UK Public-Sector Borrowing starts to improve

Today has brought the UK public-sector finances into focus and we find some better news which is very welcome in these times. I was going to type good but as you will soon see the numbers remain somewhat eye-watering. Let me illustrate with the opening paragraph from this morning’s release.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in June 2020 is estimated to have been £35.5 billion, roughly five times (or £28.3 billion more) that in June 2019 and the third highest borrowing in any month on record (records began in 1993).

We can’t call that good when we were pre pandemic thinking of borrowing that sort of amount in the whole year. But it represents a slowing on the pandemic trend which is reinforced by this from May.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in May 2020 was revised down by £9.8 billion to £45.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions

The better news theme continues with two nuances. The first is simply welcoming a lower number and the second is the strong hint that the economy was doing better than so far thought via stronger tax receipts. So I dug a little deeper.

Central government tax receipts and NICs for May 2020 have been increased by £6.6 billion and £2.3 billion respectively compared with those published in our previous bulletin (published 19 June 2020). Previous estimates of Pay As You Earn (PAYE) Income Tax increased by £4.2 billion and Value Added Tax (VAT) increased by £2.3 billion, both because of updated data.

This is outright good news as we see that both income taxes and expenditure or consumption taxes are better than previously thought. For overseas readers National Insurance Contributions can be confusing as they are presented as everything they are not. For example they hint they are for pensions and the like when in fact they just go in a common pot, and they give the impression they are not income taxes when they are.

Oh and something else we have been noting was in play.

Alcohol duty collected in May has increased by £0.5 billion (on a national accounts basis) compared with our previous estimate. A large proportion of this additional revenue relates to repayment of arrears of duty payments (or debt) from February, March and April 2020.

Perhaps whoever was collecting those numbers had been having a drink themselves….

Tax Receipts

This pandemic has reminded us that they are not what you might expect.

To estimate borrowing, tax receipts and NICs are recorded on an accrued (or national accounts) rather than on a cash receipt basis. In other words, we attempt to record receipts at the point where the liability arose, rather than when the tax is actually paid.

In a modern online IT area that seems poor to me. But it gets worse as we note my first rule of OBR club which for newer readers is that it is always wrong.

This process means many receipts are provisional for the latest period(s) as they depend on both actual cash payments and on projections of future tax receipts (currently based on the Office for Budget Responsibility’s (OBR’s) Coronavirus Reference Scenario ( 14 May 2020) , which are “accrued” (or time adjusted) back to the current month(s)).

So as usual we see that in May the OBR was wrong.

June

After noting the above please take this with a pinch of salt.

In June 2020, central government receipts are estimated to have fallen by 16.5% compared with June 2019 to £49.4 billion, including £35.0 billion in taxes…..This month, tax revenue on a national accounts basis fell by 20.1% compared with June last year, with Value Added Tax (VAT), Corporation Tax and Pay As You Earn (PAYE) Income Tax receipts falling by 45.1%, 19.2% and 1.6% respectively.

Hopefully they have learned something from the May experience. There is some hope from this although surely it should also apply to NICs?

However, we have applied an additional adjustment to PAYE Income Tax and Air Passenger Duty (APD).

There are a couple of extra points to note from the detail. For example they expect Stamp Duty on property to be £600 million as opposed to £900 million last June which gives us some more data on the property market. Also in the light of the upwards revision to alcohol duty I am a bit surprised they expect less this June ( £200 million lower) but £100 million more from tobacco.

We are spending much more.

In June 2020, central government spent £80.5 billion, an increase of 24.8% on June 2019.

There was also quite a win from reporting lower inflation levels.

Interest payments on the government’s outstanding debt in June 2020 were £2.7 billion, a £4.6 billion decrease compared with June 2019. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

Perspective

We get some from this.

Borrowing in the first quarter of this financial year is estimated to have been £127.9 billion, £103.9 billion more than in the same period last year and the highest borrowing in any April to June period on record (records began in 1993), with each of the months from April to June being records.

We only get some written detail.

This unprecedented increase largely reflects the impact of the pandemic on the public finances, with the furlough schemes (CJRS and SEISS) adding £37.6 billion in borrowing alone as subsidies paid by central government to the private sector.

So let me help out a bit. Income taxes are only a little bit down on last year but VAT receipts are £10.8 billion lower which means there has been some saving going on. Fuel Duty is unsurprisingly some £3.2 billion lower and Stamp Duty some £1.2 billion lower.

One matter I would note is that expenditure on debt is down substantially by some £5.6 billion and I would caution about putting it all down to lower inflation and inflation ( RPI) linked Gilts. We have begun to issue the occasional Gilt at negative yields and others for little or nothing which will add to this. It is a development which I think only  we have had on our radar which is that whilst we are issuing so much debt it is at only a small annual cost. By the way this is another area which the OBR has got spectacularly wrong and confirmed my first rule about them one more time.

Comment

So we learn that the UK economy has been doing better than previously reported as one of the signals is tax receipts. However, that is relative and one could easily type less badly. Moving onto the National Debt I have to confess I had a wry smile.

At the end of June 2020, the amount of money owed by the public sector to the private sector was just under £2.0 trillion (or £1,983.8 billion), which equates to 99.6% of gross domestic product (GDP).

So I was both right and wrong in awarding myself a slice of humble pie last month. Right in that unless you can prove the numbers are wrong you take it on the chin. But on the other side I was in fact more accurate than the Office for National Statistics in expecting the breaching of the 100% threshold to take longer. Also my first rule of OBR Club won again. Oh well! As Fleetwood Mac sang.

Another matter of note is how the Bank of England is affecting these numbers which is two ways. It has inflated how we record the debt.

