Can the good news from UK wage growth last?

Today is one of those days where we find ourselves awash in economic data from the UK. The labour market data usually comes out the day before the inflation numbers but it is a week late and has been produced at the same time as the public finances numbers. So whilst this is not what is called a theme day we have a lot to digest as we mull why the public finances were not released yesterday or tomorrow so they could get their own space and attention.

Let us start with some good news from an area that has been short of it in the credit crunch era.

Looking at annual growth rates for total pay (including bonuses), between September to November 2017 and September to November 2018:


total pay in nominal terms increased by 3.4%, the annual growth rate has not been higher since May to July 2008.


total pay in real terms increased by 1.2%, the annual growth rate has not been higher since September to November 2016.

I am pleased to see a concentration on total pay as whilst we learn something from regular pay the main number of interest is the total. It has risen to the highest it has been for over a decade and according to the official measure at least we have some sort of solid real wage growth. The actual picture in terms of real wages is not as good as that sadly because it relies on the CPIH measure that found itself under fire from the House Of Lords only last week.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs

But even if we switch to other inflation measures which are invariably higher we see that we have at least some real wage growth albeit not much if compared to RPI, but at least we have some. If we switch to the monthly numbers we see that they are erratic but the last 3 readers at 2.9% then 4% then 3.2% do show a drift higher and thus we may see another better three-monthly figure next time around. The catch will be when the October 4% drops out because we might then see something of a sharp fall.

Moving to actual amounts we see this.

For November 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was:

£527 per week in nominal terms, up from £510 per week for a year earlier.£495 per week in constant 2015 prices, up from £490 per week for a year earlier, but £30 lower than the pre-downturn peak of £525 per week for February 2008.

Put like that there is something of a quirk in the numbers as it was £528 in October so wages are up on a year before but down on a monthly basis so I think we need to welcome the news but cross our fingers looking ahead. The areas which have been pulling the numbers higher have been construction ( 4% in November) which in general has been doing well over the past year and finance ( 4.2% in November) which has picked up  in the last couple of months.


This continued the good news theme.

The employment rates for both men and women have been generally increasing since early 2012. For the latest time period, September to November 2018, the employment rate for all people aged from 16 to 64 years was 75.8%, the highest since comparable estimates began in 1971.

This area was the first to turn around back in the day and regular readers may recall it was a leading indicator when other signals both lacked and lagged. It took the economic output numbers ( GDP) another year or so to catch up.

Whilst the rate of growth has slowed it remains positive.

For September to November 2018, there were an estimated 32.53 million people aged 16 years and over in work, 141,000 more than for June to August 2018 and 328,000 more than for a year earlier.

Although some have been forced into this situation as for example by this.

The increase in the employment rate for women over the last few years has been partly due to ongoing changes to the State Pension age for women, resulting in fewer women retiring between the ages of 60 and 65 years.


Here the news was more nuanced as we see that relatively things improved.

the unemployment rate for all people was 4.0%, it has not lower been since December 1974 to February 1975

But in absolute terms the number rose in the quarterly period measured.

1.37 million unemployed people, little changed (up 8,000) compared with June to August 2018 but 68,000 fewer than for a year earlier.

Public Finances

Let us look at this from the labour market data which would suggest rising income tax revenues and higher VAT receipts from the combination of higher wages and more people being employed.

Central government receipts in December 2018 increased by 4.3% compared with December 2017, to £59.8 billion……

Much of this annual growth in central government receipts in December 2018 came from Value Added Tax (VAT), Income Tax, Rail Franchise Premia and National Insurance contributions compared with December 2017.

So that does seem to have some backing and if we switch to the fiscal year so far we see that income tax receipts have risen by £8 billion to £128.2 billion compared to last year. These extra receipts combined with some more VAT and for once some extra from Corporation Tax ( up £2.3 billion to £45.8 billion) have played their part in this.

Borrowing in the current financial year-to-date (YTD) was £35.9 billion, £13.1 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

There was an issue with the December numbers and it was pretty much from something not far off most people’s lips these days.

Borrowing (public sector net borrowing excluding public sector banks) in December 2018 was £3.0 billion, £0.3 billion more than in December 2017;

Here it is.

In December 2018, the UK’s net contribution to the European Union (EU) was £1.5 billion higher than in December 2017……In December 2018, there have been some amendments to member states’ contributions to 2018 EU budget, however the amount returned to the UK is much smaller than in December 2017.

As to the national debt it continues to rise but it has been outperformed by the economy so in relative terms it has fallen.

Debt (public sector net debt excluding public sector banks) at the end of December 2018 was £1,808.9 billion (or 84.0% of gross domestic product (GDP)); an increase of £48.6 billion (or a decrease of 0.5 percentage points of GDP) on December 2017.



We see that the main trends looked at today provide some welcome mid-winter cheer for the UK. The key signal these days is real wages and the difference to 2016 is that this time around we have some wage growth rather than the leader being lower inflation. This will boost other areas of the economy and it has done its bit for the public finances.

However there are dark clouds out there and it is hard not to think of what is happening in China and in the car sector as we note that manufacturing wage growth has been declining over the past 12 months.. The 3.1% of November 2017 was replaced by a mere 1.2% this November reminding us that some areas are singing along with Taylor Swift.

Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble



UK GDP and Public Finances look good but the detail is worrying

Today as is often the case the last full trading day before Christmas brings the latest official data for the UK Public Finances which have had a good year. My main theme today will be to look at the many varieties of statistical manipulation that have been happening or as Marvin Gaye so famously put it.

Oh, what’s going on
What’s going on
Yeah, what’s going on
Ah, what’s going on

We also get as is the new wont a further update on UK GDP which also has a statistical swerve as we note the day has begun badly for France on this front.

In Q3 2018, GDP in volume terms* accelerated slightly: +0.3% after +0.2%.

That is a downwards revision of 0.1% and with the current debate over future public finances there was also this.

In Q3 2018, general government net borrowing increased by 0.4 points: the public deficit stood at 3.1% of the GDP after 2.7%.

The national debt is edging towards 100% of GDP ( 99.3%).

UK Public Finances

On Monday the Office for National Statistics gave us an update on a regular theme on here which is the issue of student loans. This is what the position was.

The UK’s student loan system is based on the government giving loans to most students for their tuition fees and maintenance. Students then repay these loans from their pay packets once they have graduated. Currently, in the National Accounts, these loans are treated as government lending.

That matters because in terms of the deficit lending does not appear. But as I have often argued reality is rather different.

However, the design of the system means much of this student loan debt will never be repaid, and is therefore written off by the government. Because of this, many people, including Parliamentary committees, have asked whether this means some, or all, of the money should be treated as government spending rather than government lending.

So this is what they will do in future.

To ensure our treatment of student loans reflects the way the system works in practice we have decided to split the government’s student loan payments into a portion that is genuine government lending and a portion that is government spending. The lending element will be calculated based on expected future repayments. The remainder, which is not expected to be repaid, will be treated as government spending. This will be treated as capital spending

Fair enough in many ways and as to how much here are the initial estimates.

The Office for Budget Responsibility (OBR) has published some initial estimates for the impact on government deficit. According to these estimates, our new approach will lead to the deficit being increased by approximately 0.6 percentage points of GDP a year, which equates to around £12 billion in the current year.

Of course it is hard not to think of the first rule of OBR Club as we note the numbers ( for newer readers it is that the OBR is always wrong). But as a general direction of travel it looks sound and I welcome it/ The changes should begin in the autumn of next year. In a way it should not matter as reality is unchanged but we do know that changes in measurement do have an impact.

So if we look to the positive we may now see some reform of the failing UK student loan system.

Today’s Data

The news here was good yet again.

Borrowing (public sector net borrowing excluding public sector banks) in November 2018 was £7.2 billion, £0.9 billion less than in November 2017; this was the lowest November borrowing for 14 years (since 2004). Borrowing in the current financial year-to-date (YTD) was £32.8 billion, £13.6 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

If we take the broad sweep then revenue growth has been what has made the difference as well as some control over total spending.

In the current financial YTD, central government received £471.1 billion in income, including £353.5 billion in taxes. This was around 4% more than in the same period in 2017.

Over the same period, central government spent £491.9 billion, around 2% more than in the same period in 2017.

Some of this is a reflection of other factors in play as for example the cost of servicing the UK national debt is some £3 billion lower than last year. This is mostly driven by the fall in the annual rate of rise of the Retail Price Index or RPI which defines the UK index-linked Gilt sector.

One area which was a former milch cow is no longer helping as Stamp Duty revenue is £8.8 billion in the financial year so far as opposed to £9.4 billion in 2017.

Moving to the national debt I notice that something we have been looking at has been missed/ignored by financial social media. So here it is and some of you will spot it immediately.

Debt (public sector net debt excluding public sector banks) at the end of November 2018 was £1,795.1 billion (or 83.9% of gross domestic product (GDP)); an increase of £59.3 billion (unchanged at 83.9% of GDP) on November 2017.

Last month the annual increase was only £1.6 billion! The swerve is that the classification change for the UK Housing Associations which was worth circa £65 billion has exited the annual comparison. The numbers do not add up because there have been some genuine changes too.


On the surface nothing has changed and at a time of downwards revisions elsewhere that is good news.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.6% between Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018.

Indeed the past was better than we thought at the time.

GDP was estimated to have increased by 1.8% between 2016 and 2017, revised upwards by 0.1 percentage points from the previous estimate.

However the devil is in the detail as when the first estimate of UK GDP for the third quarter of 2018 was released we were told this.

Net trade contributed 0.8 percentage points to GDP growth in Quarter 3 2018, with a 2.7% rise in exports and flat growth in imports.

Whereas now we are told this.

various revisions to net trade estimates led to a widening of the trade balance,

And Boom!

The cumulative effect over this period has been for net trade to have contributed less than previously estimated, most notably in the latest quarter in which net trade is now estimated to have contributed 0.1 percentage points to GDP growth in Quarter 3 2018. This is revised down from 0.8 percentage points and mainly reflects updated estimates of unspecified goods (which contains NMG). ( NMG is Non Monetary Gold)

So there you have it we have a reduction in a component of GDP by 0.7% but  the final answer remains the same. Rather like we have seen at times for Imputed Rent ( when the deflator was changed on a grand scale) and the Diane Coyle critique of the measurement of the telecommunications sector which suggested the numbers were much too low. In each instance we get an acknowledgement and assurances of changes before the Four Tops fire up.

