising problem there.

Let me wish you a happy Easter as the UK takes a long weekend and add something else. Next month Japan will take a long break due to the accession of a new Emperor as what is called Golden Week becomes more like a Golden Fortnight. Some seem to approach this with trepidation, has the control freakery become so high, it has come to this?

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?
Original pirate material
Your listening to the streets  ( The Streets)

Me on The Investing Channel

Some much needed better economic news for France

Today has brought some good news for the economy of France and let us start with a benefit for the future. From Reuters.

Airbus signed a deal on Monday to sell 300 aircraft to China Aviation Supplies Holding Company, including 290 A320 planes and 10 A350, the French presidency said in a statement.

So we learn that someone can benefit from a trade war as we also see Boeing’s current problem with the 737 max 8 no doubt also at play here. Airbus is a European consortium but is a major factor in the French economy and below is its description of its operations in France.

Overall, Airbus exports more than €26 billion of aeronautical and space products from France each year, while placing some €12.5 billion of orders with more than 10,000 French industrial partners annually.

Business surveys

The official measure released earlier told us this.

In March 2019, the business climate is slightly more favorable than in February. The composite indicator, compiled from the answers of business managers in the main sectors, has gained one point: it stands at 104, above its long-term mean (100).

If we look at the recent pattern we see a fall from 105 in November to 102 in December where it remained in January before rising to 103 in February and now 104 in March. So according to it growth is picking up. It has a long track record but is far from perfect as for example the recent peak was 112 in December 2017 but we then saw GDP growth of only 0.2% in the first quarter of 2018 as it recorded 110.

Continuing with its message today we are also told this about employment.

In March 2019, the employment climate has improved again a little, after a more marked increase in February: the associated composite indicator has gained one point and stands at 108, well above its long-term average.

This is being driven by the service sector.

Also things should be improving as we look ahead.

The turning point indicator for the French economy as a whole remains in the area indicating a favourable short-term economic outlook.

Although the reading has fallen from 0.7 in January to 0.5 in March.

Economic Growth

We have been updated on this too with a nudge higher.It did not come with the fourth quarter number for Gross Domestic Product ( GDP) growth which was still 0.3% but the year to it was revised up to 1% from 0.9% and the average for 2018 is now 1.6% rather than 1.5%.

National Debt

The economic growth has helped with the relative number for the national debt.

At the end of 2018, the Maastricht debt accounted for €2,315.3 bn, a €56.6 bn year-on-year growth after a €70.2 bn increase in 2017. Maastricht debt is the gross consolidated debt of the general government, measured at nominal value. It reached 98.4% of GDP at the end of 2018 as in 2017.

As you can see the debt has risen but the economic growth has kept the ratio the same. At the moment investors are sanguine about such debt levels with the ten-year yield a mere 0.37% and it has been falling since mid October last year when it was just above 0.9%. Partly that is to do with the ECB buying and now holding onto some 422 billion Euros of it plus mounting speculation it may find itself buying again.

Those who followed the way the European Commission dealt with Italy may have a wry smile at this.

In 2018, public deficit reached −€59.6 bn, accounting for −2.5% of GDP after −2,8% of GDP in 2017

With economic growth slowing and President Macron offering a fiscal bone or two to the Gilet Jaunes then 2019 looks like it will see a rise. As to the overall situation then France has a public sector which fits the description, hey big spender.

As a share of GDP, revenues decreased from 53.6% to 53.5%. Expenditure went down from 56.4% to 56.0%.

For comparison the UK national debt under the same criteria is 84% of GDP although our bond yield is higher with benchmark being 1%.


The Bank of France released its latest forecasts earlier this month and if we stay in the fiscal space makes a similar point to mine.

After a period of quasi-stability in 2018 at 2.6% of GDP, the government deficit is expected to climb temporarily above 3% of GDP in 2019, given the one-off effect related to the transformation of the Tax Credit for Competitiveness and Employment (CICE).

So the national debt will be under pressure this year and depending on economic growth the ratio could rise to above 100%. As to economic growth here is the detail.