If we were to remove the temporary debt impact of APF and Term Funding Scheme, public sector net debt excluding public sector banks (PSND ex) at the end of June 2020 would reduce by £192.9 billion (or 9.7% percentage points of GDP) to £1,790.9 billion (or 89.9% of GDP).

However all its purchases ( another £3.45 billion today) mean that we are borrowing very cheaply with some bond yields negative ( out to 6/7 years) and even the fifty-year being only 0.53%.

 

 

How much extra will the UK government borrow?

A feature of our economic life going forwards will be much higher levels of national debts. This is being driven by much higher levels of government spending which will lead to a surge in fiscal deficits. That is before we even get to lower tax receipts a hint of which has been provided by Markit with its PMI reports this morning.

Simple historical comparisons of the PMI with GDP indicate that the April survey reading is consistent with GDP falling at a quarterly rate of approximately 7%. The actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector, which have been especially hard-hit by
the COVID-19 containment measures

I think you can see for yourselves what that will do to tax receipts and that will add to the falls in revenue from the oil market. After all how do you tax a negative price? As an aside Markit do not seem to have noticed that the economists they survey are wrong pretty much every month. They seem to have to learn that every month.

The UK in March

Whilst the world has moved on we can see that the UK government was already spending more before the virus pandemic fully arrived,

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in March 2020 was £3.1 billion, £3.9 billion more than in March 2019; the highest borrowing in any March since 2016.

A further push was given to an existing trend.

Borrowing in the latest full financial year was £48.7 billion, £9.3 billion more than in the previous financial year.

Because of the situation we find ourselves in let us in this instance peer into the single month data for March.

In March 2020, central government receipts fell by 0.7% compared with March 2019 to £67.2 billion, including £47.5 billion in tax revenue.

That is a change and the actual situation is likely to be worse due to the way the numbers are collected.

These figures are subject to some uncertainty, as the accrued measures of both Value Added Tax (VAT) and Corporation Tax contain some forecast cash receipts data and are liable to revision when actual cash receipts data are received.

By contrast spending soared.

In March 2020, central government spent £72.6 billion, an increase of 11.2% on March 2019.

Also one big new scheme is not yet included.

We have not yet included central government expenditure associated with the coronavirus job retention scheme, some of which is expected to relate to March 2020.

Tucked away in the detail was quite a shift in the structure of the UK public-sector.

In March 2020, central government transferred £13.6 billion to local government in the form of a current grant. This was £4.2 billion more than in March 2019, is mainly to fund additional support because of the COVID-19 pandemic, and represents the highest March transfer on record.

There was also a rise in social benefits from £8.2 billion to £9.2 billion in another signal of a slowing economy.

One warning I would make is that Stamp Duty receipts at £1 billion are supposed to be the same as March 2019, does anyway believe that?

Looking Ahead

This morning also brought some strong hints as to what the UK government thinks.

The UK Debt Management Office (DMO) is today publishing a revision to its 2020-21 financing remit covering the period May to July 2020. In line with the revision to the DMO’s financing remit announced by HM Treasury today, the DMO is planning to raise £180 billion during the May to July 2020 (inclusive) period, exclusively through issuance of conventional and index-linked gilts.

They are hoping that it will prove to be one higher burst of borrowing.

In order to meet the immediate financing needs resulting from the government’s response to COVID-19, it is expected that a significantly higher proportion of total gilt
sales in 2020-21 will take place in the first four months of the financial year (April to July 2020).

If we look back we can see that they planned to issue some £156 billion in the whole financial year previously whereas now we plan to issue some £225 billion by the end of July. This is because we are already issuing some £45 billion this month.

We can add to this flashes of examples of where some of that money will be spent. Here is the Department of Work and Pensions or DWP from yesterday.

Around 1.8 million new benefits claims have been made since mid-March – over 1.5 million for #UniversalCredit

Also the amounts are now higher.

We’ve increased #UniversalCredit, making people up to £1,040 better off a year and are doing all we can to make it as straightforward as possible for people to claim a benefit, easing some of the worry that many are facing right now:

National Debt

As we will not be seeing numbers this low again and we need some sort of benchmark here we go.

At the end of March 2020, the amount of money owed by the public sector to the private sector stood at approximately £1.8 trillion (or £1,804.0 billion), which equates to 79.7% of gross domestic product (GDP). Though debt has increased by £30.5 billion on March 2019, the ratio of debt to GDP has decreased by 1.0 percentage point, as UK GDP has grown at a faster rate than debt over this period.

As you can see the increase in debt over the past year will be happening each month now and with GDP falling the ratio will sing along with Fat Larry’s Band.

Oh zoom, you chased the day away
High noon, the moon and stars came out to play
Then my whole wide world went zoom
(High as a rainbow as we went flyin’ by)

Comment

We are seeing fiscal policy being pretty much dully deployed. If we consider this from economic theory we are seeing the government attempting to step in and replace private sector spending declines. That means not only will the deficit balloon but the number we compare it too ( GDP) will drop substantially as well. We should avoid too much panic on the initial numbers as the real issue going forwards will be the long-term level of economic activity we can maintain which we will only find out in dribs and drabs. One example has been announced this morning as the construction company Taylor Wimpey has announced it will restart work in early May.

Next comes the issue of spurious accuracy which has two factors. There are issues with the public finances data at the best of times but right now they are there in spades. To be fair to our official statisticians they have made the latter point. So messages like this from the Resolution Foundation are pie in the sky.

But the Government’s financing needs could reach as high as £500bn if the lockdown last for six months, or £750bn if it last for 12 months.

We struggle to look three months ahead and a year well it could be anything.

One thing we should welcome is that the UK continues to be able to borrow cheaply. Yesterday £6.8 billion of some 2024 and 2027 Gilts and had to pay 0.12% and 0.16% respectively. So in real terms we could sing along with Stevie Nicks.