Now it’s the same old song
But with a different meaning
Since you been gone
It’s the same old song.


Today’s data releases are positive for the UK as headline GDP growth was relatively strong in the third quarter of this year and the public finances continue to improve. There is both a theme and an irony in my next point which it is very cheap for the UK government to borrow right now with the ten-year Gilt yield being a mere 1.29%. The theme is that there is a certain logic with that following better numbers although the major factor is the expected enthusiasm for the Bank of England Whale making further purchases. The irony is that we borrowed a lot when it was much more expensive and borrow much less when it is cheaper.

Meanwhile as I have illustrated today the numbers need to be taken not just with a pinch of salt but the whole cellar.

Let me finish by wishing you all a Merry Christmas although I have not quite finished as I will publish my weekly podcast later. I will be back in the New Year which looks like yet another one of ch-ch-changes before it has even got out of the starting blocks.





Was October a sign of the end of austerity for the UK Public Finances?

A feature of the past few months or so is that much of the economic data for the UK has been good, at least for these times. This was repeated by the CBI Industrial Trends Survey yesterday.

Manufacturing output growth picked up in the quarter to November, and firms saw overall order books rebound from a fall in October, according to the latest monthly CBI Industrial Trends Survey.

If we look into the detail we see this.

35% of businesses said the volume of output over the past three months was up, and 17% said it was down, giving a balance of +18%. This was above the historic average (+4%) and a slight pick-up from October (+13%).

So in spite of the ongoing problems for the car sector the manufacturing sector has been growing and above trend. Of course the trend for growth has not been much meaning that over the past few decades it has shrunk as a percentage of our economy but at least it is in a better phase and orders look solid too.

29% of manufacturers reported total order books to be above normal, and 19% said they were below normal, giving a balance of +10%. This was above the long-run average (-13%) and followed a weakening in October (-6%).17% of firms said their export order books were above normal, and 17% said they were below normal, giving a normal balance (0) – above the long-run average of -17%, and marginally higher than October (-4%).

I am not quite sure how to treat the export order books as that implies they were always shrinking, but anyway in relative terms we are doing better than usual. Speaking of exports overall take a look at this I spotted the other day.

Will I have to change the theme of trade deficits that I have run with for over twenty years now? It is way to early to say anything like that because any good month seems quite often to be followed by a reversal. But overall there has been an improving trend in there.

Bank of England

Yesterday several policymakers including Governor Carney were called to give evidence to the Treasury Select Committee. I would like to use the written evidence of Michael Saunders to illustrate their thinking, as it should in my view be questioned much more than it is.

With economic growth having been above potential for six or seven years, the spare capacity created by the recession has now probably been used up.

Hands up anybody who thinks that the past six or seven years have been “above potential”? Also if it has been this is quite a downgrade on the past as whilst I am far from a fan of extrapolating the previous boom we are way below its trends and need to understand why. Whereas the policies that have got us here from the Bank of England have apparently been a triumph. This swerve from central bankers from we saved you to the future is grim does not get challenged anything like enough. I would argue that the many of the problems have been created by their policies.

He is at it again here.

In turn, underlying pay growth (measured by private sector average weekly earnings excluding
bonuses) has picked up from 2-2½% a year ago to about 3% in June-August. This is close to a target consistent
pace, given the subdued trend in productivity growth.

As ever we see a central banker cherry-picking the data to get the answer he wants but let;s be fair. After all with their performances they are unlikely to be keen on bonuses! But there is a suggestion here that 3% wages growth is as good as it gets. Yet the same models which via their output gap theories suggest we can’t grow very fast are the same ones which previously told us that wage growth would be 5% plus if we had an employment situation like we do now.

Also the two statements below need challenging.

Under-employment has fallen markedly over recent years, with the net balance of desired extra working hours now around zero.

Okay so traditional output gap and full employment theory. But how does it go with this?

Overall, a U6-type  underemployment measure (which combines unemployment, IVPTs and the marginally attached) has fallen to 11.8% of the workforce in June-August from 12.6% a year ago.

It seems that there is quite a gap here as we recall that the level we have been guided to for the unemployment rate has dropped from 7% to 4.25% over the past five years, again with much less challenge than should have happened.

Oh and if you are struggling with currency trends Governor Carney provided his thoughts on the matter. From Bloomberg.

“There will be events that move sterling up and events that move sterling down,” he said. “That will likely continue for the next little while.”

The Public Finances

The picture here has been set fair and to some extent that continued today in the official figures.

Borrowing in the current financial year-to-date (YTD) was £26.7 billion: £11.2 billion less than in the same period in 2017; the lowest year-to-date for 13 years (since 2005).

As you can see this picked up the pace on the previous year, and FYE stands for Financial Year Ending.

Borrowing in the FYE March 2018 was £40.1 billion: £5.5 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So we need to borrow less than we did which means that in relative terms the debt issue is fading as the economy has been growing.

Debt at the end of October 2018 excluding Bank of England (mainly quantitative easing) was £1,598.5 billion (or 75.0% of GDP); a decrease of £33.6 billion (or a decrease of 4.0 percentage points) on October 2017.

Oh and as a technical point it is not mainly QE it is mainly the Term Funding Scheme and if we put the Bank of England back in the ratio is falling more slowly and is 84% of GDP.

