UK sees a worrying rise in inflation and record borrowing

Today has brought quite a panoply of UK economic data some of it which is hardly a surprise, but there is a section which is rather eye-catching and provides food for thought. It will only be revealed at the Bank of England morning meeting if someone has the career equivalent of a death wish.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.2%, up from 1.8% last month……The annual rate for CPI at constant tax rates, CPI-CT, is 2.2%, up from 1.8% last month.

The pattern for these numbers has been for a rise as CPI-CT initially dipped in response to the Covid-19 pandemic and fell to 0.4% in May. But since then has gone 0.5%,1%,1.8% and now 2.2%.

The sector driving the change has been the services sector which has seen quite a lift-off. If we look back we see that it has been regularly above 2% per annum but after a brief dip to 1.7% in June it has gone 2.1%, 4.1% and now 5%. Something that the Bank of England should be investigating as these seems to be quite an inflationary surge going on here. It is so strong that it has overpowered the good section ( -0.4% and the energy one ( -8.5%) both of which are seeing disinflation.

Nothing to see here, move along now please

Of course the official Bank of England view will be based on this number.

The Consumer Prices Index (CPI) 12-month rate was 0.5% in September 2020, up from 0.2% in August.

On that road they can vote for more QE bond buying next month ( another £100 billion seems likely) and if one policymaker is any guide they are looking ever more at further interest-rate cuts.

There is some debate about the scale of the stimulus that negative rates have imparted on these economies, but the growing empirical literature finds that the effect has
generally been positive, i.e. negative rates have not been counterproductive to the aims of monetary policy.

That is hardly a ringing endorsement but there is more.

My own view is that the risk that negative rates end up being counterproductive to the aims of monetary
policy is low. Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is
not at a point yet when it can reach a conclusion on this issue. But given how low short term and long term
interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that
headroom.

So should there be a vote on this subject he will vote yes to negative interest-rates.

Returning to inflation measurement there has been something of a misfire. In fact in terms of the establishment’s objective it has been a disaster.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.7% in September 2020, up from 0.5% in August 2020.

The issue here is that the measure which was designed to give a lower inflation reading is giving a higher one than its predecessor CPI. Even worse the factor that was introduced to further weaken the measure is the one to blame.

The OOH component annual rate is 1.2%, up from 1.1% last month.

OOH is Owner Occupied Housing and is mostly composed of rents which are never paid as it assumes that if you own your own home you pay yourself a rent. That is a complete fantasy as the two major payments are in fact the sale price and for many the mortgage costs and rent is not paid. This is quite different to those who do rent and for them it is included. But there is another swerve here which is that the inflation report today is for September but the rent figures are not. They are “smoothed” in technical terms which means they are a composition of rents over the past 16 months or so, or if you prefer they represent the picture around the turn of the year. Yes we have pre pandemic numbers for rent rises ( there were some then) covering a period where there seem to be quite a lot of rent falls.

Returning to the inflation numbers the much maligned Retail Prices Index or RPI continues to put in a better performance than its replacements.

The all items RPI annual rate is 1.1%, up from 0.5% last month.The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 1.4%, up from 0.8% last month.

They still have mortgage payments reducing inflation which if the latest rises for low deposit mortgages are any guide will be reversing soon.

As to this month’s inflation rise then a major factor was the end of the Eat Out To Help Out Scheme.

Transport costs, and restaurant and café prices, following the end of the Eat Out to Help Out scheme, made the largest upward contributions (of 0.23 and 0.21 percentage points, respectively) to the change in the CPIH 12-month inflation rate between August and September 2020.

Borrowing Has Surged

The theme here will not surprise regular readers although the exact amount was uncertain.

Borrowing (PSNB ex) in the first six months of this financial year (April to September 2020) is estimated to have been £208.5 billion, £174.5 billion more than in the same period last year and the highest borrowing in any April to September period since records began in 1993; each of the six months from April to September 2020 were also records.

We looked a few days ago at a suggestion by the Institute for Fiscal Studies what we might borrow £350 billion or so this fiscal year and we are on that sort of road. As to the state of play we can compare this to what the Bank of England has bought via its QE operations. Sadly our official statisticians have used the wrong number.

At the end of September 2020, the gilt holdings of the APF were £569.2 billion (at nominal value), an increase of £12.2 billion compared with a month earlier. Over the same period, the net gilt issuance by the DMO was £22.7 billion, which implies that gilt holdings by bodies other than the APF have grown by £10.5 billion since July 2020.