What’s cheaper than free?
You and me

That brings me to the other side of this particular balance sheet which is the rate at which the Bank of England is buying Gilts to implicitly finance all of this. By the end of today it will be another £13.5 billion for this week alone. I have given my views on this many times so let me hand you over to the view of Gertjan Vlieghe of the Bank of England from earlier.

I propose that these types of discussions about monetary financing definitions are not useful. One person
might say we have never done monetary finance, another might say we are always doing monetary finance,
and in some sense both are correct.

Nobody seems to have told him about the spell when UK inflation want above 5% post the initial burst of QE.

 Instead, the post-crisis recovery was generally characterised by inflation being too weak, rather
than too strong.

Anyway I dread to think what The Sun would do if it got hold of this bit.

If we were the central bank of the Weimar Republic or Zimbabwe, the mechanical transactions on our
balance sheet would be similar to what is actually happening in the UK right now

The Investing Channel

 

 

Andrew Bailey’s appointment as Governor shows yet again how accurate Yes Prime Minister was

The pace of events has picked up again as whilst there is much to consider about the likely UK public finances something else has caught the eye.

Today, 20 December 2019, the Chancellor has announced that Andrew Bailey will become the new Governor of the Bank of England from 16 March 2020. Her Majesty the Queen has approved the appointment.

In order to provide for a smooth transition, the current Governor, Mark Carney, has agreed to now complete his term on 15 March 2020.

Making the announcement the Chancellor said: “When we launched this process, we said we were looking for a leader of international standing with expertise across monetary, economic and regulatory matters. In Andrew Bailey that is who we have appointed.

Andrew was the stand-out candidate in a competitive field. He is the right person to lead the Bank as we forge a new future outside the EU and level-up opportunity across the country.

It is hard not to have a wry smile at Governor Carney getting yet another extension! I think we have predicted that before. As to Andrew Bailey I guess that the delay means he will be busy in his present role as head of the Financial Conduct Authority covering up yesterday’s scandal at the Bank of England before he can move over. A new definition of moral hazard straight out of the Yes Prime Minister play book. There is the issue of the scandals he has overlooked or been tardy dealing with in his time at the FCA but there is something even more bizarre which was in the Evening Standard in 2016 and thank you to Kellie Dawson for this.

I was interested in the story of Andrew Bailey, new Bank of England chief battling a bear. Turns out his WIFE battled the bear while he was on the phone. Rolls knowing eyes at all women everywhere.

Economic Growth

There was also some good news for the UK economy this morning.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.4% in Quarter 3 (July to Sept) 2019, revised upwards by 0.1 percentage points from the first quarterly estimate…..When compared with the same quarter a year ago, UK GDP increased by 1.1% to Quarter 3 2019; revised upwards by 0.1 percentage points from the previous estimate.

So still an anaemic rate of annual growth but at these levels every little helps. One of the ironies in the Brexit situation is that annual growth is very similar as the Euro area is at 1.2%. As to the UK detail there is this.

Services output increased by a revised 0.5% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Manufacturing grew by 0.1% in Quarter 3 2019, as did production output. Construction output experienced a pickup following a weak Quarter 2 (Apr to June), increasing by 1.2%

So the “march of the makers” has in fact turned out to be the opposite of the “rebalancing” promised by the former Bank of England Governor Baron King of Lothbury. As I regularly point out services are becoming an ever larger component of UK GDP.

Also for once there was good news from the trade position.

The current account deficit narrowed to 2.8% of GDP in Quarter 3 2019, its lowest share of GDP since early 2012,

That is obviously welcome but there is a fly in this particular ointment as they seem to be splashing around between trade and investment.

The latest figures mean that net trade is now estimated to have added 1.2 percentage points to GDP growth over this period compared with the almost flat contribution in the previous estimate.

Gross capital formation is now estimated to have subtracted 1.2 percentage points from GDP growth since Quarter 1 2018 compared with the negative contribution of 0.5 percentage points previously recorded.

Also UK business investment over the past year has been revised up from -0.6% to 0.5% which is quite a change and deserves an explanation.

Public Finances

There were some announcements about future government spending in the Queen’s Speech yesterday. From the BBC.

Schools in England are promised more funding, rising by £7.1bn by 2022-23, which the Institute for Fiscal Studies think tank says will reverse the budget cuts of the austerity years.

Also there was this about the NHS.

The five-year plan, which sees the budget grow by 3.4% a year to 2023, was unveiled last year and was included in the Tory election manifesto.

The proposal to help on business rates was more minor than badged so we are seeing something of a mild fiscal expansion that the Bank of England thinks will add 0.4% to GDP. So can we afford it?

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of November 2019 was £1,808.8 billion (or 80.6% of gross domestic product (GDP)), an increase of £39.4 billion (or a decrease of 0.8 percentage points) on November 2018.

As you can see whilst the debt is rising in relative terms it is falling and if we take out the effect of Bank of England policy it looks better.

Debt at the end of November 2019 excluding the Bank of England (mainly quantitative easing) was £1,626.6 billion (or 72.5% of GDP); this is an increase of £46.9 billion (or a decrease of 0.2 percentage points) on November 2018.

I am not sure why they call in QE when it is mostly the Term Funding Scheme but as regular readers will be aware there seems to be a lack of understanding of this area amongst our official statisticians.

It also remains cheap for the UK to borrow with the benchmark ten-year Gilt yield at 0.82% and more relevantly the 50-year yield being 1.2%. We have seen lower levels but as I have seen yields as high as 15% we remain in a cheaper phase.

Current Fiscal Stimulus

The UK has been seeing a minor fiscal stimulus which has been confirmed again by this morning’s data.

Borrowing in the current financial year-to-date (April 2019 to November 2019) was £50.9 billion, £5.1 billion more than in the same period last year; this is the highest April-to-November borrowing for two years (since 2017), though April-to-November 2018 remains the lowest in such a period for 12 years (since 2007).