The end of austerity?

October itself had an interesting kicker which will be immediately apparent below.

Central government receipts in October 2018 increased by 1.2% compared with October 2017, to £59.9 billion; while total expenditure increased by 7.7% to £65.4 billion.

I have looked into the numbers and if we look just at taxes growth seems to have remained at around 4%. The extremely complicated business as to how we account for interest on the Bank of England’s QE holdings seems to have subtracted about £1 billion which makes up the difference.

Moving to expenditure the explanation is about as clear as mud.

This month, much of the increase in spending was in the current account, with notable growth in both the expenditure on goods and services as well as net social benefits. Over the same period, interest payments on the government’s outstanding debt have increased; due largely to movements in the Retail Prices Index to which index-linked bonds are pegged.

So we spent more because we spent more. As to the index-linked debt we will have to monitor that as overall the numbers are down this financial year and with the oil price now at US $64 that will help.

As ever it is complicated as you see last October we thought we borrowed £8 billion but the figures ( as happens often) have improved.

Borrowing (Public sector net borrowing excluding public sector banks) in October 2018 was £8.8 billion, £1.6 billion more than in October 2017;


So the overall good economic news has led to a number higher than before for the UK fiscal deficit! It is a reminder that these numbers are erratic as back in July we were noting harsh austerity and now October says “spend,spend,spend.” Whilst there may be some flickers of change in for example the £700 million extra for the troubled local authority sector we need to see more before there is a clear change of direction.

One thing we can be sure of however is the first rule of OBR Club, where OBR stands for the Office of Budget Responsibility. When I checked last October’s it had around half the year’s data but apparently had learnt nothing.

The Office for Budget Responsibility (OBR) forecast that public sector net borrowing (excluding public sector banks) will be £58.3 billion during the financial year ending March 2018, an increase of £12.5 billion on the outturn net borrowing in the financial year ending March 2017.

Up is always the new down for them. Well we should have realised October might be a dodgy month when the OBR released this on the 29th.

On 29 October 2018, the Office for Budget Responsibility (OBR) revised their official forecast of borrowing for the financial year ending (FYE) March 2019 down by £11.6 billion to £25.5 billion.


Much better UK public borrowing gives the Chancellor an extra Budget option

Sometime we find ourselves with the opportunity to look at things from a different perspective and learn from it and this morning is providing that. Let me illustrate with this tweet from @SunChartist.

Are 4.5 year high in Italian bond & 52 week high on Spanish bonds yields bullish Euro? Asking for a friend.

It did not need to draw my attention to the Italian bond market which has been falling again and set new lows for this phase today. In futures terms its BTP December contract is a bit over 118 which means the ten-year yield has reached 3.8%. I forget which investment bank said that between 3,5% and 4% was the point of no return. That is over dramatic in my opinion, but it is what Taylor Swift would call a sign of “trouble,trouble,trouble”.

There is now a hint of contagion as we note that the Spanish bond market is falling today and its equivalent yield is now 1.8%. Context is needed as it is less than half the Italian equivalent and rises were always likely as the ECB scaled back its purchases under its QE programme but a change none the less. However and this is my main opening thrust today there is a small or medium-sized island depending on your perspective which has seen its bonds doing well over the last week or so. It is the UK where the ten-year Gilt yield has fallen from above 1.71% to 1.53%. Again memes can be overdone but looked at in isolation there is a case for suggesting there has perhaps been what is called a flight to quality or a move towards a safe haven. Of course safer haven would be a better description for a market once described as being on a “bed of nitroglycerine” but however you spin it UK Gilts have been in demand.

I have looked at it this way because this week the media have been looking at it in a different way as this from the Financial Times highlights.

Even if Mr Hammond sticks to his current target of balancing the government’s books by the mid 2020s, government debt will fall only slowly as a proportion of GDP, because the long-term outlook for growth is so lacklustre.

Actually this misses out that the national debt to GDP ratio is falling which has been demonstrated by this morning’s official release.

Debt (Public sector net debt excluding public sector banks) at the end of September 2018 was £1,789.5 billion (or 84.3% of gross domestic product (GDP)); an increase of £3.4 billion (or a decrease of 2.4 percentage points) on September 2017.

As you can see we are seeing a fall and economic growth is lacklustre as the recent rally is not yet in the figures. In essence the outlook for the public finances is always poor if you have a weak economy. Anyone who did not know that has been taught it by the experience of Italy.

If we move onto the other parts of the FT quote there is the reference to the ongoing fantasy that the government has some plan to actually balance the books. Personally I think it has been surprised by the recent better figures as it was continuing the past philosophy of George Osborne where a balanced budget was perpetually 3/4 years away.

So in fact something which is being spun as unlikely is if we look at the facts above quite possible especially as we note that the UK Gilt market has not only ignore such reports it has rallied.

“Increasing borrowing is clearly the line of least resistance,” said Paul Johnson, the IFS’ director, noting that Conservative chancellors have historically been more likely to announce giveaways when the public finances were better than expected, than to raise taxes when finances were worse than expected.

Still there is something refreshing which is the acknowledgement of this, and the emphasis is mine.

debt could rise as a share of national income over the longer term, because periodic recessions would hit the public finances.

I do hope that this is not a one-off and that the IFS will continue on this road as I am reminded of a bit in the film Snatch which explains the economic consequences.