That will be especially out for longer-dated Gilts which are being purchased for more than twice their nominal value on occassion. The value of the APF at the end of September was £674 billion. Looking at the calendar the Bank of England bought around £21 billion of UK Gilts or bonds in September meaning it bought nearly all those offered in net terms ( it does not buy new Gilts but by buying older ones pushes others into buying newer ones).

National Debt

The total here is misleading ironically because if the numbers above. Let me explain why.

At the end of September 2020, the amount of money owed by the public sector to the private sector was approximately £2.1 trillion (or £2,059.7 billion), which equates to 103.5% of gross domestic product (GDP).

That seems simple but a reasonable chunk of that is not debt at all and it relates to the Bank of England.

The estimated impact of the APF’s gilt holdings on PSND ex currently stands at £105.6 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase. The final debt impact of the APF depends on the disposal of these financial instruments at the end of the scheme.

Further, the APF holds £19.7 billion in corporate bonds, adding an equivalent amount to the level of public sector net debt.

If we just consider the latter point no allowance at all is made for the value of the corporate bonds. In fact we can also throw in the Term Funding Scheme for good luck and end up with a total of £225 billion. Thus allowing for all that this is where we are.

public sector net debt excluding public sector banks (PSND ex) at the end of September 2020 would reduce by £225.6 billion (or 11.4 percentage points of GDP) to £1,834.1 billion (or 92.1% of GDP).

Comment

Some of the numbers come under the category described by the apocryphal civil servant Sir Humphrey Appleby as a clarification. By that he does not mean something that is clearer he means you issue it to obscure the truth. We have seen this consistently in the area of inflation measurement where the last decade has seen a litany of increasingly desperate official attempts to miss measure it. It is also hard not to have a wry smile at one inflation measure rising about the target as the Bank of England is often keen on emphasising such breakdowns. But a suspect a rise will get ignored on the grounds it is inconvenient.

Switching to the UK public finances we see that there is a lot of uncertainty as many tax receipt numbers are estimated. In normal times that is a relatively minor matter but at a time like this will be much more material. Also government expenditure is more uncertain that you might think or frankly in an IT era it should be. The national debt is also much more debatable that you might think especially with the Bank of England chomping on it like this.

Come back stronger than a powered-up Pacman ( Kaiser Chiefs )
Oh well.

 

 

 

The UK will continue to see quite a surge in the national debt

Today I thought it was time to take stock of the UK economic situation. This is because we find ourselves experiencing a sort of second wave of the Covid-19 pandemic.

Official figures show the UK has recorded a further 22,961 cases of COVID-19 after Public Health England announced it has identified 15,841 cases that were not included in previous cases between 25 September and 2 October due to a technical issue. ( Sky News )

Those numbers are something of a shambles and as a TalkTalk customer it does seem to have similarities to when Baroness Harding was in charge of it. Fortunately we are not experiencing a similar rise in deaths ( 33) as we try to allow for the lags in this process. But however you look at the numbers economic restrictions look set to remain and maybe increased as we note what is about to take place in Paris.

Paris and neighbouring suburbs have been placed on maximum coronavirus alert on Monday, the prime minister’s office announced on Sunday, with the city’s iconic bars closing, as alarming Covid-19 infection numbers appeared to leave the French government little choice. Mayor Anne Hidalgo is to outline further specific measures Monday morning. ( France24)

We have already seen more restrictions for Madrid. So the overall picture is not a good one for those who have asserted the likelihood of a V-Shaped economic recovery.Some area yes but others not and on a purely personal level passing bars and pubs in South-West London trade looks thin. All of this is also before we see the end of the furlough scheme at the end of the month.

Car Registrations

This morning’s update showed an area which is still in trouble.

The UK new car market declined -4.4% in September, according to figures published today by the Society of Motor Manufacturers and Traders (SMMT). The sector recorded 328,041 new registrations in the month – the weakest September since the introduction of the dual number plate system in 1999 and some -15.8% lower than the 10-year average of around 390,000 units for the month.

There are quite a few factors at play here. The car industry had its issues pre the pandemic. But added to it was the lockdown earlier this year followed by several U-Turns. People were encouraged to drive to work as the previous official view of encouraging public transport changed. But in London this was accompanied by the sprouting of cycle lanes in many places that looked rather bizarre to even a Boris Biker like me. This was not helped by problems with a couple of bridges and now official policy is for people to work from home again.

There is the ongoing background as to what cars we should buy? The internal combustion engine is out of favour but there are plenty of issues with batteries made out of toxic elements. The net effect of all the factors is this.