French GDP should grow by around 1.4-1.5% per year between 2019 and 2021. This growth rate, which has been slightly revised since our December 2018 projections, should lead to a gradual fall in unemployment to 8% in 2021.

So the omission of the word up means the revision was downwards and if they are right then we also get a perspective on the QE era as GDP growth will have gone 2.3%,1.6% and then 1.4/1.5%. So looked at like that it was associated with a rise in GDP of 1%. Also we see the Bank of France settling on what is something of a central banking standard of 1.5% per annum being the “speed limit” for economic growth.

Right now they think this.

Based on the Banque de France’s business survey published on 11 March, we estimate GDP growth of 0.3% for the first quarter of 2019.

Which apparently allows them to do a little trolling of Germany.

The deceleration in world demand is expected to weigh on activity, even though France is slightly less exposed than some of its larger euro area partners, until mid-2019.

It only has one larger Euro area partner.

Also we get a perspective in that after a relatively good growth phase should the projections have an aim that is true unemployment will be double what it is in the UK already.

Added to this we have central banks who claim to have a green agenda but somehow also believe that growth can keep coming and is to some extent automatic.

Growth should then be sustained by an international environment that is becoming generally favourable once again and export market shares that are expected to stabilise.

Oh and these days central banks are what Arthur Daley of Minder would call a nice little earner.

Like each year, the bulk of the Banque de France’s profits were paid to the government and hence to the national community in the form of income tax and dividends, with EUR 5 billion due for 2017.


There is a fair bit to consider here. Firstly we have the issue of the private-sector or Markit PMI survey being not far off the polar opposite of the official one.

At the end of the first quarter, the French private
sector was unable to continue the recovery seen in
February, as both the manufacturing and service
sectors registered contractions in business activity.

If they surveyed a similar group that is quite a triumph! The French economy can “Go Your Own Way” as for example we saw it grow at a quarterly rate of 0.2% in the first half of 2018 and then 0.3% in the second. Only a minor difference but the opposite pattern to elsewhere.

Looking at the monetary data it does seem to be doing better than the overall Euro area. There was a sharp fall in M1 growth  between November and December which poses a worry for now but then a recovery of much of it to 9.2% in January. So if this is sustained France looks like it might outperform the Euro area as 2018 progresses as it overall saw a fall in money supply growth. Or if the numbers turn out to work literally then a dip followed by a pick-up.


Public Finance and Retail Sales numbers are upbeat about UK economic prospects

Before we even got to the latest in the current round of UK economic data there has been something of a change in financial markets. So let us reflect this via a tweet from me as I am the only person pointing this out.

Simply extraordinary! The UK ten-year Gilt yield is a mere 1.1% and we can borrow very cheaply. A combination of this week’s £3.4 billion QE from the Bank of England and the US Fed folding last night.

I suppose it is my time in the Gilt Market which means I follow it but there has been quite a shift which is getting ignored. Let me shift to the economic implications of this of which the most obvious is that the UK government can borrow very cheaply. Even if we look at the thirty-year yield at 1.59% it is very low in historical terms and but for the fact we have seen negative yields elsewhere ( and very briefly here) I would call it ultra low. No doubt its move lower last night was influenced by the £3.4 billion of purchases by the Bank of England this week especially the £1.1 billion of our 2057 Gilt. Added to that was the way that as we expected here the US Federal Reserve folded like a deck chair last night as placed a Powell put option under the US stock market.

UK Public Finances

Another area where I have been on a lonely journey is this which I reflected on last week ahead of the Spring Statement in the UK.

 However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

In fact the January figures had been really good but maybe a little too good to be true.

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear.

So let us now find out.

Borrowing (public sector net borrowing excluding public sector banks) in February 2019 was £0.2 billion, £1.0 billion less than in February 2018; this was the lowest February borrowing since 2017.

So that is hopeful as there was no reverse swing but as ever we need to take some perspective for a clearer picture.

Borrowing in the current financial year-to-date (April 2018 to February 2019) (YTD) was £23.1 billion, £18.0 billion less than in the same period last year; the lowest YTD borrowing for 17 years (April 2001 to February 2002).