If we go the breakdown we see this.

In the latest financial year-to-date, central government receipts grew by 2.1% on the same period last year to £485.7 billion, including £356.5 billion in tax revenue.

Over the same period, central government spent £514.6 billion, an increase of 2.8%.

With the rate of inflation declining we are now seeing increases in public spending in real terms and they may well build up as we have not yet seen the full budget plans of the new government.

Care is needed however as the numbers have developed a habit of getting better over time.

PSNB ex in the financial year ending March 2019 has been revised down by £3.3 billion compared with figures presented in the previous bulletin (published on 21 November 2019) as a result of new data.

Comment

We are at times living an episode of Yes Prime Minister as proved by the appointment of the new Governor.

Doesn’t it surprise you? – Not with Sir Desmond Glazebrook as chairman.

 

– How on earth did he become chairman? He never has any original ideas, never takes a stand on principle.

 

As he doesn’t understand anything, he agrees with everybody and so people think he’s sound.

 

Is that why I’ve been invited to consult him about this governorship?

Sir Desmond would be called a “safe pair of hands” too and no doubt would also have run into all sorts of issues if he had been in charge of the FCA just like Andrew Bailey has. Favouring banks, looking the other way from scandals and that is before we get to the treatment of whistle blowers. I do not recall him ever saying much about monetary policy.

Also the timing has taken yesterday’s scandal at the Bank of England off the front pages again like something straight out of Yes Prime Minister. We will never know whether this announcement was driven by that. However should it continue to be so accurate we can expect this next.

If I can’t announce the appointment of Mr Clean as Governor –
Why not announce a cut in interest rates?
Oh, don’t be silly, I What? Announce a cut in interest rates The Bank couldn’t allow a political cut – particularly with Jameson.
It would with Desmond Glazebrook.
Now, if you appoint him Governor, he’ll cut Bartlett’s interest rates in the morning – you can announce both in your speech.
– How do you know?
He’s just told me.

It turns out that the UK government has been borrowing less than we thought

As we look at the latest numbers for the UK fiscal situation we cannot avoid this thought for the post election situation which was expressed by Shirley Bassey some years ago.

Hey big spender,
Spend a little time with me
Wouldn’t you like to have fun, fun, fun
How’s about a few laughs, laughs
I could show you a good time
Let me show you a good time!

Yesterday produced an example of that on the tax front as Prime Minster Boris Johnson proposed cuts in National Insurance contributions in the same manner as the personal allowance for income tax was raised. This would start with a rise to £9500 in the National Insurance threshold and might go as high as £12.500 to align it with income tax. The initial cost would be around £3 billion a year.

Housing has also come to the front line with Labour promising to build a lot more homes.

In 2017, they promised 100,000 council or housing association homes a year. Now it’s 150,000 between them…..Labour’s £75bn plans will be paid for using half of its £150bn Social Transformation Fund – a pot it says it will use to “repair the social fabric” in the country, if they win a majority in 12 December’s general election. ( BBC)

On the other side of the coin there is less explicit spending from the Conservatives but a clear implicit burden for the taxpayer from these.

The party will promise to introduce a new mortgage with long-term fixed rates, and only needing a 5% deposit, to help renters buy their first homes.

And it will create a scheme where local first-time buyers will be able to get a 30% discount on new homes in their area.

State mortgages? Also a type of help to buy on steroids. So extra liabilities for taxpayers which should be a debit somewhere in the public finances.

The Liberal Democrats offer this.

On Wednesday, the Liberal Democrats launched their manifesto, promising to build 300,000 homes a year by 2024, including 100,000 social homes.

The problem with all of these is twofold. We seem to be building more houses now anyway so how many more do we need? The issue seems to be more of one of them being in the wrong place rather than a total shortage. Also we have had lots of schemes to build more houses which have been full of hot air including one which built none at all. Whoever gets in power there will be more spending in this area it seems.

The Liberal Democrats

Last time around their manifesto was not available but we see now that actually they plan to be relatively fiscally responsible.

A good government should responsibly manage the nation’s finances: taking advantage of opportunities to borrow to invest in key infrastructure while making sure that day-to-day spending does not exceed the amount of money raised in taxes…….Ensure overall national debt continues to decline as a share of national income.

The “day to day” bit looks a continuation of the swerves we see to look like you are being restrained when you are spending but the national debt plan does imply a brake. Compared to the plans of the Tories and Labour quite a brake actually.

Where things get confused is here, because we would under their plan to stay in the European Union just carry on so the “bonus” is what precisely?

Use the £50 billion Remain Bonus to invest in services and tackle inequality, giving a major boost to schools and combatting in-work poverty.

On the other hand they do move from fantasy to reality with their plan to raise the basic rate of income tax by 1 pence. That is I believe for improvements to education in theory although of course it just goes in the same pot. But at least it is reasonably clear.

How much are we taxed?

Here are the calculations of the Resolution Foundation.

Total revenue as a share of GDP has risen to its highest level since 1985-86 but remains very close to its post-war average of 37 per cent. Tax revenue excluding other receipts has hit its highest share of GDP since 1981-82.

Today’s Data

This should bring us back to reality although there are issues with the version of reality presented to us as regular readers will be aware. There is yet another example of that today and let me illustrate with something you might have been expecting.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in October 2019 was £11.2 billion, £2.3 billion more than in October 2018; this is the highest October borrowing for five years (since October 2014).

If we stay with the October figures then yet again the phrase “as expected” can be used.

Departmental expenditure on goods and services increased by £2.3 billion, compared with October 2018, including a £1.0 billion increase in expenditure on staff costs and a £1.0 billion increase in the purchase of goods and services.

