What are the economics of the UK General Election?

Yesterday brought a surprise announcement of a General Election in the UK. I say surprise because the present government has been polling a very long way behind the opposition Labour party. Also rather curiously the Prime Minister seemed to want to sing along with Travis.

Why does it always rain on me?
Is it because I lied when I was seventeen?
Why does it always rain on me?
Even when the sun is shinning I can’t avoid the lightning

A type of metaphor for a rather hapless term in power although someone who I assume was Steve Bray was playing “Things can only get better”. Good song although a slightly curious choice for him personally as his job will soon be over.

It does give us an opportunity to look at an economic issue that will be in the background of the election debate. It had looked as though the public finances release would be drowned out by the inflation figures but now they assume more importance, so let us take a look.

Borrowing – the difference between public sector spending and income – was £20.5 billion in April 2024, the fourth highest April borrowing since monthly records began in 1993.

Actually it was a day for metaphors as another high borrowing figure was rather symbolic of this government’s term. Indeed the Prime Minister indirectly boasted about it as he tried to bathe himself in goodwill from his largesse during the Furlough period. He will no doubt be much less keen to discuss the extra debt it created nor the cost of living crisis it contributed to.

In fact there was an upwards revision adding to the general theme.

Since our March 2024 publication, we have increased our initial estimate of borrowing in the financial year ending March 2024 by £0.8 billion to £121.4 billion, now £7.3 billion more than the £114.1 billion forecast by the OBR.

Not a large one but it does add to the upwards revision we saw last month. Also as it gets a mention above and its forecasts will be quoted as facts by the mainstream media let me remind you of this.

The first rule of OBR Club is that the OBR is always wrong.

The Office for Budget Responsibility

Over the time of its existence the two most spectacular errors have been around bond yields and wages but there is plenty of competition. The point needs to be reinforced because it is not only the media who want to reinforce the OBR. The rather extraordinary word salad from the International Monetary Fund below shows this.

 Second, the credibility of fiscal plans should be enhanced…..requiring that an OBR forecast accompany each fiscal event; and extending the OBR’s forecast horizon for its Economic and Fiscal Outlooks to ten years to better capture longer-term spending pressures, as well as dividends from growth-enhancing measures (especially public investments and the impact of private investment incentivized by the recently-implemented capital allowances), which will help provide a more complete picture of the sustainability of public finances.

The emphasis is mine and highlights the air of fantasy economics.If we look back over the longer-term predictions of the OBR as I am a polite man I shall call them hopeless. Also it is revealing that the IMF has just got the UK economy in 2024 completely wrong as we grew by 0.6% in the first quarter exceeding their forecast for the year.

As you are all aware, first quarter GDP surprise was on the upside, 0.6 percent, allowing us to upgrade our growth forecast for this year from 0.5 percent as it was in April to 0.7 percent today.

The only reason the change in the growth forecast was so small was to prevent too much embarrassment. But for our purposes today it is a reminder that the IMF is also a hopeless forecaster and thus sees nothing wrong in boosting the role of the OBR. Under the likely new Chancellor Rachel Reeves this seems to be a plan.

Shadow chancellor Rachel Reeves has announced a new ‘fiscal lock’ to guarantee that the Office for Budget Responsibility (OBR) will publish a forecast to accompany any major decision on tax and spending, with the aim of avoiding the events of last autumn where an apparent disregard for objective evidence led to a loss of faith in the UK’s fiscal policy.

That is from the Institute for Government who seem to be yet another think-tank that are short on thinking.

The shadow chancellor has set out an approach to fiscal policy which has long been called for by the Institute for Government but, says Olly Bartrum, a government committed to fiscal policy making could still go further

That shows a quite extraordinary ignorance of the forecasting errors made by the OBR which is quite something when you consider how frequent they have been. A bit more than the one blind eye turned famously by Nelson as they appear to have two blind eyes. A person of a more cynical disposition than myself might wonder if they anticipate being appointed to the OBR gravy train.

If I may inject a note of realism into the fantasies expounded above new Chancellors are often keen on bathing themselves in fiscal rectitude of a rules in this case set by the OBR. However these seldom survive long when economic reality hits ( political desire for more spending or weaker growth) so I do not expect it to last that long.

Back to the April Numbers

Actually we can stay with the air of unreality of the IMF review of the UK economy as they claim this.

On fiscal policy, the government has done well to follow the prudent fiscal plan that it set out in November 2022.

Yet the very next day the public finances tell us this.

the fourth highest April borrowing since monthly records began in 1993.

In terms of the detail it seems to simply be more spending.

Public sector receipts grew by £1.6 billion compared with April 2023, however, this growth was outstripped by a £3.1 billion increase in spending over the same period.

That theme is reinforced by the national debt figures.

Public sector net debt excluding public sector banks (debt) at the end of April 2024 was provisionally estimated at 97.9% of gross domestic product (GDP); this was 2.5 percentage points more than at the end of April 2023, and remains at levels last seen in the early 1960s.

These numbers have been distorted by the Term Funding Scheme which is about half of the difference between the number above and below.

Excluding the Bank of England, debt was 89.9% of GDP, 8.0 percentage points lower than the wider debt measure.

Those who follow the comments section will note a discussion of what the Bank of England means by a “small number” of extensions to this, so its end and improvement in the debt numbers looks set to be delayed.

Inflation

Next up on recent news is something that is specifically the responsibility of this government but I think is really likely to be unchanged. Our political class mostly have the same beliefs regardless of party. It is going to be ever harder work claiming renewables to be cheap after this.

Today is a defining moment for National Grid as we announce a significant step up in energy infrastructure investment that cements our position as a leader in the energy transition on both sides of the Atlantic. We’re investing around £60bn in networks in the next five years, with over £30bn of that in the UK. ( National Grid)

Also there is the issue of water bills.

12th June @Ofwat

will announce its latest water bill increases. Here’s an update on what the out of control WCs are asking for. Southern Water – 91% to £915 Thames Water – 59% to £749 Severn Trent – 50% to £657 Wessex Water – 50% to £822 etc etc

In rather a twist of role the tweet above was from the former lead singer of The Undertones.

Comment

As you can see our political class seem addicted to both borrowing and inflation. So let me end with some better news which is that we look to be set for another quarter of economic growth following the 0.6% GDP rise last time. In the end that is the biggest issue and comes from a backdrop of very little growth.

Those interested in the debate on UK inflation statistics I will be talking at the Better Statistics conference this afternoon. Sadly it is yet another area where the establishment have egg ( actually a lot of it) on their faces.

Inflation 2024 – Are we using the right measures?

 

 

 

 

The UK Public Finances continue to improve as debt interest falls

Today our focus remains on the UK but not for the reason that you might think. I am not expecting an interest-rate change from the Bank of England today although the cat has been put amongst the central banking pigeons with this announcement.

The Swiss National Bank is lowering the SNB policy rate by 0.25 percentage points to 1.5%.
The change applies from tomorrow, 22 March 2024.

So someone was willing to move before the US Federal Reserve and I think one reason for that comes from the currency position.

With its decision, the SNB is taking into account the reduced inflationary pressure as well as
the appreciation of the Swiss franc in real terms over the past year.

As an aside it means that what were the “Currency Twins” have very different policies this week with the Japanese raising interest-rates and the Swiss cutting them.

Returning to the UK we have some more improving data on the public finances.

Public sector net borrowing excluding public sector banks (borrowing) was £8.4 billion in February 2024, £3.4 billion less than in February 2023.

I mean that on two counts and the most obvious is the fall compared to last year. But also we spent a period where monthly borrowing was not only in the double-digits but comfortably so and we now look to have left that trend.

Monthly Data

Looking at the numbers we see that receipts were pretty strong.

Central government’s receipts were £86.4 billion in February 2024, £7.2 billion more than in February 2023.

In terms of what areas were strong we see that Income Tax was.

with increases in Income Tax, Corporation Tax and Value Added Tax (VAT) receipts of £3.5 billion, £1.9 billion and, £0.6 billion, respectively

In spite of the fact that the Self Assessment numbers were not.