We see that we have maintained the same trend as the difference between this and January is within the likely error at £500 million. Also the driving force here was as hoped a strong tax collecting season.

combined self-assessed Income Tax receipts were £18.7 billion, of which £14.7 billion was paid in January and £4.0 billion was paid in February; an increase of £1.7 billion compared with the same period in 2018…….Combined Capital Gains Tax receipts were £8.8 billion, of which £6.8 billion was paid in January and £2.0 billion was paid in February; an increase of £1.3 billion compared with the same period in 2018.

I have to confess I am a little surprised at the relative size of the capital gains take and can only think that higher asset prices have helped. Do readers have any insight on it?

This means that looked at in isolation the UK fiscal position now looks very strong and we may be approaching fiscal balance which has been 2/3  years away since about 2012! Of course it may be spent and if we widen our outlook there are plainly plenty of good causes out there such as the Universal Credit shambles and the police for starters.

The national debt position is more complex.

Debt (public sector net debt excluding public sector banks) at the end of February 2019 was £1,785.6 billion (or 82.8% of gross domestic product (GDP)); an increase of £22.7 billion (or a decrease of 1.4 percentage points of GDP) on February 2018.

As you can see the rate of rise has slowed very sharply and such that even the low rate of economic growth we have seen has exceeded it causing the debt to GDP ratio to fall. Now I was asked on here about the banks last week and replied with this.

But it misses out the banks which would add another £283 billion to this. So much less than they did but still there.

So if we put them back in then the debt to GDP ratio is more like 96% but as I then pointed out the poor design of the Bank of England Term Funding Scheme amongst other things means this happens too.

Also they impact in another way as the Bank of England adds £185 billion to the national debt mostly via help to the banks.

So if we knock that off then a more realistic ratio is perhaps 87%.

Retail Sales

These showed yet again that the UK consumer seems to have “spend,spend,spend” on the brain.

The monthly growth rate in the quantity bought in February 2019 increased by 0.4%, with a decline of 1.2% in food stores offset by growth in all other main sectors.

As an aside I have noticed more than a few articles in the media telling us that people are stockpiling food and someone posted a receipt on twitter for over £600 after doing exactly that. But if we move from the media world to the much wide real one we see this.

The monthly fall in food stores was the strongest decline since December 2016 at negative 1.5%, reversing the increase of 0.9% in January 2019, with food retailers suggesting that “getting back to normal” following the January sales had contributed to this fall.

If they stockpiled a few months ago I will only be eating tinned or frozen food at their place.

Moving to the annual picture tells us this.

Year-on-year growth in the quantity bought in February 2019 increased by 4.0%, with growth in all main sectors, while the only sub-sector to show a decline within non-food stores was household goods stores at negative 1.3%.

Those who follow my theme from January 2015 that lower inflation boosts retail sales may like to note that the figures below suggest that at 0.3% it has been at play again.

Both the amount spent and the quantity bought in the retail industry showed strong growth of 4.3% and 4.0% respectively in February 2019 when compared with a year earlier.

If we look at wage growth at over 3% we see that in terms of retail sales we are seeing substantial real wage growth if the official data is any guide.


We find that the UK economic news continues to be pretty good. There are good signs for consumption from retail sales and the strong public finances do relate to what is strong tax take.

In the current financial YTD (April 2018 to February 2019), central government received £674.9 billion in income, including £512.2 billion in taxes. This was 5% more than in the same period in 2017.

So these numbers suggest we are doing better than we would otherwise have thought and if we also factor in the real wage growth that they might continue. A little caution is required as the money supply data is weak but perhaps GDP growth could continue to bumble on at 0.3% per quarter or so. At the moment if we add in an international perspective that does not look too bad.

Meanwhile some things just cannot be avoided it would seem.

In February 2019, the UK’s GNI and VAT contribution to the European Union (EU) was £2.9 billion, £1.0 billion higher than in February 2018; the highest cash payment in any month on record (monthly records began in January 1993). This is due largely to the timing of payments made to the EU by all member states rather than a reflection of any budgetary increase.

