What is the state of the UK Public Finances?

This afternoon the UK Chancellor of the Exchequer will stand up and give what is now called the Spring Statement about the UK public finances. It looks set to be an example of what a difference a few short months can make. But before we get to that let me take us back to yesterday when we were looking at the issue of falling house prices in London. That would have an impact on the revenue side should it be prolonged and the reason for that is the house price boom in the UK which was engineered back the Bank of England back in the summer of 2012 led to this. From HM Parliament last month.

In 2016/17 stamp duty land tax (SDLT) receipts were roughly £11.8 billion, £8.6 billion from residential property and £3.2 billion from nonresidential property. Such receipts are forecast to rise to close to £16 billion in 2022/23, or around £14.5 billion after adjusting for inflation.

That is a far cry from the £4.8 billion of 2008/09 when the credit crunch hit and the £6.9 billion of 2012/13 when the Bank of England lit the blue touch-paper for house prices. Although of course some care is needed at the rates of the tax have been in a state of almost constant change. A bit like pensions policy Chancellors cannot stop meddling with Stamp Duty.

Indeed much of this is associated with London.

Around 2% of properties potentially liable for stamp
duty were sold for over £1 million – these properties
accounted for 30% of the SDLT yield on residential
property.

In fact most of the tax comes from higher priced properties.

In 2016/17 the stamp duty yields on residential property
were split nearly 45:55 between those paying the tax for
purchases between £125,000 and £500,000, and those
paying for properties purchased at over £500,000.

So there you have it the London property boom has brought some riches to the UK Treasury as has the policy of the Bank of England.

The Bank of England part two

Yesterday brought something of a reminder of an often forgotten role on this front.

Operations to make these gilt purchases will commence in the week beginning 12 March 2018……..The Bank intends to purchase evenly across the three gilt maturity sectors.  The size of auctions will initially be £1,220mn for each maturity sector.

This is an Operation Twist style reinvestment of a part of the QE holdings that has matured.

As set out in the Minutes of the MPC’s meeting ending 7 February 2018, the MPC has agreed to make £18.3bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2018 of a gilt owned by the Asset Purchase Facility (APF)

So the Bank of England’s holdings which dropped to a bit over £416 billion will be returned to the target of £435 billion. So the new flow will help reduce the yields that the UK pays on its borrowings which has saved the government a lot of money. The combination of it and the existing holdings means that the UK can currently borrow for 50 years at an interest-rate of a mere 1.71%. Extraordinary when you think about it isn’t it?

The Office for Budget Responsibility ( OBR)

If we continue with the gain from the QE of the Bank of England then the OBR forecast that the average yield would be 5.1% and rising in 2015/16 back when it reviewed its first Budget. This gives us a measuring rod for the impact of QE on the public finances which is a steady drip,drip, drip gain which builds up over time.

If we bring in another major forecast from back then we get a reminder of my First Rule of OBR Club.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

For newer readers that rule is that the OBR is always wrong! I return regularly to the wages one as it has turned out of course to be the feature of modern economic life as the US labour market reminded us last Friday. If you take the conventional view as official forecasts find compulsory then at this stage of the cycle non-farm job creation of 313,000 cannot co-exist with annual hourly earnings growth fading from 2.9% to 2.6%. At this point HAL-9000 from the film 2001 A Space Odyssey would feel that he has been lied to again. Yet today and tomorrow will see a swathe of Phillips Curve style analysis from the OBR and others regardless of the continuing evidence of its failures.

The Bank of England has kindly pointed this out yesterday.

The accuracy of such forecasts has come under much scrutiny.

Here for a start! But ahem and the emphasis is mine…..

Gertjan Vlieghe explains how forecasting is an important tool that helps policymakers diagnose the state and outlook for the economy, and in turn assess – and communicate – the implications for current and future policy. So achieving accuracy is not always the sole aim of the forecast.