That is consistent with what we have been seeing with a hint of spending ahead of the supposed Brexit date at the end of October. Indeed overall the spending was higher overall because we see that there was a cut.

Interest payments on the government’s outstanding debt decreased by £0.5 billion, compared with October 2018, largely resulting from movements in the Retail Prices Index (RPI), to which index-linked bonds are pegged.

But I am afraid if you look deeper there is a swerve as hinted at below.

Borrowing in the current financial year-to-date (April 2019 to October 2019) was £46.3 billion, £4.3 billion more than in the same period last year; this is the highest April-to-October borrowing for two years (since 2017), though April-to-October 2018 remains the lowest in such a period for 12 years (since 2007).

So much of the extra borrowing was October which made me thing hang on! We have been told for a while spending has been higher and last month the year so far was £5.9 billion higher.So we should be £8.2 billion higher now not £4.3 billion. The difference is found below.

PSNB ex in the current financial year-to-date (April to September 2019) has been revised down by £3.9 billion compared with figures presented in the previous bulletin (published as corrected on 29 October 2019) as a result of updated central government data.

 

 we find out that  the problems have been mostly with expenditure.

Over the same period, we have reduced our previous estimate of central government current expenditure by £2.5 billion. Reductions in previous estimates of the purchase of goods and services, social assistance and “other” current grants of £3.2 billion, £0.6 billion and £0.6 billion, respectively, were partially offset by a combined upward revision to previous estimates of staff costs and grants to local government of £1.4 billion and £0.5 billion.

Seeing as that is the expenditure which we are told has gone up this month the situation looks a bit of a mess.

Also we never seem to be able to quite shake off issues with the banks whatever subject we look at.

The previous estimate of interest and dividends receipts has been increased by £0.7 billion, largely because of a £0.8 billion misrecording of the Royal Bank of Scotland (RBS), paid in April 2019, being captured in cash receipts but not in central government net borrowing. Further, updated bank levy data increased tax receipt estimates by £0.2 billion.

Comment

So there you have it a clear case of value from my style of work as in actually looking at the numbers and data. You will find loads of reports in the media that we have spent more whereas overall we have spent less than we thought! Or if you prefer today’s revisions mean that the UK’s fiscal stimulus has so far been smaller than we have been told. In a way that about sum’s up the years I have been looking at this area.

Looking ahead we do seem set to spend more whoever forms the next government and in some cases much more. We can borrow more presently at cheap rates ( 1.21% for the 50 year Gilt yield) but as to taxation I intend to wait and see as in recent times governments have not found it easy to actually raise it. The last big move I can recall was the post crash rise in Value Added Tax and some taxes have the issue illustrated by Ireland and the way big companies use it.

 

 

 

My thoughts on the IFS Green Budget for the UK

Today we find that the news flow has crossed one of the major themes that I have established on here. It is something we looked at yesterday as we mulled the debt and deficit issues in Japan where the new “consensus” on public finances has been met by Japan doing the reverse. So let me take you to the headlines from the Institute for Fiscal Studies for the UK.

A decade after the financial crisis, the deficit has been returned to normal levels, but debt is at a historical high. The latest estimate for borrowing in 2018–19, at 1.9%
of national income, is at its long-run historical average. However, higher borrowing during the crisis and since has left a mark on debt, which stood at 82% of national
income, more than twice its pre-crisis level.

There are several issues already of which the first is the use of “national income” as they switch to GDP later. Next concepts such as the one below are frankly quite meaningless in the credit crunch era as so much has changed.

at its long-run historical average

This issue gets worse if we switch from the numbers above which are a very UK style way oh looking at things and use more of an international standard.

general government deficit (or net borrowing) was £41.5 billion in the FYE March 2019, equivalent to 1.9% of GDP

general government gross debt was £1,821.9 billion at the end of the FYE March 2019, equivalent to 85.3% of GDP…  ( UK ONS)

As you can see the deficit is the same but the national debt is higher. In terms of the Maastricht Stability and Growth Pact we are within the fiscal deficit limit by 1.1% but 25.3% over the national debt to GDP target.

What will happen next?

The IFS thinks this.

Given welcome changes to student loan accounting, the spending increases announced at the September Spending Round, and a likely growth downgrade (even assuming a smooth Brexit), borrowing in 2019–20 could be around
£55 billion, and still at £52 billion next year. Those figures are respectively £26 billion and £31 billion more than the OBR’s March 2019 forecast. Both exceed 2% of national
income.

It is hard not to have a wry smile at the way my first rule of OBR ( Office for Budget Responsibility) Club which is that it is always wrong! You will not get that from the IFS which lives in an illusion where the forecasts are not unlike a Holy Grail. Next comes the way that the changes to student loans are used to raise the number. If we step back we are in fact acknowledging reality as there was an issue here all along it is just that we are measuring it now. So it is something we should welcome and not worry too much about. This year has seen growth downgrades in lots of countries and locales as we have seen this morning from the Bank of Italy but of course the IFS are entitled to their view on the consequences of any Brexit.

Next the IFS which has in general given the impression of being in favour of more government spending seems maybe not so sure.

A fiscal giveaway beyond the one announced in the September Spending Round could increase borrowing above its historical average over the next five years.
With a permanent fiscal giveaway of 1% of national income (£22 billion in today’s terms), borrowing would reach a peak of 2.8% of GDP in 2022–23 under a smooth-Brexit
scenario, and headline debt would no longer be falling.

Actually assuming they are correct which on the track record of such forecasts is unlikely then we would for example still be within the Maastricht rules albeit only just. You may note that a swerve has been slipped in which is this.

headline debt would no longer be falling

As an absolute amount it is not falling but relatively it has been as this from the latest official Public Finances bulletin tells us.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of August 2019 was £1,779.9 billion (or 80.9% of gross domestic product, GDP), an increase of £24.5 billion (or a decrease of 1.5 percentage points of GDP) on August 2018.