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The UK Public Finances are looking strong ahead of the Spring Statement

Today brings one of the set piece events of the UK financial year as the Chancellor of the Exchequer presents his Spring Statement. Of course it was supposed to follow a success last night for the government’s proposed Brexit deal but that did not happen. Thus the rumours about providing financial sweeteners after such a deal are likely to remain just that. However it does provide an opportunity to make clear how much the UK public finances have improved in the last few years. This often gets ignored in the media maelstrom as the priority is more often to score a political point.

There are quite a few issues here and let me open by illustrating with some recent tweets from Ben Chu of the Independent.

…Because there ISN’T a pot of money waiting to be spent, which is what that language from the Chancellor suggests……Instead there is, according to the last October, projected to be a structural deficit of 1.3% of GDP in 2020-21. The Chancellor’s self-imposed ‘fiscal mandate’ requires a deficit of less than 2% of GDP in that year……so he’s set to undershoot that by 0.7% of GDP in that year, which works out as £15.4bn. (These figures will be updated next week at the Spring Statement BTW but Treasury leaks suggest they will be direction that’s beneficial for the Chancellor)……so it’s this £15.4bn (or more) which Hammond seems to be saying will be made available for public spending or tax cuts or whatever if MPs approve May’s deal…

Let us work our way through this. Is there a pot of money waiting to be spent? Not literally as in as having squirreled some away but the improvement in the public finances means that we could borrow more. The latest numbers for the public finances show this.

Borrowing in the current financial year-to-date (April 2018 to January 2019) (YTD) was £21.2 billion, £18.5 billion less than in the same period last year; the lowest YTD for 17 years (since 2001)……..Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

Whilst some tax may have been paid earlier this year and flattered the Income Tax self assessment season the direction of travel is and has been clear. Regular readers will recall there was a period when the numbers underperformed the economy well after a lag we got that back. So whilst there is not a literal pot of money there is a metaphorical one. For perspective the peak year for borrowing after the credit crunch was a bit over £150 billion.

Structural Deficit

If we address this next then let me point out that in reality it is pretty meaningless. At a time where by definition the credit crunch has brought enormous structural change there is a clear conceptual problem. Politician’s love this sort of number as it allows them to claim success after hitting an easier target. But as we have seen before a small tweak to the assumptions can lead to large ch-ch-changes.

Fiscal Mandate

These sort of things are really will o’ the wisp style developments which suit the political agenda but can disappear as quickly as they appeared. For example the deficit of 2% of GDP quoted is a self-imposed rule that could be changed overnight in either direction. It is simply a choice ( unless you hit a stage where the “bond vigilantes” impose things on you) presented as a fait accompli until it changes again.

State of Independence

We find ourselves wondering what establishment claims of independence mean in practice yet again? If you claim the Office for Budget Responsibility is independent the tweets above pose two clear challenges. Firstly if so. how is the Treasury leaking its figures? Next comes the way that it regularly manages to tweak its assumptions to suit the government of the day.

If we stay with the OBR then Ben Chu seems to be a believer.

What the lord of forecasting (in this case OBR director Robert Chote) giveth, he can also taketh away.

That was from the Independent last November and again as I have noted above there is an element of truth but the “lord of forecasting” ignores the simply woeful forecasting record of the OBR. The latest example of this is the way that the OBR has been forecasting rises in the UK fiscal deficit over the past 2/3 years whereas the deficit has been falling sharply.

Gilt Yields and Inflation

These are two big influences on the public finances as they determine the costs of our borrowing. They have declined in three main ways.

  1. UK Gilt yields are very low in historical terms with the benchmark ten-year yield only 1.18% and even the thirty-year yield being only 1.71%
  2. Inflation has fallen reducing the cost of index-linked debt which is indexed to the Retail Prices Index. That currently rising at an annual rate of 2.5%
  3. As we are borrowing less this is a smaller influence as on our fixed-interest borrowing (~78%) the extra costs are on new debt only.

Thus the impact of matters such as the QE ( Quantitative Easing) era and the way that central banks have operated is positive for the public finances. A recent example of this was the response to the new policy announcement of the ECB which reduced UK debt costs as they followed European ones lower.