For best really in the circumstances I think. Oh and as Forward Guidance turned out to be at best something of a dog’s dinner as promised interest-rate rises suddenly became a cut I think Gertjan’s intervention makes things worse not better.

Employment

Embarrassingly for the Forward Guidance so beloved by Gertjan Vlieghe this has been an area of woe for the credibility of the Bank of England but good news for the UK economy and public finances. This is of course how the 6.5% unemployment rate target which was supposed to be “far,far away” to coin a phrase turned up almost immediately followed by further declines leading us to this.

There were 32.15 million people in work, 88,000 more than for July to September 2017 and 321,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.2%, higher than for a year earlier (74.6%).

As we look at that we can almost count the surge into the coffers directly via taxes on income and also indirectly via excise duties and VAT ( Value Added Tax). According to The Times more may be on its way.

Hiring confidence among British companies has reached its highest level in more than a year and recruitment is set to pick up as businesses shrug off downbeat economic projections, according to a closely watched study.

Manpower’s quarterly survey recorded that net optimism had climbed to +6 per cent in the latest quarter.

Comment

If we look for the situation I pointed out on the 2nd of this month that we are being led into a land of politics rather than economics. From the IEA ( Institute of Economic Affairs ).

New data shows that the Conservative government has finally hit its original target to eliminate the £100bn day-to-day budget deficit they inherited in 2010.

We get all sorts of definitions to make the numbers lower but whether they are cyclical or day-to day they are open to “interpretation” which of course is always one-way. But we have made progress.

the UK’s achievement of sustained deficit reduction over eight years should not be taken for granted.

This has been a fair bit slower than promised which leaves us with this.

The problem is the financial crisis and its aftermath saw public debt balloon from 35.4 per cent of GDP in 2008 to 86.5 per cent today – far higher than the 35 per cent average since 1975.

The consequences of that have been ameliorated by Bank of England QE and to some extent by QE elsewhere. Also it is time for the First Rule of OBR Club again.

The Office for Budget Responsibility projects that public debt will shoot up to 178 per cent of GDP in the next 40 years on unchanged policies, as demands on the state pension, social care, and healthcare rise.

The state of play is that public borrowing has finally benefited from economic growth and particularly employment growth. We are still borrowing but we can see a horizon where that might end as opposed to the mirages promised so often. There are two main catches. The first is that we need the view of The Times on employment to be more accurate that the official data. The second is that for debt costs not to be a problem then QE will need to be a permanent part of the economic landscape.

The certainty today is that the OBR forecasts will be wrong again. The question is why we have been pointed towards better numbers by the mainstream media? The choice is between more spending and looking fiscally hard-line ( which also usually means more spending only later….).

 

 

 

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The UK Public finances have sometimes believed as many as six impossible things before breakfast.

As we await the UK Budget which of course is showing all the signs of being a leaky vessel if not a sieve a lot is going on in the background. What I mean by this is that the goal posts are moving back and forth so much that the grounds(wo)man must be grateful they have wheels on them these days. Let me give you the first example which I mentioned last week. From the Financial Times.

Chancellor Philip Hammond is planning to shift the goalposts on the government’s borrowing limits in a move that will flatter the public finances and provide up to £5bn a year in additional public spending in the Budget on Wednesday. He will use a technical change in the accounting status of housing associations to reduce headline borrowing figures but will not make a corresponding change to his deficit targets in the Budget.

What the FT omitted to point out was the full-scale of the mess here. You see it was only a couple of years ago the housing associations were included in the national debt and now they are not. So overall we have not really gained anything it just looks like we have! Along the way the credibility of the numbers has been reduced again.

The danger for a Chancellor with an apparent windfall is that somebody spends it before he can and marathon man Mark Carney sprinted to the front of the queue to help his banking friends.

Consistent with this, I am requesting that you authorise an increase in the total size of the APF of £25bn to £585bn, in order to accommodate expected usage of the TFS by the end of the drawdown period.