Next if we use the IFS view on Brexit then this is the view and I note we have switched away from GDP to national income as it continues a type of hokey-cokey in this area.

Even under a relatively orderly no-deal scenario, and with a permanent fiscal loosening of 1% of national income, the deficit would likely rise to over 4% of national income in 2021–22 and debt would climb to almost 90% of national income for the first time since the mid 1960s. Some fiscal tightening – that is, more austerity – would likely be required in subsequent years in order to keep debt on a sustainable path.

The keep debt on a sustainable path is at best a dubious statement so let me explain why.

It is so cheap to borrow

As we stand the UK fifty-year Gilt yield is 0.85% and the ten-year is 0.44% and in this “new world” the analysis above simply does not stand up. Actually if we go to page six of the report it does cover it.

Despite this doubling of net debt, the government’s debt interest bill has remained flat in real terms as the recorded cost of government borrowing has fallen. As shown in Figure 4.3, in 2018–19, when public sector net debt exceeded 80% of national income, spending on debt interest was 1.8% of national income, or £37.5 billion in nominal terms. Compare this with 2007–08, when public sector net debt was below 40% of national income but spending on debt interest was actually higher as a share of national income, at 2.0%.

As you can see we are in fact paying less as in spite of the higher volume of debt it is so cheap to run. Assuming Gilt yields stay at these sort of levels that trend will continue because as each Gilt matures it will be refinanced more cheaply. Let me give you an example of this as on the 7th of last month a UK Gilt worth just under £29 billion matured and it had a coupon or interest-rate of 3.5%. That will likely be replaced by something yielding more like 0.5% so in round numbers we save £870 million a year. A back of an envelope calculation but you get the idea of a process that has been happening for some years. It takes place in chunks as there was one in July but the next is not due until March.

The role of the Bank of England

Next comes the role of the Bank of England which has bought some £435 billion of UK debt which means as we stand it is effectively interest-free. To be more specific it gets paid the debt interest and later refunds it to HM Treasury. As the amount looks ever more permanent I think we need to look at an analysis of what difference that makes. Because as I look at the world the amount of QE bond buying only seems to increase as the one country that tried to reverse course the United States seems set to rub that out and the Euro area has announced a restart of it.

Indeed there are roads forwards where the Bank of England will engage in more QE and make that debt effectively free as well.

There are two nuances to this. If we start with the “QE to infinity” theme I do nor agree with it but it does look the most likely reality. Also the way this is expressed in the public finances is a shambles as only what is called “entrepreneurial income” is counted and those of you who recall my £2 billion challenge to the July numbers may like to know that our official statisticians have failed to come up with any answer to my enquiry.

Comment

I have covered a fair bit of ground today. But a fundamental point is that the way we look at the national debt needs to change with reality and not stay plugged in 2010. Do I think we can borrow for ever? No. But it is also true that with yields at such levels we can borrow very cheaply and if we look around the world seem set to do so. I have written before that we should be taking as much advantage of this as we can.

https://notayesmanseconomics.wordpress.com/2019/06/27/the-uk-should-issue-a-100-year-bond-gilt/

Gilt yields may get even lower and head to zero but I have seen them at 15% and compared to that we are far from the literal middle of the road but in line with their biggest hit.

Ooh wee, chirpy chirpy cheep cheep
Chirpy chirpy cheep cheep chirp

The caveat here is that I have ignored our index-linked borrowing but let me offer some advice on this too. At these levels for conventional yields I see little or no point in running the risk of issuing index-linked Gilts.

The UK public finances finally accept that many student loans will never be repaid

The present UK government seems to be much keener on public spending than its predecessor. From the Evening Standard.

Up to £1 billion of the aid budget will be made available to scientists inventing new technology to tackle the climate crisis in developing countries, Boris Johnson is to announce……..Putting an emphasis on technology’s potential to answer the climate emergency, he will also announce a further £220 million from the overseas aid budget to save endangered species from extinction.

Although of course as so often there is an element there of announcing spending which would have happened anyway. Also the government did avoid bailing out Thomas Cook which seems sensible as it looked completely insolvent by the end as Frances Coppola points out.

Dear@BBC

, you should not believe what you read in corporate press releases. The rescue plan for Thomas Cook was not £900m as the company said. It was £900m of new loans PLUS new equity of £450m PLUS conversion of £1.7bn of existing debt to equity (with a whopping haircut).

It is very sad for the customers and especially the workers. Well except for the board who have paid themselves large bonuses whilst ruining the company. Surely there must be some part of company law that applies here.

UK Public Finances

There have been a lot of significant methodological changes this month which need to be addressed. They add to the past moves on Housing Associations which had an impact on the National Debt of the order of £50 billion as they have been in and out of the numbers like in the Hokey Cokey song. Also there was the Royal Mail pension fund which was recorded as a credit when in fact it was a debit. Oh well as Fleetwood Mac would say.

Student Loans

For once the changes are in line with a view that I hold. Regular readers will be aware that much of the Student Loans in existence will not be repaid.

This new approach recognises that a significant proportion of student loan debt will never be repaid. We record government expenditure related to the expected cancellation of student loans in the period that loans are issued. Further, government revenue no longer includes interest accrued that will never be paid.

This brings us to what is the impact of this?

Improvements in the statistical treatment of student loans have added £12.4 billion to net borrowing in the financial year ending March 2019. Outlays are no longer all treated as conventional loans. Instead, we split lending into two components: a genuine loan to students and government spending.

Whether the £12.4 billion is accurate I do not know as some of it is unknowable but in principle I think that this is a step in the right direction.

Pensions

There are larger changes planned for next month but let me point out one that has taken place that will be impacted by Thomas Cook.