We do already have one announcement which may affect the public finances as this was announced this morning. From the Department for International Trade.

Today the government announces details of 12-month 🇬🇧 temporary tariff that will only be applied if we leave the EU with no deal: UK businesses will not pay tariffs on 87% of goods imports by value – helping to avoid price increases & supporting households.

They go on to give some examples.

There will be a mix of tariffs & quotas on products including: Finished vehicles Beef, lamb, pork & poultry Butter & some cheeses Bananas, raw cane sugar, and certain kinds of fish And in sectors where the UK is maintaining protection from unfair trading practices.

That is how we will treat other countries it is up to them how they treat our exports. But moving back to today;s theme there will be a loss of revenue from this should it take place.


In terms of the public finances alone then the UK has done well. If we widen the debate though there are consequences elsewhere. For example there is the issue of austerity which we have not seen in outright terms as government spending has risen and usually by more than inflation. However it has hit some for example the way that some benefits rises were capped at 1% per annum. Also the rise in knife crime has refocused attention on cuts to the policy budget.

Meanwhile the improvement will not be welcome in other areas as here is the Financial Times from November 2016.

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

As we are nearly half-way through that period it is safe to say that things could not be going much worse for that Chris Giles analysis. If I may offer him some help then my first rule of OBR club that it is always wrong worked yet again.

With bad income tax revenues so far this financial year, the OBR has already said it was “very unlikely” to hit the 2016-17 Budget forecast.

Actually time was not especially kind to this bit either.

Public sector debt will jump, Mr Hammond will be forced to admit, by £100bn this year, raising it from 83 per cent of national income to almost 90 per cent from higher borrowing and because the ONS has announced it will treat the Bank of England’s new term-funding scheme as additional debt.

Still at least one reply kept a sense of humour as we note we have not left the European Union yet so things could change.

The last time we left Europe was May 1940. It didn’t go very well. ( Three line flip )

Number Crunching

Last night Ronaldo scored a Champions League Hat-Trick. This morning the shares of Juventus are up by 16% meaning the club is in theory worth an extra amount more than they paid for him. Of course you would be unlikely to be able to sell all the shares at that price but as they have doubled since he arrived the number crunching goes on.

Even the bond market has got in on the game.


Strong news from the UK Public Finances suggest better news for the economy too

The last year or so has been something of a battle concerning the UK finances between perception and reality. What I mean by this has been that the figures have overall been good but at the same time there have been a lot of stories about there being trouble ahead. Much of that has been Brexit related. As I have pointed out before the post Brexit news involves a lot of speculation but what has disappointed me is the way that many places have implied we are in trouble. If there are problems they are around unfunded pension obligations and an ageing population which have been true for years.

This has not been helped by the Office for Budget Responsibility which is treated with far more respect than it deserves. My rule of thumb is that the first rule of OBR Club is that the OBR is always wrong. It has been kind enough to confirm this rule yet again and let me show how from its latest comprehensive forecast from last October.

The public finances have performed better so far this year than we and outside forecasters expected back in March, even though the economy has grown less quickly.

As you can see they are trying to ameliorate things by involving others but if you peer through the spin you see that their error was in fact larger than it appears as if they had been right about the economy they would have been even more wrong about the public finances. How wrong were they?

As a result – and before the impact of any policy decisions – we have revised borrowing £11.9 billion lower for the full
year (like for like), creating a more favourable starting point for the forecast. This reflects stronger tax revenues and lower spending on welfare and debt interest than expected.

Even in these inflated times £11.9 billion is a lot of money and in fact they now think that the future is brighter too leading to this.

But this masks a significant improvement in the underlying pace of deficit reduction, that on its own would have put the Government on course to achieve its objective of a balanced budget for the first time.

That would be news although care is needed on two fronts. The first is that the government is likely to spend it making a balanced budget something of an ongoing mirage which let;s face it has been just around the corner for about five years now. More ominously as the OBR is always wrong we might well fear upside improvements from it.