SA Income Tax receipts in February increased by £0.8 billion to £3.9 billion, bringing the total for January and February 2024 to £25.5 billion, £0.4 billion more than in the same two months in 2023.

One interesting nuance is that Capital Gains Tax has been weaker in the self-assessment numbers.

SA Capital Gains Tax receipts in February increased by £0.2 billion to £2.2 billion, bringing the total for January and February 2024 to £13.6 billion, £1.2 billion less than in the same two months in 2023.

On the other side of the coin government spending is more under control.

Central government’s total expenditure was £89.6 billion in February 2024, £2.9 billion more than in February 2023.

There is a nuance as there is still an impact from the previous inflation surge.

net social benefits paid by central government increased by £5.9 billion to £25.0 billion, largely because of inflation-linked benefits uprating and around £2 billion in cost-of-living payments……..central government departmental spending on goods and services increased by £3.2 billion to £34.0 billion, as inflation increased running costs.

But on the other side of the coin the past energy subsidies have fallen heavily.

subsidies paid by central government reduced by £4.9 billion to £2.2 billion………payments recorded under central government “other current grants” reduced by £2.3 billion to £1.5 billion, largely because of the cost of the previous year’s Energy Bills Support Scheme

Also debt interest continues its decline.

interest payable on central government debt reduced by £1.1 billion to £6.8 billion, largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index

The decline in inflation as measured by the Retail Prices Index is the main player here.

Capital uplift in February 2024 was £2.5 billion reflecting the 0.5% increase in the RPI between November and December 2023.

That compares with £5.2 billion in February 2022 and £3.4 billion in February last year. Looking ahead we know that better numbers are coming via the three month lag used here. So the larger monthly fall in January that in 2023 and the smaller rise in February compared to the previous year will be in future numbers.

The Financial Year so far

We are now seeing numbers below that of the previous year.

Borrowing in the financial year-to-February 2024 was £106.8 billion, £4.6 billion less than in the same eleven-month period a year ago, and the lowest for four years in nominal terms.

That comes in spite of an upwards revision of £1.8 billion to the local government numbers. Rather awkwardly due to beneficial revisions in the meantime we are doing a lot better than we thought at the time.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (financial year ending (FYE) 2023) by £11.2 billion, from £139.2 billion to £128.0 billion.

Bank of England QE

This appears in these numbers in a rather confusing fashion.

This was partially offset by a £22.5 billion Bank of England (BoE) surplus and balanced by remaining subsectors.

As what HM Treasury has paid is public-sector neutral.

The borrowing of both of these subsectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last eleven months under the Asset Purchase Facility Fund (APF) indemnity agreement.

National Debt

This too has been made more complex by the activities of the Bank of England.

Debt was provisionally estimated at around 97.1% of the UK’s annual gross domestic product (GDP) at the end of February 2024, 2.3 percentage points more than at the end of February 2023, and remains at levels last seen in the early 1960s.

If you take out its activities then the debt is quite a bit lower.

Excluding the Bank of England, debt was £2,423.5 billion, or around 88.5% of GDP, £236.0 billion (or 8.6 percentage points) lower than the wider measure.

The main issue to my mind is over the Term Funding Scheme  This is presently £150 billion and has been declining by at least £6 billion per quarter in the last year. So it flatters the debt numbers when in fact it was never really borrowing as one would usually understand it in the first place. One could say put in a 10% margin as security but I think that is it.

Comment

The UK public finances have seen several months now where they have turned for the better. This morning has brought some further news which should reinforce this.

The survey data are indicative
of first quarter GDP rising 0.25% to thereby signal a
reassuringly solid rebound from the technical recession
seen in the second half of 2023. ( S&P PMI)

There is some spurious accuracy in them using a second decimal place but any growth is welcome and the data so far suggests around 0.3% GDP growth for the first quarter of 2024. I rather suspect the Bank of England will follow the US Federal Reserve in hinting at interest-rate cuts later in the year as well.

There is a possible challenge to this if National Insurance is scrapped as the government has tried to hint at. To be fair this looks like a brain fart from a Chancellor splashing around but only time will tell.

Finally you may have spotted that I have not mentioned that the first rule of OBR Cub is that the OBR is always wrong and it is because of this.

On 6 March 2024, the Office for Budget Responsibility (OBR) published its latest outlook for the economy and public sector finances. The statistics in this bulletin do not yet fully reflect these updated forecasts,

Perhaps they have got on the phone to the Office for National Statistics and asked them not to publish the forecasts next to the out turns.

 

The Institute for Fiscal Studies wants to ramp UK house prices even higher

Next week we will see the UK Spring Budget and it has provided the Institute for Fiscal Studies to demonstrate their usual dislike off tax cuts. But before we get there I have spotted something in their report which is pretty shocking.

But simply cutting the main rates of these taxes would represent a missed opportunity.

Okay so what should the UK do?

For example, stamp duties on purchases of properties and shares are particularly damaging taxes and should be towards the front of the queue for growth-friendly tax cuts.

Yes so asset price pumping from the IFS and by mistake I first typed pimping which actually is accurate too. We had a recent trial run for this via the post pandemic Stamp Duty holiday introduced by Chancellor Rishi Sunak. Below is an LSE analysis in 2021 of this impact of this.

It is generally well understood that stamp duty impacts house prices – and of course that house
prices modify the receipts obtained. Importantly the average house price in England in March 2021,
at £273,000, was almost 10% higher than in March 2020. In the previous year, prices had only risen
by 3%.

It is rather typical of this sort of analysis from the LSE that we see claimed Wealth Effects.

A recent report by CEBR which uses government estimates of elasticities suggests that if the holiday
were to be made permanent there would be a roughly 2% increase in housing wealth because of
house price increases (CEBR 2020). More generally, the CEBR report suggests that such an extension
might actually increase overall tax revenues, not just through higher house prices but also through
the knock-on effect of increased housing wealth on consumption.

As an aside the research shows that the North has more to worry about this than the South if the pandemic experiment is any guide.

Price rises have differed very considerable between regions. For the period April 2020 – April 2021,
they rose most rapidly in the North East (almost 17%) and Yorkshire and the Humber (around 12%),
and least in London (3%) and the South East (5%). Southern regions have in general experienced
lower increases than the rest of the country.

Eventually they are forced to address what for me is the elephant in this particular room which is that the claimed “Wealth Effects” are at the expense of first-time buyers and those trading up.

There are thus well evidenced concerns that an extended holiday would tend to increase house
prices and reduce affordability. So the government might well benefit in terms of revenues, but
some of those trying to enter owner-occupation might be disadvantaged.

You may have spotted the framing here where house price rises are permanent and so they suggest are wealth effects. But the poor punished first-time buyer only “might be disadvantaged”! When it is the most certain outcome of the lot.

Also we have had a post pandemic surge in house prices as only yesterday I noted that we have had only minor house price falls to follow the surges ( 10% reported by the LSE paper but remember it was followed by even more rises). So all those “wealth effects should have seen an economic surge.

As this report says, that adds up to anywhere between £1.8- £2.7bn being injected into the economy
– probably more by the time you add the multiplier effect.

Except over the past year our economy has not grown at all. The real world is often rather inconvenient…..

The first rule of OBR Club strikes again!

If we return to the IFS paper it rather inadvertently strengthens the argument for the first rule of OBR Club that the OBR is always wrong.

Borrowing in 2023–24 is now on course to be £113 billion, which would be £11 billion below the £124 billion forecast by the Office for Budget Responsibility (OBR) in the November 2023 Autumn Statement.

Actually we do not even get beyond point one without another example of forecasts that have proven to be not only wrong but actively misleading.

A reduction in forecast borrowing would doubtless be welcomed by the Chancellor, but we should remember that as recently as March 2022 the OBR was forecasting borrowing in 2023–24 would, at £50 billion, be less than half what we now project.