What is happening here is that the Bank of England has got permission to increase the size of its bank subsidy called the Term Funding Scheme by another £25 billion to £140 billion. This is where banks get the ability to borrow from the Bank of England at or close to Bank Rate which is bad news for depositors as it means the banks are less interested in them. This has three consequences, Firstly as we are looking at the public finances today if this £25 billion is used then it raises the national debt by the same amount. Then there is an odd link because if things are going well why do we need to add an extra £40 billion ( there was an extra £15 billion in August) to this?

With the stronger economy and lending growth, TFS drawings reached a total of £91 bn at mid-November 2017.

We are in a pretty pickle if banks need subsidies in the good times. Sadly the mostly supine media are unlikely to ask this question or to wonder how all the downbeat forecasts and Brexit worries have suddenly morphed into a “stronger economy”. The next issue is where will the money turn up? It could be funds to give the car loans sector one last hurrah but as housing appears to be top of the list right now it seems more likely that the Chancellor would prefer another £25 billion to subsidise mortgage rates even further.

Rates on new and existing loans fell after the TFS was launched and have remained low by historical standards

If we move to Bank of England policy it has raised interest-rates on the wider economy but now plans to expand its subsidies to “the precious”. Frankly its opus operandi could not be much more transparent.

Number Crunching

Part one

Firstly there is the FT on the Office for Budget Responsibility or OBR.

But the mood has improved since then after the OBR made clear it would offset some of the “significant” productivity downgrade with more optimistic employment forecasts.

So much for being “independent” and please remember tomorrow when the media are treating its pronouncements with respect and grandeur which is that the first rule of OBR club is that it is always wrong. Unless of course wage growth and gilt yields actually are 5% right now.

Part two

Then there is the possible/probable Brexit bill which is being reported as rising from £20 billion to £40 billion by places which told us it would be either £60 billion or £100 billion. So is that up or down? You choose.

Part three

I am sad that what was once a proud national broadcaster has sunk to this but this is finance from the BBC.

http://www.bbc.co.uk/news/av/uk-politics-42059439/loadsamoney-norman-smith-on-the-brexit-divorce-bill

Today’s data

The news did not give any great reasons to be cheerful.

Public sector net borrowing (excluding public sector banks) increased by £0.5 billion to £8.0 billion in October 2017, compared with October 2016.

The driver here was increased debt costs as the interest bill rose from £4.8 billion last October to £6 billion this. As conventional Gilt yields are broadly similar then most if not all of this has been caused by higher inflation as measured by the Retail Prices Index. The actual amount varies as they pay on a lagged inflation basis which is not always the same but as a rule of thumb the measure has been ~2% per annum higher this year.

Looking beyond that there is a little more optimism to be seen as revenues are not to bad if we switch to the fiscal year to date numbers.

In the current financial year-to-date, central government received £394.3 billion in income, including £292.7 billion in taxes. This was around 4% more than in the same period in the previous financial year.

This means that we are doing a little better than last year.

Public sector net borrowing (excluding public sector banks) decreased by £4.1 billion to £38.5 billion in the current financial year-to-date (April 2017 to October 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2007.

There has been a trend for a while for the numbers to be revised favourably as time passes so even including the debt interest rises we are edging forwards. As the inflation peak passes that will be less of an influence. The next major factor will be the self-assessment season in January and February when we will find out how much last years numbers were flattered by efforts to avoid the rise in dividend taxation.

National Debt

On the theme of moving goal posts we produce quite a lot of numbers on this front and here is the headline.

Public sector net debt (excluding public sector banks) was £1,790.4 billion at the end of October 2017, equivalent to 87.2% of gross domestic product (GDP), an increase of £147.8 billion (or 4.5 percentage points as a ratio of GDP) on October 2016.

Most of the rise in the last year can be attributed to Mark Carney and his colleagues at the Bank of England.

Of this £147.8 billion, £101.7 billion is attributable to debt accumulated within the Bank of England. Nearly all of it is in the Asset Purchase Facility, including £89.9 billion from the Term Funding Scheme (TFS).