 With little realistic prospect of recovering the 615,000 registrations lost so far in 2020, the sector now expects an overall -30.6% market decline by the end of the year, equivalent to some £21.2 billion2 in lost sales.

Business Surveys

This was more optimistic this morning as Markit released the main PMI data.

The UK service sector showed encouraging resilience in
September, with business activity continuing to grow solidly despite the government’s Eat Out to Help Out scheme being withdrawn……….However, growth across the services sector was uneven with gains principally focussed on areas such as business-to-business services. Those sub-sectors more exposed to social contact such as Hotels, Restaurants & Catering reported a downturn in business during the month,

The better news for the large services sector fed straight into the wider measure.

The UK Composite Output Index….. recorded 56.5 to
signal a third month of growth.

This continues a welcome trend and was much better than the Euro area which recorded 50.4. However there are contexts to this which include the fact that the UK economy contracted more in the second quarter so we would expect a stronger bounce back. Also these numbers have proved unreliable so we should take them as a broad brush.

Also even with the furlough scheme the jobs situation looks weak.

Less positive, however, was on the jobs front, with private
sector employment continuing to fall at a steep rate.
September marked a seventh successive month of job
losses, with the greater decline again seen in services.
Cost considerations amid an uncertain near-term outlook
continued to weigh on the labour market.

National Debt

This has been an extraordinary year for UK debt markets which began like this.

The Net Financing Requirement (NFR) for the DMO in 2020-21 is forecast to be £156.1 billion; this will be financed exclusively by gilt sales.

Looking back to March we see that some £97.6 billion was due to redemptions of existing bonds. So we were planning to raise £58.5 billion of new debt. Also you might like to note that back then National Savings and Investments were expected to raise £6 billion this financial year.

If we press the fast forward button we now see this.

The UK Debt Management Office (DMO) is today publishing a further revision to its 2020-21 financing remit covering the period to end-November 2020. In line with the
update on the government’s financing needs announced by HM Treasury today, the DMO is planning to raise a minimum of £385 billion during the period April to November 2020 (inclusive) through the issuance of conventional and index-linked gilts.

So an just under an extra £229 billion and that is only until the end of next month. As of the beginning of this month we have issued in total some £330.5 billion or more than double what we planned for the whole financial year.

Bank of England

I am including it because the numbers above have been reduced in net terms by its purchases. So far it has bought an extra £241 billion. That number does not strictly match the numbers above as it began in late March but it does give an idea of the flows involved here.

That will continue this week with the Bank of England buying another £4.4 billion of UK bonds or Gilts and the Debt Management Office issuing another £8.5 billion.

Comment

We see a situation where we have seen a welcome bounce in UK economic activity but it still has quite a distance to travel. Sadly some areas look likely to be hit again. There must be a subliminal influence on going out and more restrictions seem probable. Thus the rate of recovery will slow and moving onto my next theme the size of the national debt and the fiscal deficit will grow. As to its size there are different ways of measuring it but here is the Office for National Statistics version.

At the end of August 2020, there was £1,718.0 billion of central government gilts in circulation (including those held by the Bank of England (BoE) Asset Purchase Facility Fund).

That will continue to grow pretty rapidly but there are a couple of reasons why we should not be immediately concerned. The average yield at the end of June was 0.29% so it is not costing much and the average maturity if we include index-linked Gilts was a bit over 18 years.

One way of measuring the surge in bond prices is to note that the market value then was some £2,659 billion so some have made large profits. This does not get much publicity. One area which has been affected is index-linked Gilts which if you allow for inflation were worth some £441.5 billion but had a market value of £805.2 billion. Why? Well they do offer a yield that is much higher than elsewhere as we see another casualty of all the QE bond purchases as they are at the wrong price and could manage to fall in price if inflation rises. Or their “yield” is -2.5%.

Imagine being a pension fund manager and having to match an inflation liability with that! It is a much larger issue than the debates over the Retail Price Index but strangely barely gets a flicker of a mention.

Podcast

 

 

 

The UK National Debt is growing whilst the cost of it falls

The last 24 hours or so have brought a barrage of information on the UK public finances. As the new restrictions on activity began we have a background where economic activity will be lower meaning lower tax revenue and likely higher government spending. Next came the Chancellor’s Winter Economic Plan with the job support element looking like it will cost around £1.2 billion a month although of course that depends on the size of the take-up. The continuation of this will also have an impact on tax revenues.

The chancellor has announced the extension of a VAT cut for the hospitality and tourism sectors – some of the worst-hit by the pandemic.