If the OBR was an archer not only would they miss the bullseye they would miss the target and have the spectators running for cover. There are two very important points to note from this.Firstly the ridiculous nature of setting policy on the basis of such forecasts and yet our media and establishment do. Let me give you an example from the 17th of November 2022 when I pointed this out.

It has all come from this as reported by the Financial Times back in mid October.

The Institute for Fiscal Studies has said a £60bn fiscal tightening will be required to make the sums add up, implying that Hunt will have to go much further in reversing tax cuts, raising taxes and cutting spending.

Remember the fiscal “Black Hole” that the IFS,OBR, Bank of England and the media were hollering about? Where did it go as after all we have had very little economic growth since. Plus the whole situation is rather incestuous as these bodies rather than being independent as it may appear are in fact made up of the same type of people  as I pointed out about the OBR back in November 2022.

 If you look at the 3 members of the Committee you see that 2 are from HM Treasury. This is the sort of thing that only the state can get away with which is claiming to be independent of HM Treasury and then taking back control.

Actually the third one was maybe even worse as Professor David Miles voted for more QE just as the UK economy was picking up in 2012/13.

Oh and I was saying all this back then.

 Now we see that our fiscal policy looks set to tighten into a slowing economy as well which compounds the problem.

Comment

If we look at recent UK economic history we see that bodies like the IFS and the OBR have made things worse rather than better. That “black hole” analysis from late 2022 led to a fiscal tightening which contributed to the present recession. That adds to the way that what I would describe as the same old establishment crew at the Bank of England raised interest-rates too late and thus helped create a recession. If you think that through logically you see that interest-rates can do nothing about what has already happened and should instead by aimed at the future. Also tax policy was a rear gunner as well. Yet on BBC Breakfast this morning I heard the presenter describe the IFS as “well respected”. By whom please?

Also there is the issue of the house price pumping and punishment of the young of a Stamp Duty Cut. The head of the IFS Paul Johnson has form in this area via his botched 2015 Inflation Review.

“In 2013, the UK Statistics Authority de-designated the RPI as a National Statistic and the Office for National Statistics introduced the new CPIH measure to include owner occupiers’ housing costs. In my view, it is time for the UK government to take the next, logical step and stop using RPI in any element of the tax, benefit and regulatory systems.”

I am not sure how much more wrong he could have been! Notice how he has punished the poor receiving benefits as well as taxpayers by recommending using a much lower measure of inflation. Also “to include owner occupiers housing costs” was misleading and frankly has turned into a lie as the Imputed Rents used in CPIH have been vert different to house price rise as we have already seen via the LSE analysis I looked at above. Yesterday the Household Cost Indices provided an eloquest critique of his rejection of mortgage costs.

 Unlike CPIH, the HCIs are based on the payments approach, which includes changes in mortgage interest payments. These are the actual costs paid by households out of their disposable income, rather than imputed rents, which are a proxy for the cost of consuming shelter as a housing service.

Or in practical terms.

Taken together, OOH costs increased by about 23% in the year to December 2023 according to the payments approach, contributing 0.8 percentage points to cost inflation over the same period for an average household.

The UK Public Finances look to be finally improving but local councils remain a concern

Last month ( on the 23rd) I pointed out that the UK public finances were showing signs of a turn.

Today’s public finances numbers show a more hopeful position for the UK public finances. As I have already pointed out it was on the cards due to the impact of lower inflation on our relatively higher proportion of debt index-linked to inflation.

For those unaware the cost of inflation via index-linked bonds peaks in December and June. That positive vibe has continued this morning via the latest numbers.

Public sector net borrowing excluding public sector banks (borrowing) in January 2024 was in surplus by £16.7 billion, more than double the surplus of January 2023 and the largest surplus since monthly records began in 1993 in nominal terms.

So we have had a better January too and it was backed up by some positive revisions.

combined with a downward revision of £5.8 billion to our previously published financial year-to-December 2023 borrowing estimate,

This one rather changes the financial year so far as we are now doing better than last year.

Borrowing in the financial year-to-January 2024 was £96.6 billion, £3.1 billion less than in the same ten-month period a year ago; this is the first time in the present financial year that year-to-date borrowing has been lower than in the equivalent period in the last financial year, partly because central government receipts have been revised.

I have emphasised the last bit because it is a reminder that these numbers have an error margin. Also it is a reminder that they do not actually know what the receipts are until some time afterwards. I always think that is a disappointment in the modern data led society but then public-sector IT programmes are a regular disappointment. They lead to this sort of thing.

On 29 January 2024, His Majesty’s Revenue and Customs (HMRC) announced that they had identified a potential concern with receipts data affecting Pay As You Earn (PAYE)  in the financial years ending March 2023 and March 2024.

Okay, how much?

Subsequent investigation identified an additional £6.5 billion in PAYE income tax and National Insurance Contributions (NICs) cash receipts that had not previously been recorded in the financial year to December 2023. This has now been corrected.

On the upside higher receipts suggest that the economy may have been stronger than we previously thought. Whether that is enough to alter the recession at the end of the year only time will tell.

The concept of the numbers improving over time seems to be a theme at the moment.

Since our Public sector finances, UK: March 2023 bulletin published on 25 April 2023, we have reduced our estimate of borrowing for the 12 months to March 2023 (financial year ending (FYE) 2023) by £10.5 billion, from £139.2 billion to £128.7 billion.

So we have a double-gain in that this year is better than last year which itself has improved by more than £10 billion on what it was originally thought to be.

The first rule of OBR Club is that the OBR is always wrong

It was yet another good day for this.

This was £9.2 billion less borrowing than the £105.8 billion forecast by the Office for Budget Responsibility (OBR).

We can look at that more deeply via the words of Diana Ross.

Do you know where you’re going to?
Do you like the things that life is showing you?
Where are you going to?
Do you know?

The truth is that the public finances struggle under her critique as we have already seen that even the past is shrouded in some doubt and we are therefore much less sure of the present than we might like to think. Thus the future projections of the OBR start on shifting sands and get worse. You might think that those in charge of the OBR would be on a mission to point this out but instead they trouser their salaries and continue to produce forecasts which are wide of the mark and sometimes very wide of the mark.

The circus continues via both our media and political class acting as if they have amnesia and forgetting all the mistakes and treating each new forecast as something to be taken very seriously.

January

We can start our analysis with revenue.

Central government’s receipts were £111.4 billion in January 2024, £3.9 billion more than in January 2023.

Whilst it is welcome revenues are higher that is similar to what we think inflation is so no particular boost here which is added to by this.

In January 2024, SA Income Tax receipts have been provisionally estimated at £21.6 billion, £0.4 billion less than in January 2023 and £2.4 billion less than the £24.0 billion forecast by the Office for Budget Responsibility (OBR).

If we move on from another OBR failure we see a decline on self assessment receipts. So having seen a sign of a stronger economy earlier this heads the other way, although for the full picture we also need to February numbers.

Switching now to expenditure we are beginning finally to see a turn here as well.

Central government’s total expenditure was £102.6 billion in January 2024, £1.6 billion more than in January 2023.

Not an outright decline but one less than inflation in spite of its influence clearly affecting some parts of spending.

Net social benefits paid by central government were £23.7 billion in January 2024, £3.4 billion more than in January 2023.

In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.

In fact it was in plat here too.

Central government departmental spending on goods and services was £34.2 billion in January 2024, £2.5 billion more than in January 2023, as inflation increased running costs.

But other areas compensated starting with lower energy subsidies.

Subsidies paid by central government were £2.3 billion in January 2024, £6.6 billion less than in January 2023.

Whilst not on the scale of December lower inflation helped with debt interest.

In January 2024, the interest payable on central government debt was £4.4 billion, £3.5 billion less than in January 2023. This was the lowest January interest payable since 2021

Oh and yes it happened again.

£2.7 billion less than the £7.1 billion forecast by the OBR.

In percentage terms that is their biggest error of the day.

