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.
, 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.
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.
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 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.
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%.