By chance our headline number is quite close to international standards as Eurostat has our national debt at this.

general government gross debt was £1,720.0 billion at the end of March 2017, equivalent to 86.8% of gross domestic product (GDP); an increase of £68.1 billion on March 2016.

Comment

The accident of timing that brings our public finance data up to date a bit over 24 hours before the Budget gives us some perspective. Firstly if you recall some of the numbers from yesterday how wrong the OBR has been which never seems to bother the media along the lines of Alice through the looking-glass.

‘I could tell you my adventures–beginning from this morning,’ said Alice a little timidly: ‘but it’s no use going back to yesterday, because I was a different person then.’

Let me offer a policy prescription for the OBR

The mad Queen said, “Off with his head! Off with his head! Off with his head!” Well… that’s too bad… no more heads to cut.”

As to the Budget it would seem it is arriving with a housing obsession. Even the Governor of the Bank of England has got in on the act with yet another banking subsidy to reduce mortgage rates. The way we are told that was ending but in fact is being expanded feels like something out of Alice In Wonderland. Perhaps we will seem some more bribes in addition to the cheap railcards for millenials also.

As to the public finances if we skip the incompetent blunderings of the Bank of England which surely could have designed a scheme which did not raise the national debt we see a situation which is slowly improving. It is not impossible once the inflation peak passes that our debt to GDP ratio could fall but care is needed as you see the only question in the number crunching here is are there only 6?

Why, sometimes I’ve believed as many as six impossible things before breakfast.

 

 

 

 

 

Are improving UK Public Finances a sign of austerity or stimulus?

One of the features of the credit crunch era is that it brought the public finances into the news headlines. There were two main reasons for this and the first was the economic slow down leading to fiscal stabilisers coming into effect as tax revenues dropped. The second was the cost of the bank bailouts as privatisation of profits turned into socialisation of losses. The latter also had the feature that establishments did everything they could to keep the bailouts out of the official records. For example my country the UK put them at the back of the statistical bulletin hoping ( successfully) that the vast majority would not bother to read that far. My subject of earlier this week Portugal always says the bailout is excluded before a year or so later Eurostat corrects this.

The next tactic was to forecast that the future would be bright and in the UK that involved a fiscal surplus that has never turned up! It is now rather late and seems to have been abandoned but under the previous Chancellor of the Exchequer George Osborne it was always around 3/4 years away. This meant that we have had a sort of stimulus austerity where we know that some people and at times many people have been affected and experienced cuts but somehow the aggregate number does not shrink by much if at all.

If we move to the economy then there have been developments to boost revenue and we got a clear example of this yesterday. Here is the official retail sales update.

Compared with August 2016, the quantity bought increased by 2.4%; the 52nd consecutive month of year-on-year increase in retail sales.

As you can see we have seen quite a long spell of rising retail volumes providing upward momentum for indirect taxes of which the flagship in the UK is Value Added Tax which was increased to 20% in response to the credit crunch. Actually as it is levied on price increases too the development below will boost VAT as well.

Store prices increased across all store types on the year, with non-food stores and non-store retailing recording their highest year-on-year price growth since March 1992, at 3.2% and 3.3% respectively.

There is one cautionary note is that clothing prices ( 4.2%) are a factor and we are at a time of year where the UK’s statisticians have got themselves into a mess on this front. In fact much of the recent debate over inflation measurement was initially triggered by the 2010 debacle on this front.

Public Sector Pay

One area of austerity was/is the public-sector pay cap where rises were limited to 1% per annum, although we should say 1% per annum for most as we saw that some seemed to be exempt. However this seems to be ending as we start to see deals that break it. In terms of the public finances the Financial Times has published this.

 

The IFS has estimated that it would cost £4.1bn a year by 2019-20 if pay across the public sector were increased in line with inflation from next year rather than capped at 1 per cent……….Figures published in March by the Office for Budget Responsibility, the fiscal watchdog, suggest that if a 2 per cent pay rise were offered to all public sector workers rather than the planned 1 per cent cap, employee numbers would need to be reduced by about 50,000 to stay within current budgets.