All bets are off!

Today’s Data

We had another month of improved figures.

Borrowing (Public sector net borrowing excluding public sector banks) in September 2018 was £4.1 billion, £0.8 billion less than in September 2017; this was the lowest September borrowing for 11 years (since 2007).

This meant that the deeper perspective continues to look good as well.

Borrowing in the current financial year-to-date (YTD) was £19.9 billion: £10.7 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

This was due to the fact that tax receipts are solid and spending increases have been below the rate of inflation.

In the current financial YTD, central government received £352.4 billion in income, including £265.6 billion in taxes. This was around 4% more than in the same period in 2017.

Over the same period, central government spent £368.0 billion, around 2% more than in the same period in 2017.

If we look into the detail we see that VAT receipts are strong being up £4.4 billion at £74.7 billion. Also Income Tax is doing well as it is up £5.8 billion at £81 billion in the tax year so far. Given the state of the UK housing market you will not be surprised to see that Stamp Duty receipts have fallen by £0.5 billion to £6.5 billion.

On the other side of the coin you could argue that the fall in spending is flattered by lower debt costs of £3.1 billion as the impact of past inflation rises washes out of index-linked Gilts to some extent.


As you can see the UK Gilt market has been on the opposite path to the rhetoric of the mainstream media and those presented by them as authorities. One way of looking at this is to consider the phrase “put your money where you mouth is”. But it is also true that markets are not always right which has been highlighted this year best by those who bought Italian bonds at a negative yield. That is not going to be so easy at the next investors conference “Wait, you actually paid to hold Italian bonds?”. It is also perhaps revealing to note that the media seems to have taken Paul Simon’s advice about the Gilt market rally.

No one dared
Disturb the sound of silence

It is, however also wrong to say it is plain sailing as whilst we have entered a better phase it could quickly change if the economy stopped ignoring the weakness in the monetary data. Actually some of the tax receipt data above hints the economy may have done better than we have been told. So on that note let me leave you with the words of Avril Lavigne.

Why’d you have to go and make things so complicated?
I see the way you’re
Actin’ like you’re somebody else, gets me frustrated

Higher bond yields and higher inflation mean higher national debt costs

The last week or so has brought a theme of this blog back to life and reminds me of the many years I spent working in bond markets. They have spent much of the credit crunch era being an economic version of the dog that did not bark. Much of that has been due to the enormous scale of the QE ( Quantitative Easing) sovereign bond buying policies of many of the major central banks. The politicians who came up with the idea of making central banks independent and then staffing them with people who were anything but should be warmly toasted by their successors. The successors would never have got away with a policy which has benefited them enormously in terms of ability to spend because of lower debt costs.


However the times are now a-changing and this morning has brought more bad news on this front from Italy. The BTP bond future for December has fallen to 120 which means it has lost a bit over 7 points over the last ten or eleven days. Putting that into yield terms it means that the ten-year yield has reached 3.5% which has a degree of symbolism. A factor in this is described by the Financial Times.

The commission issued its warning to the Five Star and League governing coalition after Rome deviated from the EU’s fiscal rules by proposing a budget deficit equivalent to 2.4 per cent of gross domestic product instead of the 1.6 per cent previously mooted by the finance minister Giovanni Tria. Although the new plans keep Italy under the EU’s 3 per cent deficit threshold, the country’s high debt levels — the highest in the eurozone after Greece — means Rome is required to cut spending to bring debt levels gradually lower.

However the chart below tells us that in fact you can look at it from another point of view entirely.

Actually I think that the situation is more pronounced than that as the ECB has bought 356 billion Euros worth. But you get the idea. It is hard not to think that a major factor in the recent falls is the halving of ECB QE purchases since the beginning of this month and to worry about their end in the New Year. In case you were wondering why the share prices of Italian banks have been tumbling again recently? The fact they have been buying in size in 2018 when one of the trades of 2018 has been to sell Italian bonds gives quite a clue.

If we switch to the consequences for debt costs then a rough rule of thumb is to multiply the 3.5% by the national debt to GDP ratio of 1.33 which gives us 4.65%. In practice this takes time as there is a large stock of debt and the impact from new debt takes time. For example Italy issued 2 billion Euros of its ten-year on the 28th of last month at 2.9%. So a fair bit less than now although much more expensive that it had got used too. This below from the Italian Treasury forecasts gives an idea of how the higher yields impact over time.

The redemptions in 2018 are approximately €184 billion (excluding BOTs) including approximately
€3 billion in relation to the international programme……..the average life of the stock of
government securities, which was 6.9 years at the end of 2017.

Oh and the tipping point below has been reached. From the Wall Street Journal.

Harvinder Sian, a bond strategist at Citigroup, thinks a 10-year yield of 3.5%-4% is now the tipping point, after which yields jump toward the 7% reached at the height of the last euro crisis

Personally I am not so sure about tipping point as the “gentlemen of the spread” ( with apologies to female bond traders) have been selling it at quite a rate anyway.


The United States

Here bond yields have been rising recently and let us take the advice of President Trump and look at what has happened during his term of office. Whilst back then Newsweek was busy congratulating Madame President Hilary Clinton my attention was elsewhere.

There has been a clear market adjustment to this which is that the 30 year ( long bond) yield has risen by 0.12% to 2.75%.

