As we head towards the weekend we have the opportunity to not only look at an area where there has been good news but also inject a little humour. The latter was unintentionally provided by the OBR or Office for Budget Responsibility earlier this week.
second, we look at the potential fiscal impact of future government activity, by making 50-year projections of all public spending, revenues and significant financial
transactions, such as government loans to students.
No your eyes do not deceive you it really has forecast our fiscal future out towards 2068. This is from an organisation that in its eight years of existence has shown amazing consistency in being wrong. Sometimes it has been wrong pretty much immediately and at other times we have has to wait but usually not for too long. If we look back to its early days then let me give you two examples of its forecasting arrows not only missing the target but soaring out of the stadium with the crowd ducking for cover. Wage growth was forecast to be around 4.5% now and that is being nice to them as you see they got unemployment wrong too and so if we apply their “output gap” style analysis they would have wage growth at 5% or more. Also they would have Gilt yields up towards 5% as well whereas all are below 2% and the ten-year yield is 1.24%.
For newer readers that is the road which led to this.
The first rule of OBR Club is that the OBR is always wrong.
Putting it another way here is how something which is very good what is called the Whole of Government Accounts which as you can see below is sadly converted into laughing-stock status.
The net present value of future public service pension payments arising from past employment was £1,835 billion or 92 per cent of GDP. This is £410 billion higher than a year earlier, with the rise more than explained by the use of a lower discount rate to convert the projected flow of future payments into a one-off net present value and by other changes to assumptions underpinning the value of the liabilities.
The saga starts really well as I regularly get asked for an estimate of the UK’s pension liabilities but as you can see an enormous change has happened due to “a lower discount rate” . So the interest-rate or more specifically yield has been changed by an establishment that has consistently got yields not only wrong but very wrong. This also happened in the insurance world where this sort of blundering in the dark caused a lot of changes and costs.
The OBR weighed in on this subject earlier this week and as a reminder this is the issue as described by the BBC.
Last month, the Prime Minister announced that the NHS in England would get an extra £20bn a year by 2023.
The £114bn budget will rise by an average of 3.4% annually.
In itself this is simple as government’s plan to spend more all the time and actually the OBR feels it needs to do so as the demographics of an ageing population bites. Yet we ended up with more heat than light and I could write a whole post on the “Brexit Dividend” so let us instead look at the overall position. There are three ways this can be paid for.
The easiest is that the economy grows by enough to finance it via higher taxes and lower social spending. After all we live in an era of Black Swan events but even in these days they happen only from time to time so the other choices are higher taxes or borrowing more. As you are about to see the public finances data have been pretty good over the past 18 months or so ( something else the OBR got wrong as it predicted a pretty substantial rise for the fiscal year just gone). So as we stand we could borrow the money quite easily and as I explained earlier we can do so cheaply in fact extremely cheaply in historical terms. Just for clarity as these issues get heated I am not advocating such a move simply saying that as we stand we could and probably quite easily. That seems to have got lost as at least some of the media looks for examples of higher taxes in response to the extra spending.
This whole issue makes me look back over the last issue and something stands out so let me put it in italics.
Over the credit crunch era we have borrowed a lot when it has been (relatively) expensive and not it is cheaper we are borrowing much less.
Some of that was forced on us but not all of it.
This continues to be good.
Public sector net borrowing (excluding public sector banks) decreased by £0.8 billion to £5.4 billion in June 2018, compared with June 2017;
As is the picture with a little more perspective
Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to June 2018) was £16.8 billion; that is, £5.4 billion less than in the same period in 2017; this is the lowest year-to-date (April to June) net borrowing since 2007.
So we are back to pre credit crunch levels in this regard and the trajectory is lower. If we look into the detail then we see this about revenues.
In the current financial year-to-date, central government received £169.4 billion in income, including £125.0 billion in taxes. This was around 3% more than in the same period in 2017.
Looked at like that we get a confirmation of the slowing of the housing market as Stamp Duty revenues have fallen by £300 million to £3.1 billion and the QE operations of the Bank of England contributed £600 million less.
But on the other side of the ledger we do for once see some outright austerity.
Over the same period, central government spent £184.2 billion, around 1% less than in the same period in 2017.
Before we get too excited debt interest fell by £2.2 billion which will be mostly if not entirely the impact of lower ( RPI ) inflation on index-linked Gilts. Also the numbers for local councils have swung too so allowing for that we do not have outright austerity but we do on the measure compared with inflation.
There is good news here too at least in relative terms.
Public sector net debt (excluding public sector banks) was £1,792.3 billion at the end of June 2018, equivalent to 85.2% of gross domestic product (GDP), an increase of £33.0 billion (or a decrease of 1.0 percentage points as a ratio of GDP) on June 2017.
There are also numbers excluding the Bank of England but sadly the numbers published are inconsistent. This happened a few months ago as well, There are also wider numbers for what previously I would have said was something of a gold standard but after the pension revision we looked at above I will merely say they are worth a look.
The overall net liability in the WGA was £2,421 billion or 122 per cent of GDP at the end of March 2017, up £435 billion on the previous year’s restated results ( OBR)
We have been on quite a journey with the UK public finances and to some extent it has been this sort of Journey.
It goes on and on and on and on
We have also seen that
Some will win some will lose
Because until this phase a lot of the austerity has been from one group to another as for example comparing the Triple Lock for the Basic State Pension with its 2.5% minimum with the 1% per annum for other social benefits and pay rises. But with the better news can we say this?
Don’t stop believing
Hold on to that feeling
We can to some extent but that does not mean the sky is pure blue. The clouds come from all the efforts to manipulate the numbers which would take an article in their own right and also the way the national debt has risen. Which allows me one more example of OBR Club unless of course we find an alternative universe where the national debt peaked at below 70% of GDP and then fell primarily due to us being in surplus for the last couple of years……