Bank of England QE Problems

This is an issue which gets very little media coverage.

This increase was largely a result of payments to the Bank of England Asset Purchase Facility Fund (APF) from HM Treasury (HMT) under the indemnity agreement. These payments, recorded as capital transfers, began in October 2022, and occur every three months. This month saw a payment of £11.2 billion to the APF, £7.0 billion more than in January 2023.

The total transfers are getting larger as I have long warned.

The borrowing of both of these sub-sectors is affected by payments totalling £44.4 billion made by central government to the BoE over the last ten months under the Asset Purchase Facility Fund (APF) indemnity agreement. This was £39.4 billion more than the £5.0 billion paid in the same period the previous year.

Comment

The trajectory for the UK public finances looks to have improved which is welcome and may over time feed into lower UK bond yields. The latter will also be influenced by any pre election tax cuts. Between public finance announcements we have seen Energy Secretary Claire Coutinho get into quite a mess on the national debt. If you follow her pronouncements on energy policy that will have been no surprise at all as she has been a cheerleader for the policies which have got us into an energy crisis.

Also there is another issue on the horizon. I note that today’s release provides no further analysis of local government spending. Because of this?

Birmingham City Council must sell off £1.25bn in assets to repay a government bailout loan.

The revelation came as the troubled local authority published draft budget documents.

They provide the starkest indication to date of how the city will drag its finances back into the black after declaring itself bankrupt in September, with other dramatic measures including a 21% council tax rise. ( BBC)

It is not alone as off the top of my head I can think of problems at Croydon and Woking councils.

The UK gets welcome news from real wages and employment

This morning has brought the latest labour market release from the UK and let us start with what has been the main topic in recent times which is wage growth.

Annual growth in regular earnings (excluding bonuses) was 7.3% in August to October 2023, this growth continues to remain strong but is not as high as in recent periods; annual growth in employees’ average total earnings (including bonuses) was 7.2% in August to October 2023.

I have never really quite understood why they emphasise regular over total pay but as you can see it is a minor factor at the moment. But we see on a basic level that there is some real wage growth if we use the CPI inflation measure that the Bank of England targets.

Using CPI real earnings, in August to October 2023, total pay rose by 1.2% on the year. Growth was last higher in August to October 2021 when it was 1.5%. Regular pay rose by 1.2% on the year; growth was last higher in July to September 2021 when it was 2.2%.

This is very welcome after a period where real wages have seen substantial falls and I hope it continues.  Actually the news on pay was reinforced I think by the October number of 6% annual wage growth because the slowing in wages growth should be noted by the Bank of England and also it remained above CPI inflation for that month which was 4.7%. A situation where wages growth fades with inflation but remains above it would be a Goldilocks style one.

For the overall position we see that UK real wages peaked at £527 in May 2021 and in October were £506 so we get some idea of the impact of the cost of living crisis. Unfortunately it is only a rough guide because as regular readers will know I reported the wages numbers back then to the Office for Statistics Regulation. After all the idea that an economic collapse caused wages to surge was frankly nonsense. Actually they do have a type of confession to that in the release but I doubt many will see the full implication of it.

As a result, AWE is not a measure of rates of pay and can be affected by changes in the composition of an enterprise’s workforce.

That is somewhat damning as they are stating it is not what it gets used for! Anyway let me look further back to illustrate my point which shows that real wages have been in quite a depression in the UK. If we look back to before the credit crunch there were some odd prints but also some around £521 per week whereas now in October it was £506. Or if you prefer in the 16 years or so since real wages have fallen by 3%. The number will be higher if you use the Retail Prices Index or RPI.

Breakdowns

There was something in the breakdown which should calm the Bank of England.

 If we compare the latest three months with the three months that preceded them, and then annualise this growth rate, nominal regular average weekly earnings grew by 4.2%.

As you can see wages growth has slowed quite a bit. The actual position is a bit more complex than that because some of the past rises were “one-offs” especially in the public-sector  So we have a situation where weekly wages were £711 in June but £645 now.

One area which caught my eye was accommodation and food services which has pay of £305 per week. Isn’t that below the minimum wage?

We can have a peek at some hints for November from the tax data.

Early estimates for November 2023 indicate that median monthly pay increased by 5.3% compared with November 2022, and increased by 24.1% when compared with February 2020.

That came with an interesting breakdown in the sense that finance was not the fastest growing sector.

Annual growth in median pay in November 2023 was highest in the wholesale and retail sector, with an increase of 7.4%, and lowest in the education sector, with an increase of 1.3%.

Employment

There was positive news here too.

The estimated number of workforce jobs in the UK in September 2023 was a record 36.8 million, an increase of 210,000 from June 2023. The total number of jobs includes both employee jobs and self-employment jobs. The estimated number of employee jobs has been on a largely upwards trend since September 2020, resulting in a record high of 32.5 million in September 2023.

You may note that we only get a follow-up sentence on employee jobs presumably hoping we will not be aware of the previous falls in self-employment. The latter had peaked at 5.03 million before the Covid pandemic whereas as of the last formal estimate it was 4.24 million. The picture was muddied by legal changes which shifted things in favour of payrolled employment but even so there were falls so it is welcome we are now seeing a rise. Unfortunately we do not get told by how much they have risen. But the overall picture is of jobs growth as opposed to the previous quarter’s report of a decline.

One interesting way of looking at things is to compare with the US where non-farm payrolls were considered to be strong on Friday.

And if UK labour market stats were presented as in US (where UK Workforce Employee Jobs are roughly equivalent to Non-Farm payrolls). Then the jobs story would be roughly the same in both countries……And even if US & UK are compared on the basis of household surveys (CPS in US, LFS in UK) the picture is not that different.( @billwells_1)

That provides quite a different theme to the situation. Care is needed as what is usually the headline figure gives a very different answer.

This continuing WFJ growth contrasts with the mediocre LFS employment estimate of ~200k in latest year.

That is the same Labour Force Survey that is in such disarray right now. We can add to that if Bill Wells is right about this.

Since the LFS was reweighted in 2021 the gap in growth has widened substantially. Up from around ~1.2m to ~2.4m. So, whereas Workforce Jobs are now over 1m higher than pre-crisis peak LFS employment is around the same level. A very different picture. Perhaps WFJ more accurate?

The Experimental Series

Because of the falling response rate to the official survey the UK is producing some experimental numbers.

These alternative estimates for August to October 2023 show that:

• the UK employment rate (for those aged 16 to 64 years) was largely unchanged on the quarter at 75.7%
• the UK unemployment rate (for those aged 16 years and over) was largely unchanged on the quarter at 4.2%
• the UK economic inactivity rate (for those aged 16 to 64 years) was largely unchanged on the quarter at 20.9%

I wonder if “largely unchanged on the quarter” means they don’t really know?!

Comment

If we look at the data this is welcome news for the UK economy as we have some real wage growth and employment is rising too. That provides two major streams of thought of which the first is that such numbers remind us again what an awful job the Bank of England and the Office for Budget Responsibility made of forecasting the UK economy. Remember we were supposed to be in a deep recession ( GDP 2% lower) with unemployment rising and perhaps surging.

Next there is the underlying issue of how reliable are official statistics? I have already noted the clear differences in terms of employment between the two official surveys in the UK which mimics in terms of theme the situation in the United States. Also the average earnings figures need a review I think. The previous unemployment series has been binned. Just at the time in our lives when we can measure pretty much anything via our mobile phones and the like our official statisticians seem to be unable to measure much at all.

 

Are UK Tax Cuts only allowed when the OBR says so?

The last few days gave seen plenty of discussion of UK tax cuts. There are various issues with that which one can start with why are they are good idea in 2023 when we were told they were such as bad idea in 2022 under the Liz Truss/Kwasi Kwarteng experiment? Let me take you back just over a year to the 9th of November 2022 when the Financial Times was full of fiscal black hole rhetoric.