Rishi Sunak said that the temporary reduction of VAT rates from 20% to 5% would remain in place until 31 March 2021, rather than 13 January. ( BBC ).

Indeed according to the Office for National Statistics the hospitality sector was seeing a reverse before the new announcements anyway.

The percentage of adults that left their home to eat or drink at a restaurant, café, bar or pub decreased for the second week in a row, following continued increases since early July. This week, less than one in three adults (29%) said they had done so, compared with 30% last week and 38% at the end of August (26 to 30 August) when the Eat Out to Help Out scheme ended.

Next we can move onto the actual figures for August as we note the cost of the response to the Covid-19 pandemic

Today’s Figures

We saw a reversal of the recent trend which had been for lower borrowing. Up until now we saw a peak of £49.1 billion in April which had declined to £15.4 billion in July.

Public sector net borrowing (excluding public sector banks, PSNB ex) is estimated to have been £35.9 billion in August 2020, £30.5 billion more than in August 2019 and the third highest borrowing in any month since records began in 1993.

July is a major tax collecting month ( such as it was this year) so maybe a better comparison is with June but even so it is up on the £28.9 billion then so let us investigate.

The first factor is that tax revenues have fallen heavily and part of that is a deliberate policy ( the VAT cut for some sectors I have already noted).

In August 2020, central government receipts are estimated to have fallen by 14.3% compared with August 2019 to £51.0 billion. Of this £51.0 billion, tax receipts were £37.3 billion, £7.5 billion less than in August 2019, with Value Added Tax (VAT), Corporation Tax and Income Tax receipts falling considerably.

Next expenditure is much higher this year.

In August 2020, central government bodies spent £82.4 billion, an increase of 34.7% on August 2019.

Of this, £78.5 billion was spent on its day-to-day activities (often referred to as current expenditure)……The remaining £3.9 billion was spent on capital investment such as infrastructure.

Of this the job scheme that is about to be replaced cost this.

In August 2020, central government subsidy expenditure was £14.0 billion, of which £6.1 billion were CJRS payments and £4.7 billion were SEISS payments.

The Fiscal Year

We can get more of a perspective from this.

In the current financial year-to-date (April to August 2020), the public sector borrowed £173.7 billion, £146.9 billion more than in the same period last year. This unprecedented increase largely reflects the impact of the pandemic on the public finances, with the furlough schemes (CJRS and SEISS) alone adding £56.0 billion to borrowing as subsidies paid by central government.

The change is mostly one of spending which has risen by £105.7 billion and the tax decline is a much smaller influence at £36.7 billion. The numbers do not add to the change because I am looking at the main factors and ignoring local government for example. Although there is something odd regarding local government which we keep being told is spending more but in fact has spent £1.5 billion less.

Switching to taxes the biggest faller is VAT which is some £13.5 billion lower. However in percentage terms we see that Stamp Duty on properties has fallen by £2.2 billion to £3 billion on the year so far as first the lockdown crunched activity and now we have the Stamp Duty cut. Also fuel duty has been hit hard being some £3.9 billion lower at £7.8 billion.

National Debt

I would call this a curate’s egg but these days it is more like Churchill’s description of Russia.

 “a riddle, wrapped in a mystery, inside an enigma,”

Let me explain why starting with the official numbers.

At the end of August 2020, the amount of money owed by the public sector to the private sector was approximately £2.0 trillion (or £2,023.9 billion), which equates to 101.9% of gross domestic product (GDP).

However that includes things which are not in fact debt relating to the activities of the Bank of England. The most bizarre part is where marked to market profits are counted as debt.

The BoE’s contribution to debt is largely a result of its quantitative easing activities via the BoE Asset Purchase Facility Fund (APF) and Term Funding Scheme (TFS).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of BoE, public sector net debt excluding public sector banks (PSND ex) at the end of August 2020 would reduce by £218.0 billion (or 11.0 percentage points of GDP) to £1,805.9 billion (or 90.9% of GDP).

There could be some losses from the Term Funding Scheme so lets allow £18 billion for that to give us a round number of £200 billion. So if we keep this in round numbers the national debt is £1.8 trillion.

It really is something that feels like it should be in Alice through the Looking Glass as I note this. The Bank of England has driven Gilt prices higher meaning on a marked to (its) market basis it has a notional profit of £93.4 billion which is then added to the national debt. Each time I go through that I feel that I too have consumed from a bottle marked Drink Me.