Today’s Data

This was might be covered by the word boom!

Borrowing (public sector net borrowing excluding public sector banks) in January 2019 was in surplus by £14.9 billion, a £5.6 billion greater surplus than in January 2018; this was the largest January surplus on record (records began in 1993).

As ever we need to step back a little for some perspective.

Borrowing in the current financial year-to-date (April 2018 to January 2019) (YTD) was £21.2 billion, £18.5 billion less than in the same period last year; the lowest YTD for 17 years (since 2001).

That is quite a drop and something which will lead to yet more frowns at the OBR which has got it all wrong again. Let us examine what has taken place and first we need to note something which poses a question for much analysis.

Self-assessed Income Tax and Capital Gains Tax receipts (combined) were £21.4 billion in January 2019, which is £3.1 billion more than in January 2018; late payments mean that the proportion of self-assessed taxes recorded in January and February can vary year-on-year and it is therefore advisable to consider these two months together.

As we note the caveat that payments might have been made earlier this year we also need to remind ourselves that income tax receipts can be a signal of economic strength. So they may feed on from the stronger employment and wage data we saw on Tuesday and may also give us a signal that self-employed earnings have improved. This is all implicit rather than explicit but we may have been doing better than the GDP numbers have picked up.

Another sector of tax receipts was booming too.

Capital Gains Tax receipts in January 2019 were £6.8 billion, an increase of £1.2 billion compared with January 2018; this is the highest January on record (records began in January 1998)

I see that some are attributing this to lower tax rates which may be an influence but perhaps higher equity markets made people take profits and pay more tax too. Or the dips panicked some out but the point remains that the picture is seldom simple.

The better news for the deficit is feeding into the national debt numbers as well.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP)); an increase of £40.5 billion (or a decrease of 0.8 percentage points of GDP) on January 2018.

We are still adding to the public-sector debt in absolute terms but because the economy is stronger we are making ground in relative terms.


I see that the New Economics Foundation has reported this today.

The calculations make for grim reading. The isolated impact of government policy has reduced GDP growth every single year since 2010. After compounding this effect year-on-year, the effects of austerity are expected to have suppressed the level of GDP by almost £100 billion in the 2018/​19 alone.

An obvious issue is that this is based on OBR modelling and we know what its performance has been. Added to this is the factor that we simply do not know what the alternative would have been because as we borrowed more we might have had much higher debt interest costs and/or more QE from the Bank of England. This leads us to the conclusion that such modelling depends far more on the assumptions that it makes than any likely reality.

Moving back to the actual numbers then UK government expenditure grew in real terms in January.

while total central government expenditure increased by 3.0% to £62.2 billion.

If we switch to the financial year to date then the picture remains the same.

Over the same period, central government spent £615.9 billion, around 3% more than in the same period in 2017.


The underlying picture for the UK public finances has been really good for a while now as the deficit has fallen. Furthermore the pick-up in tax revenue especially for income taxes suggests that the economy has been doing better than the business surveys and national accounts have told us. Against that I suspect some of this is lagged from when we were doing better than now but not all of it and some taxes may have been paid earlier than last year.

Putting it another way the UK Gilt market has been telling us this for a while now as this has been an influence on the ten-year yield being a mere 1.2%. It is not the only influence as concern over another bout of Bank of England QE is at play as well and speaking of that there is this news.

A.P. Moller-Maersk A/S, the world’s biggest shipping line, forecast 2019 profit below analysts’ estimates and said trade disputes are dimming the outlook for world economic growth. The shares plunged.

Maersk said Thursday that Ebitda, a measure of operating profit, will be around $4 billion for the year, compared with an average estimate of $4.77 billion in a Bloomberg survey of analysts. The shares sank as much as 13 percent in Copenhagen, marking their worst day since June 2016. ( Bloomberg )

I wonder how the corporate bonds of Maersk that the Bank of England bought are doing? You can add that to my past concerns as to how buying bonds from a Danish shipping company help the UK economy? Perhaps someone will ask the “Sledgehammer QE” advocate Andy Haldane of the Bank of England when he gives his speech later.

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