Not this autumn: allies of chancellor Jeremy Hunt have said he is considering tax rises and spending cuts worth about £55bn a year, with one Treasury official warning that “after borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone”.

Sounds awful doesn’t it? Regular readers will know that I was arguing at the time against this. Because if the Office for Budget Responsibility is not the worst forecasting organisation in the world it is not for want of trying.

Hunt will shortly receive forecasts from the OBR revealing how big the hole is due to be when he wants to meet his main fiscal rule — most likely in 2027-28.
This figure is thought to be somewhere between £30bn and £40bn. On top of this figure, Hunt is expected to add so-called fiscal headroom of between £10bn to £15bn.

Indeed the subsequent 12 months have been even by its poor standards an awful performance as its forecast of a deep recession involving a 2% fall in GDP  was the equivalent of a footballer shooting at goal and the ball going out for a throw-in.

Tax Cuts are back on the menu

There has been a litany of tax cutting suggestions over the past few days as enough kites to keep any child happy have been flown by the government.

Mr Hunt is finalising the government’s spending plans as he seeks to revive a stagnant British economy.

The chancellor is believed to be considering reducing taxes on income or national insurance…….While the chancellor had considered cutting inheritance tax, sources said the focus of the Autumn Statement would be to promote growth – on which inheritance tax has minimal impact. ( BBC )

Apparently the Prime Minister thinks this.

Prime Minister Rishi Sunak has said the government is now able to cut taxes, after the pace of price rises eased.

If these two are valiant tax cutters then they need to speak to two gentleman who raised taxes so much last year. Their names are Rishi Sunak and Jeremy Hunt so they should not be too hard to find.

Tax levels in the UK are at their highest since records began 70 years ago ( BBC)

Much of it was via changes in personal allowances is called fiscal drag as inflation is ignored.

If successive Chancellors had obeyed the law instead of getting Parliament to rescind it year by year Jeremy Hunt would be announcing on Wednesday a personal allowance of £15,230 from April (instead of frozen £12,570)and higher rate threshold of £61,030 instead of frozen £50,270 ( @paullewiamoney)

Let us now move on from the logical problems here as we note that in another failing the OBR style analysis has led to a traditional electoral cycle. Government’s raise taxes away from an election and then cut them in the run-up. So supporters of the OBR have another question to answer.

Today’s figures

These pose an immediate problem for tax cuts being awful last year but fine this one.

Public sector net borrowing excluding public sector banks (PSNB ex) in October 2023 was £14.9 billion, £4.4 billion more than in October 2022 and the second highest October borrowing since monthly records began in 1993.

Can you imagine the media and think tank storm if the Liz Truss regime had produced such numbers? Yet Reuters open their analysis with this.

LONDON, Nov 21 (Reuters) – Britain borrowed less than predicted by its budget forecasters in the first seven months of the financial year, data showed a day before finance minister Jeremy Hunt is expected to announce some pre-election tax cuts.

Very neutral which is hardly what we were being told last autumn. That is even more of a change of tone if we note that October was pretty consistent with the year so far.

PSNB ex in the financial year-to-October 2023 was £98.3 billion, £21.9 billion more than in the same seven-month period last year,

Again we are borrowing more than last year. Indeed if we return to the October figures and look at the detail we see grounds for lower borrowing.

Of this £76.9 billion, tax receipts were £57.9 billion, £2.7 billion more than in October 2022, with Value Added Tax (VAT) receipts increasing by £1.2 billion and income tax receipts increasing by £1.1 billion.

So revenue was up and some one-offs have now ended.

Subsidies paid by central government were £2.2 billion in October 2023, £2.6 billion less than in October 2022. This is largely because of the cost of the Energy Price Guarantee (for households) and Energy Bill Relief Scheme (for businesses) affecting this month last year…….Payments recorded under central government “other current grants” were £1.7 billion in October 2023, £2.0 billion less than in October 2022, largely because of the cost of last year’s Energy Bills Support Scheme.

One of the issues on the other side of the coin was debt interest.

In October 2023, the interest payable on central government debt was £7.5 billion, £1.1 billion more than in October 2022……

You can argue whether we should count the capital uplift on UK index-linked bonds in this way but at this time we do and there was something else from this area.

Central government net investment was £14.2 billion in October 2023, £9.7 billion more than in October 2022. This increase was largely a result of payments to the Bank of England Asset Purchase Facility Fund (APF) from HM Treasury under the indemnity agreement. These payments, recorded as capital transfers, began in October 2022 and occur every three months. This month saw a payment of £9.1 billion to the APF, £8.3 billion more than in October 2022.

It is hard not to have a wry smile because this was a result of the Chancellorship of one Rishi Sunak who was very profligate. Indeed if we stay with today’s theme of how things are perceived there are lots of questions now being ignored about that era. The most basic is were the lock downs necessary which the official Covid enquiry seems determined to avoid? The economic consequences of closing an economy soaring borrowing and debt combined with the Bank of England buying a huge number of bonds at the top of the market get ignored to. After all many of the “experts” wanted more of the above and presumably more inflation and public borrowing issues now.

There is also an enormous elephant in the room via our national energy policy which has been a disaster where we have spent ever more for ever less.

Comment

There is a lot of ground to cover as we note the way the UK public finances have developed over the past few years. In a broad sweep we have been told that the tax cuts of Liz Truss were awful but the public spending surge and lock downs of the previous regime were just fine. As I have just pointed out, back in the day the UK government was being pressed to spend even more. Now apparently tax cuts are just fine again.You do not have to be a supporter of Liz Truss to think that the playing field has been far from level.

Next up is a body that over the next day or two will be treated as a public oracle with is the OBR. How did it do in today’s public finances release?

but £16.9 billion less than the £115.2 billion forecast by the Office for Budget Responsibility (OBR) in March 2023.

The first rule of OBR Club is that the OBR is always wrong and perhaps I need to add a second rule which is that the media and “think tanks” will ignore it. Maybe because the “think tanks” are in on it too.

We have held useful discussions with the Bank of England, International Monetary Fund, Migration Advisory
Committee, Institute for Fiscal Studies, National Institute for Economic and Social Research, Institute
for Government and the Resolution Foundation about their recent forecasts and analysis.

It took a lot of people to get the UK economy in 2023 so wrong. In modern language one can pit it as “Siri define group think please”?

Continuing the “think tank” theme I can see why Paul Johnson of the IFS was so keen to keep house prices out of inflation measures in his 2015 Inflation Review.

I agree with Sam on cutting stamp duty land tax. Against stiff competition it is arguably among the worst, most damaging taxes we have. Would cost c£6bn to abolish entirely for primary residences.

It would of course ramp house prices.

Let me finish with some better news which is that with the recent falls in inflation and bond yields the trajectory for debt costs has improved recently.

The UK think tank and media establishment have saddled us with the wrong economic policy

Today has quite a few of our themes in one go. One way of looking at events is to look back at just over a year ago when the media, the think tanks, US Treasury Secretary Yellen and the IMF suggested the UK had to change course on its economic policy. So Chancellor Hunt embarked on a supposed medicine of tax rises and other moves to stop this.

It is not this year’s budget deficit, nor the level of public debt. Gemma Tetlow, chief economist of the Institute for Government, another think-tank, said that at its most basic, the fiscal hole represents “the gap [in the public finances] between where we are projected to be and where we want to be”. ( November 9th 2022)

Excellent work by the FT to use one of its former journalists to make sure it got its message over whilst looking like it was outside support. Tax rises of £55 billion a year by 2027/8 were the establishment cure. You may wonder why this does not seem to get mentioned very much anymore? Well if we start with the borrowing figures the “cure” is in trouble.

Public sector net borrowing excluding public sector banks (PSNB ex) in September 2023 was £14.3 billion, £1.6 billion less than in September 2022 and the sixth highest September borrowing since monthly records began in 1993.

So not much better than last year and they had a really favourable following wind.