Today’s Data

The UK data this week has been like a bit of late summer sun.

Public sector net borrowing (excluding public sector banks) decreased by £1.3 billion to £5.7 billion in August 2017, compared with August 2016; this is the lowest August net borrowing since 2007.

This combined with a further upgrade revision for July meant that we are now slightly ahead on a year on year basis.

Public sector net borrowing (excluding public sector banks) decreased by £0.2 billion to £28.3 billion in the current financial year-to-date (April 2017 to August 2017), compared with the same period in 2016; this is the lowest year-to-date net borrowing since 2007.

Revenue

There was good news on the income tax front as the self-assessment season was completed.

This month, receipts from self-assessed Income Tax were £1.3 billion, taking the combined total of July and August 2017 to £9.4 billion; an increase of £0.4 billion compared with the same period in 2016. This is the highest level of combined July and August self-assessed Income Tax receipts on record (records began in 1999).

So we had an increase of over 4% on a year on year basis. This seems to be the state of play across overall revenues.

In the current financial year-to-date, central government received £280.4 billion in income; including £209.4 billion in taxes. This was around 4% more than in the same period in the previous financial year.

There is one area which continues to stand out and in spite of the talk and comment about slow downs it remains Stamp Duty on land and property. So far this financial year it has raised some £5.9 billion which is up £0.9 billion on the same period in 2016. A factor in the increase will be the rise in Stamp Duty rates for buy-to lets.

Expenditure

This rose at a slower rate which depending on the measure you use close to or blow the inflation rate.

Over the same period, central government spent £302.7 billion; around 3% more than in the same period in the previous financial year.

The subject of inflation remains a topic in another form as the UK’s inflation or index linked debt is getting expensive. This is due to the rises in the Retail Price Index which will be the major factor in UK debt interest rising by £3.8 billion to £26.3 billion in the financial year so far. So much so there is an official explainer.

Both the uplift on coupon payments and the uplift on the redemption value are recorded as debt interest paid by the government, so month-on-month there can be sizeable movements in payable government debt interest as a result of movements in the RPI.

The next area where there has been something of a surge raises a wry smile. Contributions to the European Union have risen by £1 billion to £4.6 billion this financial year so far.

Comment 

We can see the UK’s journey below.

Current estimates indicate that in the full financial year ending March 2017 (April 2016 to March 2017), the public sector borrowed £45.6 billion, or 2.3% of gross domestic product (GDP). This was £27.6 billion lower than in the previous full financial year and around one-third of that borrowed in the financial year ending March 2010, when borrowing was £152.5 billion or 10.0% of GDP.

We seem so far this year to be borrowing at the same rate as last year. So you could easily argue we have had a long period of stimulus ( fiscal deficits). Yet only an hour after today’s numbers have been released we seem to have moved on.

Chancellor should have room to ease austerity in November Budget, says John Hawksworth

Oh and remember the first rule of OBR ( Office of Budget Responsibility) Club? From the Guardian.

Back in March, the OBR forecast that the budget deficit would rise to around £58 billion this year, but the latest data suggest that it may be similar to the £46 billion outturn for 2016/17.

So let us enjoy a week where the data has been better as we mull the likely consequences of a minority government for public spending. Meanwhile here are the national debt numbers and as I pointed out earlier they omit £300 billion ( RBS).

Public sector net debt (excluding public sector banks) was £1,773.3 billion at the end of August 2017, equivalent to 88.0% of gross domestic product (GDP), an increase of £150.9 billion (or 4.8 percentage points as a ratio of GDP) on August 2016.

Oh and £108.8 billion of the increase is the “Sledgehammer” QE of Mark Carney and the Bank of England. On that subject here is Depeche Mode.

Enjoy the silence

Me on Core Finance TV

http://www.corelondon.tv/central-banks-infinity-beyond/

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