We see that it has risen in the Trump era to 3.4% although maybe not by as much as might have been expected. However if we look to shorter maturities we see a much stronger impact.For example the two-year now yields some 2.9% and the five-year some 3.07%. So if you read about flat yield curves this is what is meant although it is not (yet) literally true as there is a 0.5% difference. Thus the US now faces a yield of circa 3% or so looking ahead. This does have an impact as the New York Times has pointed out.

The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children’s programs.

In terms of numbers this is what they think.

Within a decade, more than $900 billion in interest payments will be due annually, easily outpacing spending on myriad other programs. Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office.

If we switch to the Congressional Budget Office it breaks down some of the influences at play here.From its September report.

Outlays for net interest on the public debt increased by $62 billion (or 20 percent), partly because of a higher rate of inflation.

The CBO points out a factor the New York Times missed which is that countries with index-linked debt are also hit by higher inflation. As the US has some US $1.38 trillion of these it is a considerable factor.

Also the US is borrowing more.

The federal budget deficit was $782 billion in fiscal year 2018, the Congressional Budget Office estimates,
$116 billion more than the shortfall recorded in fiscal year 2017………The 2018 deficit equaled an estimated 3.9 percent of gross domestic product (GDP), up from 3.5 percent in
2017. (If not for the timing shifts, the 2018 deficit would have equaled 4.1 percent of GDP.)

Higher bond yields combined with higher fiscal deficits mean more worries about this factor.

At 78 percent of gross domestic product (GDP), federal
debt held by the public is now at its highest level since
shortly after World War II. If current laws generally
remained unchanged, the Congressional Budget Office
projects, growing budget deficits would boost that
debt sharply over the next 30 years; it would approach
100 percent of GDP by the end of the next decade and
152 percent by 2048 . That amount would
be the highest in the nation’s history by far.

I counsel a lot of caution with this as 2048 will have all sorts of things we cannot think of right now. But the debt is heading higher in the period we can reasonably project and I note the CBO is omitting the debt held by the US Federal Reserve so that QE would make the figures look better but the current QT makes it look worse.


Debt costs and the associated concept of the mythical bond vigilantes have been in a QE driven hibernation but they seem to be showing signs of waking up. If we look at today’s two examples we see different roads to the destination. If we look at the road to Rome we see that the longer-term factor has been the lost decades involving a lack of economic growth. This has made it vulnerable to rising bond yields and which means that the straw currently breaking the camel’s back has been what is a very small fiscal shift. It is also a case of bad timing as it has taken place as the ECB departs the bond purchases scene.

The US is different in that it has a much better economic growth trajectory but has a President who has also primed the fiscal pumps. Should it grow strongly then the Donald will win “bigly” as he will no doubt let us know. However should economic growth weaken or the long overdue recession appear then the debt metrics will slip away quite quickly. That is a road to QE4.

Returning back home I note that UK Gilt yields are higher with the ten-year passing 1.7% last week for the first time for a few years.So the collar is a little tighter.The main impact on the UK came from the rise in inflation in 2017 leading to higher index-linked debt costs. This was the main factor in our annual debt costs rising by around £10 billion between 2015/16 and 2017/18.





The UK Public Finances have an August stumble

Yesterday we looked at the plans of Lord Skidelsky for fiscal expansionism. Let me add to that the implication of his lines of thought is that he would boost government spending now. Whilst we are not in a 2008 style slump he was clear that he thinks we have not recovered from it and some metrics confirm that. For example if you look at Gross Domestic Product and employment we have, but the case is much weaker with GDP per head and invisible with real wages.

This brings us to a familiar issue which is whether we have had austerity or fiscal stimulus in the credit crunch era? The problem with the assertions of outright austerity is that we have run a fiscal deficit throughout the period. Language shifts over time and I can recall when that would have been called a fiscal stimulus. This does matter as I can easily name two countries who are running what might be called outright austerity in the sense of both having and planning for a fiscal surplus and they are Germany and Sweden. In the UK sense it has meant reducing the fiscal deficit and in overall terms there have been two phases as there was a change made around 2012 that softened the effort. In practice we have also seen something of a lagged response to the effort. What I mean by that is that the deficit numbers took a while to respond to the economic recovery but more recently have picked up the pace.

Putting the issue into two numbers you could say that the amount we are borrowing now offers some support for Lord Skidelsky as it was £39.4 billion in the last financial year. But the amount we have borrowed heads us in the other direction because if you take the collapse of Northern Rock as the start of the credit crunch we have added some £1.23 trillion to the UK National Debt since. For those of you wondering how we have possibly afforded this let me point you in the direction of Threadneedle Street as it is the £435 billion  QE Gilt purchases of the Bank of England which have allowed it via their impact on Gilt yields. In spite of the recent trend towards higher borrowing costs exemplified by the US ten-year Treasury Note yielding 3.09% the equivalent Gilt yields a mere 1.6%.

Borrowing Costs

Let me hand myself a slice of humble pie to eat. The reason for that is if you had asked me where Gilt yields would be a decade or so later when the credit crunch began the chances of me being right would have been slim to none ( and in line with the joke slim was out of town). In an area I was right ( long time readers will recall I was long of some UK index-linked Gilts anticipating correctly a rise in inflation), I did not envisage that one day conventional Gilt yields would be so low that the price of linkers would be driven higher because they offered some sort of coupon.Madness! Or rather the consequences of the Sledgehammer QE of August 2016 about which history will not be kind.