The interest payable on central government debt in September 2023 was £0.7 billion, £7.2 billion less than in September 2022 and the third lowest in any month since monthly records began in 1997; this was largely because of the fall in the Retail Prices Index (RPI) between June and July 2023 reducing the inflationary impact on index-linked gilts.

There is a three month lag in the impact of RPI inflation on index-linked bonds so this is reflecting the monthly impact of the decline in energy prices under the cap system. The RPI index fell by 2.2 points to 374.2 which reduces debt payments and the annual comparison was with a 3.3 points rise. Or if you want it put another way.

The low amount of central government interest payable in September 2023 was largely because of a 0.6% decrease in the RPI between June and July 2023, which resulted in a negative capital uplift of £3.2 billion on index-linked gilts this month.

Let me present the borrowing issue from a deeper perspective.

PSNB ex in the first half of the financial year (April to September 2023) was £81.7 billion, £15.3 billion more than in the same six-month period last year but £19.8 billion less than the £101.5 billion forecast by the Office for Budget Responsibility (OBR) in March 2023.

So in fact we are borrowing more rather than less as you might think from the tax rises.

International Perspective and Bond Yields

We can start with US Treasury Secretary Yellen. Some of you may recall the rumours she was going to be removed and I suspect the change of heart was so she could take the blame for events. That was over her failures in the inflation arena. Well back then she and the IMF were nudging the UK to change fiscal policy whereas if we update to now we see this.

She actually said this, while we are running deficits over $2 trillion per year. Janet Yellen: US Treasury secretary says ‘We can certainly afford two wars’ ( @WallStreetSilv )

How is that going?

LONDON (Reuters via PiQSuite.com) – Red October rumbled on in world markets on Friday as the sight of U.S. government bonds yields hitting 5% for the first time since 2007 amid an increasingly threatening conflict in the Middle East left investors searching for safety.

The traditional driver of world borrowing costs – the 10-year U.S. Treasury yield – had retreated to 4.93%

As you can see she is essentially suffering from the same problem as the UK but is adopting a Viv Nicholson style “Spend! Spend! Spend!” approach which is the opposite of last year. This was mostly true when the IMF produced its Fiscal Monitor at the beginning of this month but you have to look hard to find any mention of this at all as it ran down a climate change rabbit hole.

There is a nuance in that the US gets a stronger currency out of this due to its role as the reserve currency as opposed to the dive the UK Pound took last September. But if it stays on this road to nowhere that may change too. Also if we return to the UK the ten-year yield at 4.73% on my weekly chart is higher than back then! But it is not getting anything like the attention of back then. Perhaps the think tanks are hoping we will not spot this.

Growth

Here we have a double swing. Let me take you back to last year when the “fiscal black hole” was in play because the UK was supposed to go into a deep recession and the emphasis is mine. 

The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 per cent.

That was from the Office for Budget Responsibility last November. That was so wrong as we have had growth instead. Not much of it as the annual rate was 0.6% up to the end of the second quarter but miles away from what they forecast. The problem is exacerbated by the recent economic growth upgrades for the UK which means that the underlying position is over 4% better. Or if you prefer our spaceship escaped the claimed Black Hole leaving the OBR and acolytes with egg all over their faces.

I think this may be the most spectacular example of my “The first rule of OBR Club is that the OBR is always wrong” ever. Most of us would be sacked for such errors but next month when they produce a new set of forecasts it will be treated as facts like nothing has happened.

What about now?

If you put what looks like an unnecessary brake on the economy with tax rises. Then we can add in the interest-rate increases of the Bank of England do we need to look a lot further for reasons for this.

Retail sales volumes have fallen by 0.9% in September 2023, following a rise of 0.4% in August 2023 (unrevised from our previous publication).

Looking at the quarterly picture, sales volumes fell by 0.8% in the three months to September 2023 when compared with the previous three months.

That adds to the chances we will see a quarterly decline in the next set of figures. So could we see a contraction at least partly caused by the policy response to the forecast contraction that never happened.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” ( Mad Hatter)

That feeling is reinforced by this piece of news from earlier.

UK Consumer Confidence falls nine points in October. Major Purchase Index plunges by 14 points in run-up to festive season GfK’s long-running Consumer Confidence Index decreased nine points to -30 in October. All five measures were down in comparison to last month’s announcement.

Comment

I will keep it simple. The economic policy that the UK establishment and media bayed for has turned out to be wrong. Yet we get something of a communications blackout. The worst part of this is that we would do it all again. Actually can I be allowed to have two worst parts? Because the issue is across our political spectrum and thus democracy itself has a problem as there is very little of any choice.

Standards are so low we have Ministers of the Crown apparently unaware that the wind does not always blow.

Seagreen will provide clean, secure power to 1.6 million homes every year – another success story for our world-leading renewable energy industry. ( @ClaireCoutinho )

UK GDP is growing but not by much. However it is yet another embarrassment for the OBR

This morning has given us a chance to have another look under the bonnet of the UK economy. We can start with what is positive news.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in August 2023.

That is good in two senses. Firstly the simple one of growth and secondly a relative one because several of our peers seem not to have done. This week has seen a succession of growth downgrades for Germany for example. Also our ersatz quarterly measure improved a little.

Looking at the broader picture, GDP increased by 0.3% in the three months to August 2023, with growth in all sectors.

If we look back to the days ( last November) when the Office for Budget Responsibility and the Bank of England were suggesting that UK GDP was about to fall into a Muse style “supermassive black hole” we have done much better. Indeed if we add in the new revisions for the post Covid period their whole analytical structure has crumbled. The new GDP index number is 102.5 as opposed to the 100.4 of February of 2020 or the pandemic start. So their numbers have added to what they call The Productivity Puzzle because a lot of research assistants and PhD’s have rather expensively not only wasted their time but in fact provided analysis which would have made things worse.

August

In essence it was all one sector.

Output in the services sector rose by 0.4% in August 2023 and was the only positive contributing sector to the growth in monthly GDP. Production output fell by 0.7% and construction output fell by 0.5%.

So another shift towards us becoming a services economy and with the issue over energy prices and policy ( UK wind power fell to 1.6 GW around 7 am this morning) it seems that the trend will continue. At such moments it is hard not to have a wry smile at the past “rebalancing” claims of the former Governor of the Bank of England Baron King of Lothbury.

There were a couple of areas driving this and the first is below.

Professional, scientific and technical activities grew by 1.2% in August 2023, following on from a 0.5% growth in July 2023. The architectural and engineering activities; technical testing and analysis industry was the largest contributing industry, growing by 4.7% in August, followed by legal activities, which grew by 2.3%.

Next up is an area that we have ended up mentioning a lot.

Education grew by 1.6% in August 2023, after a fall of 1.7% in July 2023 where there were two days of industrial action by teachers in England.

Although the issue of switching the measurement from an income version to output is not in play this time around as teachers do get paid in school holidays..

Please note that education attendance is considered to be constant over the school year so summer holidays do not reduce the estimate of education output in August 2023.

IT also grew.

Information and communication also grew in August 2023, by 0.9%. The growth was driven by computer programming, consultancy and related activities, which grew by 2.4% in August after a fall of 3.1% in July.

Let me at this stage just note the size of the monthly swings here as I shall return to this issue. Also there is a conceptual issue as should not at least some of the category below be production?

Wholesale and retail trade; repair of motor vehicles and motorcycles also grew in August 2023, by 0.6%, with the largest contributor being the wholesale trade, except of motor vehicles and motorcycles industry’s growth of 1.1% in August.

I realise that servicing and repair of vehicles has moved towards the use of a laptop rather than a spanner but have we perhaps defined some of our production away?

On the other side of the coin we have an area that Covid effectively put into recession and then depression.

Output in consumer-facing services fell by 0.6% in August 2023 and remains 4.3% below pre-coronavirus (COVID-19) levels (February 2020), while all other services were 7.0% above.

One section of it did grow however and it is a surprise in an era of lower house prices and soaring mortgage rates.