Debt Costs

These are the dog which has not barked. Didn’t such a thing allow Sherlock Holmes to solve a case? For our purposes we see that the impact of all the Bank of England bond buying ( £672 billion at the time of writing) is that the government can borrow at ultra cheap levels and at some maturities be paid to do so. Putting it another way bond yields have been reduced by so much they have offset the cost of the extra debt.

Interest payments on the government’s outstanding debt in August 2020 were £3.6 billion, a £0.2 billion decrease compared with August 2019.

There is as well a bonus from lower recorded inflation on index-linked debt meaning that at £17.1 billion debt costs are some £8 billion lower than last year.

Comment

We find ourselves in extraordinary times and the public finances are under pressure in many ways. We will see much higher borrowing persist until the end of the year now as the economy gets squeezed again and public expenditure falls by less than we previously thought. How much is very uncertain but we can have a wry smile at this.

Figures published in the Office for Budget Responsibility’s (OBR’s) Fiscal Sustainability Report and summer economic update monthly profiles – 21 August 2020 (XLS, 201KB) suggest that borrowing in the current financial year (April 2020 to March 2021) could reach £372.2 billion, around seven times the amount borrowed in the financial year ending (FYE) March 2020.

Yes neither the Financial Times nor the Office for National Statistics have spotted that the OBR is always wrong. Curious when you note that so far this fiscal year it has been wrong by some £50 billion at £223.5 billion. Even in these inflated times this is a lot. The OECD has missed it as well.

According to the OECD external review the OBR has established itself as a fixed part of the UK’s institutional landscape, delivering high quality publications, reducing bias in official forecasts and bringing greater transparency to the public finances during its first decade.

I will have to update my definition of being wrong in my financial lexicon for these times to include being “high quality ” and “bringing greater transparency “. The first rule of OBR Club continues to be that it is always wrong!

The public finances themselves are suffering heavily right now due to their use of estimates which means they are a broad brush at a time of large change. I think that the August numbers overstate the deficit trend but only time will tell. As to the debt we are now dependent on continued purchases by the Bank of England to keep costs low which means that it is for all the protestations QE to infinity.

Number Crunching

I thought I would add this as it shows the numbers are very unreliable tight now.

This month, we have reduced our previous estimate of borrowing in the financial year-to-July 2020 by £12.7 billion, largely because of a reduction in previous estimates of central government procurement combined with a smaller increase in the previous estimate of central government tax receipts.

Some welcome good economic news for the UK

Today is proving to be something of a rarity in the current Covid-19 pandemic as it has brought some better and indeed good economic news. It is for the UK but let us hope that such trends will be repeated elsewhere. It is also in an area that can operate as a leading indicator.

In July 2020, retail sales volumes increased by 3.6% when compared with June, and are 3.0% above pre-pandemic levels in February 2020.

As you can see not only did July improve on June but it took the UK above its pre pandemic levels. If we look at the breakdown we see that quite a lot was going on in the detail.

In July, the volume of food store sales and non-store retailing remained at high sales levels, despite monthly contractions in these sectors at negative 3.1% and 2.1% respectively.

In July, fuel sales continued to recover from low sales levels but were still 11.7% lower than February; recent analysis shows that car road traffic in July was around 17 percentage points lower compared with the first week in February, according to data from the Department for Transport.

As you can see food sales dipped ( probably good for our waistlines) as did non store retailing but the recovery in fuel sales from the nadir when so few were driving was a stronger influence. I suspect the fuel sales issue is likely to continue this month based on the new establishment passion for people diving their cars to work. That of course clashes with their past enthusiasm for the now rather empty looking public transport ( the famous double-decker red buses of London are now limited to a mere 30 passengers and the ones passing me these days rarely seem anywhere near that). Actually it also collides with the recent public works for creating cycle lanes out of is not nowhere restricted space in London which has had me scratching my head and I am a regular Boris Bike user.

As we look further I thought that I was clearly not typical as what I bought was clothing but then I noted the stores bit.

Clothing store sales were the worst hit during the pandemic and volume sales in July remained 25.7% lower than February, even with a July 2020 monthly increase of 11.9% in this sector.

Online retail sales fell by 7.0% in July when compared with June, but the strong growth experienced over the pandemic has meant that sales are still 50.4% higher than February’s pre-pandemic levels.

In fact the only downbeat part of today;s report was the implication that the decline of the high street has been given another shove by the current pandemic. On the upside we are seeing innovation and change. Also if we look for some perspective we see quite a switch on terms of trend.