Today’s Data

National Debt

We can continue the Bank of England theme as it has had an impact here too and one can only imagine the panic back in July and August of 2016 when they managed to devise schemes to do this.

Since August 2017, the net debt associated with the Bank of England (BoE) increased by £44.6 billion to £193.2 billion. Nearly all of this growth was due to the activities of the Asset Purchase Facility Fund, of which the TFS is a part.

The TFS closed for drawdowns of further loans on 28 February 2018 with a loan liability of £127.0 billion. The TFS loan liability at the end of August 2018 was £126.5 billion.

Yet again we find ourselves at least in terms of the official statistics indebted to provide yet another subsidy to the banking sector. This is a shame as our performance on this metric has been improving.

Debt (Public sector net debt excluding public sector banks (PSND ex)) at the end of August 2018 was £1,781.9 billion (or 84.3% of gross domestic product (GDP)); an increase of £15.9 billion (or a decrease of 1.8 percentage points) on August 2017.

The debt has continued to increase but has done so more slowly than economic output or GDP so in relative terms it has declined.

The Fiscal Deficit

We have got used to a sequence of good numbers so I guess we were due something like this.

Borrowing (Public sector net borrowing excluding public sector banks (PSNB ex)) in August 2018 was £6.8 billion, £2.4 billion more than in August 2017; this was the largest August borrowing for two years (since 2016).

It is hard not to have a wry smile as we investigate the reason for this because you may recall last month the UK had really crunched down on spending.

While current receipts in August have increased by 1.6%, to £55.6 billion compared with August 2017, total expenditure increased by 6.9% to £60.4 billion.

We are told that this was influenced by the “triple-lock” effect on the basic state pension (3%) but that seems weak to me as that has been in play since April. In fact every spending category was higher and after the excitement in Salzburg yesterday there is food for thought in this.

The UK contributions to the EU in August 2008 were £1.0 billion; a £0.6 billion increase on August 2017, seeing a return to a similar level as 2016 after a low 2017 due to an EU Budget surplus distributed to member states.

If we return to the underlying trend we see that in spite of this month we remain overall in a better phase for the deficit.

Borrowing (PSNB ex) in the current financial year-to-date (YTD) was £17.8 billion: £7.8 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

This is because the rate of growth of revenues at ~4% is higher than the rate of growth of spending at ~2%. The latest strong set of retail sales figures are backed up by the VAT data and income tax is doing pretty well too. Also the overall trend to lower inflation has reduced debt costs by £2.3 billion via the RPI.

One area which is of note is a confirmation of a slowing of the housing market as Stamp Duty revenues have dipped by £400 million to £5.5 billion.


The UK has made considerable progress in reducing its fiscal deficit and as ever a time like this brings us to something of a crossroads. Some will want to press on with this and others will be sympathetic to a Lord Skidelsky expansion. The latter are supported by the reality that austerity such as it is has in some cases hit the weaker members of our society. The former may note that whilst the cost of our debt remains low a continuation of the recent rise in Gilt yields will begin to get expensive. The simple truth is that we have so much more of it these days as if we return to the Northern Rock collapse we owed £0.54 trillion as opposed to the £1.77 trillion now (year to July). Putting it another way that is why some of you have replied on here saying we cannot afford interest-rates and yields of more than 3%.

In terms of the underlying economy our present trajectory continues to be one of bumbling along so it should support the fiscal position and mean that the Office for Budget Responsibility is wrong again.The OBR’s only hope is that the weak monetary data acts as a stronger drag on the economy which is an irony as I don’t think it has a monetarist on it. Meanwhile the boost provided by the booming housing market is fading away.

As some Friday humour I present this to you from the Washington Post.

I wanted to understand Europe’s populism. So I talked to Bono.

Me on Core Finance



The UK public finances are seeing outright austerity

The UK Public Finances are something that have been quietly improving over the past year or two. This has been taking place mostly outside the news headlines partly because the numbers are much smaller than they were. From the Office of National Statistics or ONS.

Over the next 12 months (April 2018 to March 2019), the Office for Budget Responsibility, which produces the official government forecasts, expects the public sector to borrow £37.1 billion; around one-quarter of what it borrowed in the financial year ending March 2010 (April 2009 to March 2010), at the peak of the financial crisis.

Another reason why this has been in the shade rather than daylight is that it has to some extent come in spite of our economic performance. If we look back regular readers will recall times when UK economic growth was a fair bit stronger than now but the public finances were slow to respond whereas now we are seeing some catch-up. Of course an alternative view is that maybe we were not doing quite so well back then and perhaps are doing better now than we are told.

In terms of economic growth the position looks as though it has improved slightly with the NIESR suggesting this.

Building on the official data, our monthly GDP Tracker suggests that growth is set to nudge higher to 0.5 per cent in the third quarter.Recent survey evidence suggests that the manufacturing and construction sectors are recovering after a particularly weak start to the year and the dominant services sector is set to maintain a similar rate of growth in the third quarter.

Should this turn out to be true it will provide a more favourable back drop for the public finances than the first half of this year. Tucked away in the detail was something else which in terms of economic theory and to some extent practice was hopeful.