The largest positive contributions to consumer-facing services in August 2023 came from accommodation (up 3.4%) and buying and selling, renting and operating of own or leased real estate, excluding imputed rent (up 0.7%).

Production

This is not a pretty picture.

Production output fell by 0.7% in August 2023, following a fall of 1.1% in July 2023, revised down from a 0.7% fall in our previous publication.

I guess we do avoid the monthly swings but in a bad way. Also it is hard not to think of the energy crisis issue as we look at this.

The largest driving sub-sector was manufacturing, which fell by 0.8% in August 2023.

Further detail is below.

Other manufacturing and repair was the main driving industry within manufacturing, falling by 3.4% in August 2023, followed by manufacture of computer, electronic and optical products, which fell by 3.2% in the month. The largest offsetting positive contribution within manufacturing came from the manufacture of transport equipment, for which output rose by 1.1% in August 2023.

Although if we look back we see we did have some growth and the index is at 99.7 compared to January 2022.

Overall though, production output rose by 1.2% in the three months to August 2023, where manufacturing was the main driver, growing by 1.7%.

On the energy issue this is welcome but should have been a national priority for some time now.

Mining and quarrying was the only production sub-sector to see increased output in August 2023, growing by 2.9%, driven by growth of 3.5% in the extraction of crude petroleum and natural gas.

The same index is at 88.5 showing how incompetent our government and indeed our whole political class as the others are similar actually is/are respectively.

Construction

This is an area that you would expect to be impacted by the interest-rate increases.

Monthly construction output is estimated to have decreased by 0.5% in volume terms in August 2023. This follows a 0.4% decrease in July 2023, revised up from a fall of 0.5% in our previous publication.

But it has taken its time because on a rolling basis we still have growth.

On the three months to August 2023, construction output increased by 0.9% compared with the three months to May 2023.

House Prices

Let me start by presenting the news from the perspective of the Financial Times.

Inflation has masked the true extent of recent falls in UK house prices, with many regions and nations of the UK no better off in real terms housing wealth than on the eve of the 2008 financial crisis, research has found.

“Research has found” is a dubious concept these days as it often is pre-designed for a particular outcome rather than to investigate so let us look deeper.

UK house prices have fallen by a modest 2.8 per cent in nominal terms since their peak in March 2022, but 13.4 per cent in real terms, according to analysis of the Nationwide house price index by estate agent Savills. After adjusting for inflation, average real house prices are no higher than they were in late 2015, Savills said.

Firstly I welcome lower house prices as they provide some respite in otherwise hard times for first-time buyers. But you might think that a financial journalist would spot that the correct deflator here is wages not inflation. Otherwise it is not a real house price is it?

Anyway we have another flicker of hope for first-time buyers which may be added to by the retracement in bond yields we have seen so far this week.

Rachel Springall, finance expert at Moneyfacts, said the average two- and five-year fixed rates had fallen for the second month running, offering borrowers potentially cheaper deals. “

Comment

There are two ways of looking at our present situation. One is that we have growth but not very much of it. The other is that we are doing far better than the ahem. experts told us. This is especially significant as what seems to be the likely next government wants to base its policy on consistent failure in this area. The first rule of OBR Club is that the OBR is always wrong.

Also I am glad I warned from the beginning that the monthly GDP numbers would be unreliable as the last three months make my point rather eloquently. June at 0.7% followed by July at -0.6% and then August at 0.2%. We can see that in elements of the detail.

The largest downward contribution was from arts, entertainment and recreation, which fell by 7.4% in August 2023, following 6.8% growth in July 2023, its largest growth since May 2021. Sports activities and amusement and recreation activities fell by 10.8%, after growth of 12.2% in July, and creative, arts and entertainment fell by 7.7%, after growth of 4.6% in July.

Does anyone actually believe that? Overall it has grown but those numbers above look a mess.

In the three months to August 2023, compared with the three months to May 2023, arts, entertainment and recreation has grown by 2.7%.

Regular readers will know I have long pointed out that the pharmaceutical sector does not correlate with a monthly schedule.

Finally let me mark your card for the public finances  figures which will see significant changes due to the GDP revisions.Thus on a theme for the day the OBR will be significantly wrong again

 

 

UK GDP gets quite an upgrade meaning the “Outlier” analysis has collapsed

Today is rather hot with UK economic news and we can start with the fact that the turn of the year was better than previously reported.

• UK GDP is now estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2023, revised up from a previous estimate of 0.1%, while growth across all quarters of 2022 is unrevised.

Looking into the detail we see that the Services sector was revised up by 0.2% as was construction. Actually there have been quite a few changes in the recent detail because whilst the second quarter remained at 0.2 there was a shift internally as Services growth fell to 0% and production rose to 1.2%. It is a sign there are a lot of changes going on and with growth low they are a relatively bigger deal. Also this is a really big change on what places like the Bank of England were saying as recently as last November.

As a result, the UK economy is expected to remain in recession throughout 2023 and 2024 H1,

In fact the UK economy has grown by 0.5% in the first half of 2023 which adds to their forecasting failures at the end of 2022.

Moving on we also have the Blue Book update for the post pandemic revisions.

But, combined with the better-than-thought pandemic rebound, the figures confirm that the UK’s economy now is larger than in earlier assumptions by around 2%, or £50 billion. ( Evening Standard)

By the way I am quoting the Evening Standard because at the time of writing our national broadcaster the BBC including its economics editor Faisal Islam seem to have missed the update. Anyway all the analysis about the UK under performing and being an outlier needs a revision as we shift from having GDP 0.2% lower than pre pandemic to the number below.

Taking into account all our recent revisions, this means that GDP is now estimated to be 1.8% above pre-coronavirus (COVID-19) pandemic levels in Quarter 2 (Apr to June) 2023.

Tucked away in the detail is an improvement for last year.

UK GDP is now estimated to have increased by 4.3% in 2022, revised from a first estimate of 4.1%. As announced in our previous Impact of Blue Book 2023 changes on gross

domestic product article on 1 September 2023, annual volume GDP growth in 2021 is revised up 1.1 percentage points to an 8.7% increase; this follows a revised 10.4% fall in 2020 (previously an 11.0% fall).

If we now try to bring things together the state of play is being reported like this.

The UK now surpasses France and Germany in economic growth since the pandemic, new figures show ( Bloomberg)

The problem with the league table type analysis is that it will change as others revise and update their numbers. Let me give you an example of Italy which I looked at yesterday and it has made major revisions. As we stand it gas done 0.3% better than the UK post Covid in GDP terms but looks to be weakening more than us in terms of a trajectory. I expect the “revision season” to see a relative improvement for the UK of between 0.5% and 1% of GDP due to our treatment of health and education output. So a bit under half of the reported change today is a relative change.

Looking Ahead

Whilst the news on the past is welcome partly because of the “doom and gloom” much of the media has indulged in ( for example Bloomberg are calling a 2% upgrade to UK GDP “slightly stronger” as I wonder what they would call a 2% fall?). What we need to move onto is the future and the monetary data does give us insights into this.

Net borrowing of mortgage debt by individuals saw an increase from £0.2 billion in July to £1.2 billion in August. This was the fourth consecutive monthly increase in mortgage borrowing and the highest since January 2023. Gross lending rose from £19.1 billion in July to £19.7 billion in August, while gross repayments were little changed at £18.9 billion in August.

So if we start with the central bankers favourite which is the housing market it is surprisingly strong as I recall they made a lot of effort to get numbers like this back in 2012 and 13. The surprisingly strong feeling is reinforced by this reality.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages rose by 16 basis points to 4.82% in August. Similarly, the rate on the outstanding stock of mortgages saw a 9 basis point increase, from 2.97% in July to 3.06% in August.

I think it has been so long since we saw a rise in mortgage rates like this that it is taking time for people to respond partly I think because rates were so low before. But if we look at the leading indicator here things are changing.

Net approvals (that is, approvals net of cancellations) for house purchases, which is an indicator of future borrowing, fell from 49,500 in July to 45,400 in August, the lowest level in six months.