We now also include the Pension Protection Fund within the public sector boundary.

Other changes including a gross accounting method which means this in spite of the fact that the PPF above will raise the national debt or at least it should.

These changes have reduced public sector net debt at the end of March 2019 by £28.6 billion, reflecting the consolidation of gilts and recognition of liquid assets held by the public pension schemes.

I will delay an opinion on this until we get the full sequence of changes.

The Numbers

The August figures were better than last year’s

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in August 2019 was £6.4 billion, £0.5 billion less than in August 2018.

There was a hint of better economic performance in the numbers too.

This month, receipts from self-assessed Income Tax were £1.7 billion, an increase of £0.4 billion on August 2018. This is the highest level of August self-assessed Income Tax receipts since 2009……..The combined self-assessed Income Tax receipts for both July and August 2019 together were £11.1 billion, an increase of £0.7 billion on the same period in 2018.

At first the numbers do not add up until you spot that the expenditure quoted is for central government which is flattered by a £900 million reduction in index-linked debt costs. Something which inflationoholics will no doubt ignore. Also local government borrowed £1 billion more. So I think there was some extra spending it is just that it was obscured by other developments in August.

In the same period, departmental expenditure on goods and services increased by £1.8 billion, compared with August 2018, including a £0.5 billion increase in expenditure on staff costs and a £0.9 billion increase in the purchase of goods and services.

If we switch to the fiscal year so far the picture looks broadly similar to what we have been seeing in previous months.

In the latest financial year-to-date, central government received £305.4 billion in receipts, including £226.0 billion in taxes. This was 2.1% more than in the same period last year……Over the same period, central government spent £325.1 billion, an increase of 4.1%.

The essential change here is that central government has spent an extra £9.1 billion on goods and services raising the amount spent to £121.5 billion in a clear fiscal boost.

The Past Is Not What We Thought It Was

Although it does not explicitly say it we were borrowing more than we thought we were, mostly due to the new view on student loans.

In the latest full financial year (April 2018 to March 2019), the £41.4 billion (or 1.9% of gross domestic product, GDP) borrowed by the public sector was around a quarter (26.1%) of the amount seen in the FYE March 2010, when borrowing was £158.3 billion (or 10.2% of GDP).

We know last year was affected by £12.4 billion but the effect is smaller the further we go back in time. For example on FYE March 2010 it was £1.5 billion.

The National Debt

This continues to grow in absolute terms but to shrink in relative terms.

Debt (public sector net debt excluding public sector banks, PSND ex) at the end of August 2019 was £1,779.9 billion (or 80.9% of gross domestic product, GDP), an increase of £24.5 billion (or a decrease of 1.5 percentage points of GDP) on August 2018.

However the Bank of England has had an impact here.

Debt at the end of August 2019 excluding the Bank of England (mainly quantitative easing) was £1,598.7 billion (or 72.7% of GDP); this is an increase of £37.4 billion (or a decrease of 0.6 percentage points of GDP) on August 2018.

For those of you wondering my £2 billion challenge to last month’s data on Bank of England transactions has not been resolved as this from Fraser Munroe of the Office for National Statistics from earlier highlights.

We should have some APF detail for you soon. Sorry for the delay.

Comment

We travel forwards although sometimes it feels as though we have just gone backwards. Although there is one constant which is the first rule of OBR club ( for newer readers it is always wrong).

These March 2019 OBR forecasts do not include estimates of the revisions made in September 2019 for student loans and pensions data. The OBR intends to reflect these changes in their next fiscal forecast.

In a way that is both harsh although they should have know of the plans and fair in that their whole process is always likely to be wrong and frankly misleading.

Next we are reminded that things we really should know in fact we do not.

The error mainly relates to the treatment of Corporation Tax credits, which are included within total Corporation Tax receipts as well as within total central government expenditure.

In terms of impact that peaked at £3.8 billion in 2017/18 declining to £1.9 billion in the last fiscal year. That is a lot in my opinion.

As to more fiscal spending well that just got harder as we conclude we were spending more anyway. But it remains very cheap to do so as the UK thirty-year Gilt yield is back below 1%.

 

 

UK Statistics are in quite a mess as the Public Finances highlight

Today we complete a week filled with UK economic data with the public finances and so far it has been a good week. Before we get to it there has been news about the state of UK statistics from the Public Affairs Committee or PAC of the House of Commons. As a major part of this has been the ongoing shambles over the Retail Price Index or RPI and I gave evidence to the PAC on this issue. So what do they think?

There has been much criticism of the position that UKSA ( UK Statistics Authority) has taken at many stages during the last nine years and the position is not resolved. The Economic Affairs Committee of the House of Lords was critical of UKSA’s failure to correct errors in RPI, stating that, “In publishing an index which it admits is flawed but refuses to fix, the Authority could be accused of failing in its statutory duties.” Evidence to this inquiry from the RPI CPI User Group was similarly critical, stating: “It is a measure of the UKSA failure as an independent regulator that such an inquiry was necessary in the first place and produced such a damning report.

It seems that much of my message has got through.

Concerns have been raised about the Treasury and the Bank of England’s influence over UKSA regarding inflation measures.

That’s polite for they dictate them. Also the designation merry-go-round has been a farce.

UKSA designated RPI as a National Statistic in 2010,286 but cancelled the designation in 2013…… Ed Humpherson later de-designated CPIH, ONS’s preferred measure, as a National Statistic……..CPIH was re-designated as a National Statistic in July 2017 following action by ONS.

As the PAC points out nothing ever seems to happen.

In evidence to our inquiry Sir David Norgrove stated that UKSA was planning to respond to the House of Lords Economic Affairs Committee report in April 2019. This did not happen.