Growth is now close to our estimate of potential.

They think the economy can grow at 0.6% per quarter which is a fair bit higher than the 1.5% per annum “speed limit” produced by the Bank of England Ivory Tower. It would be helped considerably if any of this came true. From the BBC.

Britain can be a “21st Century exporting superpower”, Liam Fox is expected to say in a speech detailing the government’s post-Brexit ambitions.

The international trade secretary will say he wants exports as a proportion of UK GDP to rise from 30% to 35%.

Of course we all want lots of things and the real issue is what plan there is to achieve this.

A Helping Hand

I have pointed out before how the policies of the Bank of England and QE (Quantitative Easing) in particular have been very government friendly. This issue was taken up by Toby Nangle yesterday.

Back in 2010 it was thought that UK debt service costs would soar, but lower rate rates (Gilt & BoE) have meant massive undershoot while debt level overshot big time.

It will come as no surprise that it was the Office for Budget Responsibility was completely wrong but the difference in the numbers is stunning. Using Toby’s projections we can estimate debt costs per annum at around £80 billion whereas in reality it is in the low forty billions. Also per unit the move has been even larger because we have borrowed much more than the OBR projected.

So we have two factors here the first is the impact of lower Gilt yields due to the low official interest-rates and QE sovereign bond purchases and the second is the fact that the Bank of England owns around 22% of the Gilt market and refunds the money ( minus costs) to the government.

Whilst we looking at Gilt yields they have been falling again recently with the ten-year yield down from 1.4% when the Bank of England raised Bank Rate to 1.24% now. This seems set to reduce debt costs further as well as meaning that Governor Carney’s bazooka looks reduced to one of those potato guns I used to play with as a child.

Today’s data

The good news keeps on coming to coin a phrase. From the ONS.

Public sector net borrowing (excluding public sector banks) was in surplus by £2.0 billion in July 2018, a £1.0 billion greater surplus than in July 2017; this is the largest July surplus for 18 years (2000).

For those wondering about the surplus this is because July is a month for Self Assessment payments and therefore has a favourable wind behind it. But if we move to the financial year so far the picture remains good.

Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to July 2018) was £12.8 billion; that is, £8.5 billion less than in the same period in 2017; this is the lowest year-to-date (April to July) net borrowing for 16 years (2002).

As you can see this is quite a drop and moves us into a zone where we can for once dream ( or for some as I will discuss later have nightmares) about an actual surplus. If we look into what is driving this we see that revenues are strong rising by 5% and in particular income tax is up by 6.1% perhaps hinting the economy has been stronger than we thought. On the other side of the coin we get an insight into cooling in the housing market in the way that Stamp Duty receipts are down by just under £400 million to £4.3 billion.


We have often debated how much of this we have seen but the year to date figures show one of the clearest signals of it we have had.

Over the same period, central government spent £246.9 billion, around 1% less than in the same period in 2017.

After all we have found ourselves mostly discussing austerity allowing for inflation whereas at the moment we have outright austerity. Also those looking at the problems various councils are facing ( e.g Northamptonshire) will find their eyes alighting on this.

 while local government borrowing was in surplus by £4.9 billion.

National Debt

We can expect an aggressive headline today from the London Evening Standard once its editor spots that the current Chancellor is achieving one of his great hopes. The emphasis is mine.

Public sector net debt (excluding public sector banks) was £1,777.5 billion at the end of July 2018, equivalent to 84.3% of gross domestic product (GDP), an increase of £17.5 billion (or a decrease of 1.7 percentage points as a ratio of GDP) on July 2017.


The situation we find ourselves in is one which we were promised for 2015/16 so it has come Network Rail style. Also there is a space oddity element about it as the previous chancellor was supposed to be the man for austerity and Phillip Hammond was one for a more relaxed view yet reality looks the opposite. An alternative view is that the numbers are much less under their control than they would like us to think. But such as they are and judging them on their own basis they now look pretty good. As ever they depend a lot on economic growth but should that continue the trajectory is for a surplus and a declining debt to GDP ratio and maybe even some falls in the national debt.

There are three challenges to this. The first is the most basic which is the inability of politicians to keep their hands out of the cookie jar. That brings us to the second which is to some extent related which is that some areas such as local councils seem to have an especially tight noose around their neck at the moment highlighted by the fact they are in surplus so far this year by £4.9 billion. Something odd is going on there. We can take this forward more generally as to whether tight now we want or need outright austerity? Even without the impact of lower inflation on debt interest we would be spending the same as last year.

Next comes the issue of the reliability of official statistics which has been raised recently by the Resolution Foundation.

When we first looked at the data, back in 2012, we came up with a clear answer: the corporate sector had been sitting on too much cash for too long……..By June 2017, a series of data revisions had lowered the scale of the corporate surplus across the entirety of the period, by a relatively uniform average of 2.4 per cent of GDP per year.

That is quite a lot but it was not the end of the story.

But a change of 4 per cent of GDP in both 2015 and 2016 – worth roughly £80 billion a year – is huge. At the very least, it might better be considered a correction rather than a revision.

Impacts on the public finances are usually from a different route in terms of how you define things but for example if you added up the impact of the Housing Associations and the Term Funding Scheme of the Bank of England you end up debating around £190 billion in national debt terms.