Pre pandemic we had got used to numbers of 60,000 plus.

Money Supply

The release tells us this from UK broad money.

The net flow of sterling money (known as M4ex) fell to -£8.1 billion in August, from -£1.9 billion in the previous month. This was largely driven by a decline in the net flows of non-intermediate other financial corporations’ (NIOFCs’) holdings of money to -£6.6 billion in August, compared to -£3.3 billion in July.

As you can see there is a monthly fall which means we now also have an annual fall of 0.6%. The monthly numbers are erratic but if we simply add the last three months we have a fall of 0.6% so the Bank of England is applying quite a squeeze here with its interest-rate increases to 5.25% and its sales of UK bonds.

Indeed we can link this back to the mortgage rates section because whilst the relative UK economic performance recently has led to us being less of an outlier in bond yield terms as we have been noting the US and elsewhere have gone higher. Overall UK mortgage rates look set to remain high but with the two-year yield below 5% we may see more of this.

The average rate on a five-year fixed mortgage has fallen below 6% for the first time since early July, new figures show.

On Thursday, the typical rate dropped to 5.99%, according to the financial information service Moneyfacts. ( BBC )

Returning to the money supply issue it looks ever more that the Bank of England in its rush to look macho after its “Transitory” inflation debacle is now overtightening. Also it is selling bonds into a bond market panic and it is hard to over state how stupid I think that is.If you look back I did warn about this scenario ( as in their plans were predictably flawed.

Comment

So we see that all the analysis about the UK being an economic outlier can be thrown in the bin. Some have a lot of deleting to do or more likely simply denial as I heard Bloomberg TV call a 2% increase “slightly stronger” earlier. There is a serious point as the Bank of England, OBR, IFS and Resolution Foundation have piled this stuff on and now it no longer exists. That does matter at a time when the most likely next government is giving them a vote of confidence.

Britain’s economic institutions were created to provide stability. Under my watch they will never be undermined. ( @RachelReevesMP)

There is an irony in that we do of course have plenty of problems as whilst the new numbers make us relatively better the issue of disappointing growth continues. But there is an large elephant in the room here because it is the US with its fracking and the like which has done the best so far in this energy crisis and it is “renewables” Germany which has done the worst.

Looking ahead the money supply numbers suggest the Bank of England mat get the recession it has been so keen on so let me leave you with The Streets.

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?

 

The first rule of OBR Club is that the OBR is always wrong

As we come to the end of the week we have the opportunity to have a little light humour as we as to look at some changes in more serious themes. So without further ado let me hand you over to the Financial Times.

UK public finances are in a “very risky” position, with government debt on course to hit 310 per cent of gross domestic product in 50 years, the Office for Budget Responsibility has warned.
The fiscal watchdog said in a report on Thursday that the UK was “more vulnerable” than in the past or than other advanced economies when it came to public debt, which in May surpassed 100 per cent of GDP for the first time since 1961.

Yes the very body that cannot get next month right is apparently to be trusted over a 50 year period! If you gave them a map and asked them to Wales you would find yourself on a Magical Mystery Tour and maybe Scotland. But if for a moment we take this seriously then unless we have very short memories we need to take note of this from only last November.

UK government officials normally avoid the phrase “fiscal hole” like the plague because it suggests ministers have lost control of the public finances and that nasty tax rises and public spending cuts are imminent. Not this autumn: allies of chancellor Jeremy Hunt have said he is considering tax rises and spending cuts worth about £55bn a year, with one Treasury official warning that “after borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone”. ( Financial Times)

The main driving force behind all of this was this masterstroke from the OBR.

The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 per cent.

If you allow for the short time period that has elapsed and the scale of the error this may be their worst ever effort as they jostled with the Bank of England in a doom and gloom party. Even worse for them the central additional tenet here were government energy subsidies which for the domestic consumer have now ended. If we look at this thematically there is always going to be an issue about this type of “steady state” analysis when the world is increasingly dynamic and changing. Or if you prefer we can apply the old aphorism “never assume as it makes an ass out of you and me”.

Indeed there is an enormous swerve in all of this. Remember only last November when we had a fiscal “black hole”? Well apparently there was scope for tax cuts!

Such developments have punctured hopes of tax cuts in the medium term. Chancellor Jeremy Hunt recently ruled out big pre-election reductions in a recent interview with the Financial Times.

These are serious issues because what the FT and OBR presented as not only the sensible option but attempted to claim it was the only one has turned to dust some 8 months later. If we had avoided the tax rises and therefore seen better growth the situation would look better in many ways.

Let me finish this particular section by showing, ironically from the OBR itself, how pointless much of its work is.

European wholesale gas prices were relatively stable at around 50p a therm in the decade leading up to the pandemic, reflecting a steadily growing supply
of pipeline gas from Norway and Russia matching steadily rising demand from European households and businesses. The interruption of Russian pipeline gas sent daily spot prices soaring to £6.40 a therm in late August, before falling to £1.10 at the time of our latest forecast in March 2023.

In essence this is all about the first sentence here. In the modern era such apparently stability is often the precusor to a move. In this instance energy policies across much of Europe were somewhere between flawed and insane so as Taylor Swift would say this was always likely.

Trouble, trouble, trouble
Oh, oh
Trouble, trouble, trouble.

Actually the often maligned Rational Expectations theories and models got near to this. But don’t worry as I am not fully going through that looking-good as it requires a post on its own. The real point here is that the OBR is set up to fail. for the reasons I have explained and yet is presented as something of a seer. Putting it another way an alien spaceship flying by would conclude that human kind are none too bright as we keep making systemic mistakes.

The Bond Yield Problem

This is something I remember from the beginnings of the OBR. A sort of you can take the boy out of the bond markets but can you ever take the bond markets out of the boy? Because they opened with forecasts of the UK bond yield being 4.5%. One of the present ironies is that there original forecast is about right except the date is 2023 rather than 2011 or 12. In reality they were wrong then as it went below 2% and then very wrong as it fell to around 0.5% during the pandemic.

This really matters because they affect what has become rather a large number which is our public or national debt. It takes a while to feed in as it is on new debt issuance plus bonds which mature that year. Usually the latter takes a while because the average debt maturity for the UK is 14 years. So how do they get to this?

a lower average maturity of the stock of government bonds ( OBR via the Financial Times)

This is because they are allowing for the QE holdings of the Bank of England which is moot point. Technically on its books they are short-term debt in terms of Bank Rate but what the taxpayer pays remains the coupon. Overall the QE situation has made rather a mess of things and the Bank of England should be called out for this, but the idea of it shorting the average maturity is more complex I think. It does create a problem though for how the Bank of England accounts for this.

Returning to the OBR even a small error in its bond yield forecasts will lead to bigger and bigger errors and over fifty years they will be enormous.

Next up is yet another area where they have an awful forecasting record and it relates to this.

The OBR also noted the UK had the highest proportion of inflation-linked debt of any major advanced economy, which has pushed up debt servicing costs; ( Financial Times)

The issue here is that there is not only enormous scope for error the OBR has made them! Let me sum it up in one word Transitory.

Comment

My purpose today has several facets to it. Forecasting the future is by its nature difficult as we struggle sometimes to have an accurate guide to the past let alone the present. Even worse we have bodies which are bad at it ( Bank of England and OBR). The real issue with this before we get to any psychological impact ( what John Maynard Keynes called animal spirits) is that policy rather then being improved turns out to be pretty consistently wrong. Indeed as I pointed out earlier this week the trend towards fixed-rate mortgages over the low interest-rate period shows that the ordinary person did rather better than the supposed experts. Also if my advice had been followed the UK would have issued several tranches of cheap century ( 100 year) bonds.

This leads me to my next point because at the moment the average UK bond yield and the inflation rate ( RPI) are issues for our borrowing and debt. But if we look at disinflationary trends in China, the  US (PPI) and India (WPI) if we follow the OBR we seem likely to make yet another policy mistake.