Sadly I can also vouch for this sort of thing as I wrote to the House of Lords on the 26th of February about this issue and if I ever get a formal reply I will let you know. Also I am awaiting a response from the ONS to the points I made at the Royal Statistical Society on the 13th of June last year. I think you get the message.

View

In general this is a good report which follows on from the report on the RPI by the Economic Affairs Committee and I welcome them both. However there have been nine years of failure here by the UK Statistics Authority where it has proven incapable of getting any sort of a grip. In fact it has made things worse. My experience of giving it evidence was that my time was wasted as it was going through the motions and ignored and or did not understand my points about the large revisions to the Imputed Rent numbers.

Also there is a danger that the establishment parrots the same old lines as for example this.

Chris Giles told us “Index-linked gilts, student loans and rail fares are all pegged to the RPI” and said that “the continued use of an index known to be wrong, takes money from recent graduates, commuters and taxpayers, and hands it as a windfall to longstanding owners of index-linked government bonds”.

Chris who is economics editor of the Financial Times has done some good work highlighting the failings of the UKSA. But it is also true that he has led a campaign against the RPI and previously ( now abandoned) in favour of CPIH. This means that the fact that CPI and CPIH are systemically wrong in the area of owner-occupied housing frequently gets ignored. It has also contributed to the wasted nine years as the establishment represented by HM Treasury were more than happy to get on board with a campaign to get lower inflation numbers otherwise known as CPIH.

After all HM Treasury could de-link student loans and rail fares from the RPI today if it wished. In my opinion they do not do so for two reasons the first is greed and the second is that they want the RPI to garner bad publicity.

Public Finances

There is a link here because over the years we have observed quite a few strategic issues with the UK Public Finances. Two large ones come to mind of which the biggest has been the hokey-cokey with the Housing Associations which have been excluded, included and the excluded again. This has had an impact on the National Debt of between £50 and £60 billion. Then there was the Royal Mail situation where a pensions liability of the order of £17 billion was initially recorded as a surplus of £10 billion.

Added to that I note that this is on the way.

While the change is mainly focused on presentation, we expect public sector net debt (PSND) at the end of March 2019 to decrease by £30.5 billion as a result of the consolidation of pension schemes’ gilt holdings and liquid assets.

On a stand alone basis that may be fair enough but the collective issue is of a large almost entirely ignored liability which increases the numbers here.

Today’s Data

We learnt that the run of better data had come to a close with some signs that the closing of Prime Minister May’s term of office has led to an opening of the spending taps.

Borrowing (public sector net borrowing excluding public sector banks) in June 2019 was £7.2 billion, £3.8 billion more than in June 2018; the highest June borrowing since 2015……..Borrowing in the current financial year-to-date (April 2019 to June 2019) was £17.9 billion, £4.5 billion more than in the same period last year; the financial year-to-date April 2018 to June 2018 remains the lowest borrowing for that period since 2007.

As to why there are several factors at play and in these times it is hard not to have a wry smile at this.

This reduction in credit accounts for around half of the observed £405 million year-on-year June increase in EU contributions.

There was something of a curiosity as well.

Interest payments on the government’s outstanding debt increased by £2.1 billion compared with June 2018, due largely to movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

I have to confess that this development seems confusing. Because this time last year not only was the annual rate of RPI higher but the pattern was higher, so I will have to check how much the numbers are lagged by as this seems to be the factor at play.

Also there was some actual what we might call negative austerity.

Over the same period, there was a notable increase in expenditure on goods and services of £1.2 billion.

To that we can perhaps add this announcement via the BBC earlier.

Two million public sector workers are reportedly set to get a £2bn pay rise.

The Treasury will unveil the biggest public sector pay rise in six years as one of Theresa May’s final acts as prime minister,the Times reported.

Soldiers are set to get a 2.9% rise while teachers and other school staff will get 2.75%, police officers, dentists and consultants 2.5% and senior civil servants 2%.

This next bit seems to be unlikely though.

It is thought the money will come from existing budgets.

Comment

Today’s theme is one of reinforcing the Quis custodiet ipsos custodes line. Or if you prefer who guards the guardians? The UK Statistics Authority and Office for National Statistics regale us with rhetoric about “improvements” but misses the bigger issues and often makes them worse. Added to the problems I have highlighted earlier comes a click bait culture where it is increasingly hard to find the data you want. Also we get opinions on the data which is not the job of the ONS, as its role should be to provide the numbers. The situation with the UKSA is so bad I think it would be better to take the advice of Orange Juice.

Rip it up and start again
Rip it up and start again
I hope to God you’re not as dumb as you make out
I hope to God
I hope to God

Meanwhile I opened by saying so fat this week the economic data has been good but today we did get a possible flicker of a slowing from the tax data.

Central government receipts in June 2019 increased by £0.8 billion (or 1.5%) compared with June 2018, to £58.7 billion,

That night be a monthly quirk but it is lower than inflation.

 

 

 

 

 

The UK poverty problem is more than a story about austerity

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

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

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

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

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

The Detail

Be that as it may the report tells us this.

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

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

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

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

UK Public Finances

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

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

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

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

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

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

UK Public Finances

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

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

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

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

So let us now find out.

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

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

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

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

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

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

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

The national debt position is more complex.

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

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

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

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

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

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

Retail Sales

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

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

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

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

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

Moving to the annual picture tells us this.

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

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

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

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

Comment

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

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

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

Meanwhile some things just cannot be avoided it would seem.

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

Me on The Investing Channel

 

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

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

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

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

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

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

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

Structural Deficit

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

Fiscal Mandate

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

State of Independence

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

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

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

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

Gilt Yields and Inflation

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

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

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

Tariffs

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

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

They go on to give some examples.

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

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

Comment

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

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

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

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

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

Actually time was not especially kind to this bit either.

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

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

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

Number Crunching

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

Even the bond market has got in on the game.