When compared with the previous three months, a stronger rate of growth is seen in the three months to July, at 5.1% and 6.1% for value and volume sales respectively. This was following eight consecutive months of decline in the three-month on three-month growth rate.

It is easy to forget in the melee of news but UK Retail Sales growth had been slip-sliding away and now we find ourselves recording what is a V-Shaped recovery in its purest form.

There is another undercut to this which feeds into a theme I first established on the 29th of January 2015 which is like Kryptonite for central bankers and their lust for inflation. If we look at the value and volume figures we see that prices have fallen and they have led to a higher volume of sales.I doubt that will feature in any Bank of England Working Paper.

Purchasing Manager’s Indices

These do not have the street credibility they once did. However the UK numbers covering August also provided some good news today.

August’s data illustrates that the recovery has gained speed
across both the manufacturing and service sectors since July. The combined expansion of UK private sector output was the fastest for almost seven years, following sharp improvements in business and consumer spending from the lows seen in April.

Public-Sector Finances

This is an example of a number which is both good and bad at the same time.

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in July 2020 is estimated to have been £26.7 billion, £28.3 billion more than in July 2019 and the fourth highest borrowing in any month on record (records began in 1993).

That is because we did need support for the economy ( how much is of course debateable) and even so the monthly numbers are falling especially if we note this as well.

Borrowing estimates are subject to greater than usual uncertainty; borrowing in June 2020 was revised down by £6.0 billion to £29.5 billion, largely because of stronger than previously estimated tax receipts and National Insurance contributions.

We can now switch to describing the position as the good the bad and the ugly.

Borrowing in the first four months of this financial year (April to July 2020) is estimated to have been £150.5 billion, £128.4 billion more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records.

The size of the debt is a combination of ugly and bad but we see that the numbers look like they are falling quite quickly now. Indeed if we allow for the effect of the economy picking up that impact should be reinforced especially if we allow for this.

Self-assessed Income Tax receipts were £4.8 billion in July 2020, £4.5 billion less than in July 2019, because of the government’s deferral policy;

National Debt

There has been some shocking reporting of this today which basically involves copy and pasting this.

Debt (public sector net debt excluding public sector banks, PSND ex) has exceeded £2 trillion for the first time; at the end of July 2020, debt was £2,004.0 billion, £227.6 billion more than at the same point last year.

It is a nice click bait headline but if you read the full document you will spot this.

The Bank of England’s (BoE’s) contribution to debt is largely a result of its quantitative easing activities via the Bank of England Asset Purchase Facility Fund (APF), Term Funding Schemes (TFS) and Covid Corporate Financing Facility Fund (CCFF).

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of BoE, PSND ex at the end of July 2020 would reduce by £194.8 billion (or 9.8 percentage points of GDP) to £1,809.3 billion (or 90.7% of GDP).

Regular readers may be having a wry smile at me finally being nice to the Term Funding Scheme! But its total should not be added to the national debt and nor should profits from the Bank of England QE holdings. Apparently profit is now debt or something like that.

As a result of these gilt holdings, the impact of the APF on public sector net debt stands at £115.8 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase.

Comment

It is nice to report some better news for the economy and let us hope it will continue until we arrive at the next information point which is how the economy responds to the end of the furlough scheme in October. As to the Public Finances I have avoided any references to the Office for Budget Responsibility until now as they have managed to limbo under their own usual low standards. Accordingly even my first rule of OBR Club that the OBR is always wrong may need an upwards revision.

Let me now take you away from the fantasy that the Bank of England has taken UK debt above £2 trillion and return to an Earth where it is implicitly financing the debt. Here is the Resolution Foundation.

These high fiscal costs of lockdown look to be manageable, though. 1) The @UK_DMO   has raised over £243bn since mid-March. 2) While debt is going up, the costs are still going down. Interest payments were £2.4bn in July 2020, a £2bn fall compared with July 2019.

That shows how much debt we have issued but how can it be cheaper? This is because the Bank of England has turned up as a buyer of first resort. At the peak it was buying some £13,5 billion of UK bonds a week and whilst the weekly pace has now dropped to £4.4 billion you can see that it has been like a powered up Pac-Man. Or if you prefer buying some £657 billion of something does tend to move the price and yield especially if we compare it to the total market.

Gilts make up the largest component of debt. At the end of July 2020 there were £1,681.2 billion of central government gilts in circulation.

Finally the UK Retail Prices Index consultation closes tonight and please feel free to contact HM Treasury to ask why they are trying to neuter out best inflation measure?

 

 

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%.