Do we face austerity and tax rises after the Covid-19 pandemic?

We have been in uncertain times for a while now and this has only been exacerbated by the Covid-19 pandemic. One particular area of concern are the public finances of nations who are copying the “Spend! Spend! Spend!” prescription of football pools winner Viv Nicholson. For younger readers the football pools were what people did before lotteries. Indeed if we note the latest IMF Fiscal Monitor there was an issue even before the new era.

Prior to the pandemic, public and private debt were
already high and rising in most countries, reaching
225 percent of GDP in 2019, 30 percentage points
above the level prevailing before the global financial
crisis. Global public debt rose faster over the period,
standing at 83 percent of GDP in 2019.

We get a pretty conventional response for the IMF which has this as a mantra.

And despite access to financing varying sharply across countries, medium- to long-term fiscal strategies were needed virtually everywhere.

There is a counterpoint here which is that the fiscal strategies approved by the IMF have been a disaster. There is of course Greece but in a way Japan is worse. Following IMF advice it began a policy of raising its Consumption Tax to reduce its fiscal deficit. It took five years for it to take the second step as the first in 2014 caused quite a dive in the economy. Then the second step last year saw Japan’s economy contract again, just in time to be on the back foot as the Covid-19 pandemic arrived.

The IMF is expecting to see quite a change this year.

In 2020, global general government debt is estimated to make an unprecedented jump up to almost 100 percent of GDP. The major increase in the primary deficit and the sharp contraction in economic activity of 4.7 percent projected in the latest World Economic Outlook, are the main drivers of this development.

Oh and where have we heard this before? The old this is “temporary” line.

But 2020 is an exceptional year in terms of
debt dynamics, and public debt is expected to stabilize
to about 100 percent of GDP until 2025, benefiting
from negative interest-growth differentials.

I make the point not because I have a crystal ball but because I know I do not. Right now the path to the end of this year looks extremely uncertain with for example France imposing a curfew on Paris and other major cities and Germany hinting at another lockdown. So we have little idea about 2021 let alone 2025.

The IMF is in favour of more spending this time around.

These high levels of public debt are hence not the
most immediate risk. The near-term priority is to
avoid premature withdrawal of fiscal support. Support
should persist, at least into 2021, to sustain the recovery and to limit long-term scarring. Health and education should be given prime consideration everywhere.

I would have more time for its view on wasteful spending and protection of the vulnerable if the places where it has intervened had actually seen much reform and protection.

Fiscally constrained economies should prioritize the
protection of the most vulnerable and eliminate
wasteful spending.

Economic Theory

The IMF view this time around is based on this view of public spending.

The Fiscal Monitor estimates that a 1 percent of
GDP increase in public investment, in advanced
economies and emerging markets, has the potential to push GDP up by 2.7 percent, private investment by
10 percent and, most importantly, to create between
20 and 33 million jobs, directly and indirectly. Investment in health and education and in digital and green
infrastructure can connect people, improve economy wide productivity, and improve resilience to climate
change and future pandemics.

If true we are saved! After all each £ or Euro or $ will become 2.7 of them and them 2.7 times that. But then we spot “has the potential” and it finishes with a sentence that reminds me of the  company for carrying on an undertaking of great advantage from the South Sea Bubble. For those unaware of the story it disappeared without trace but with investors money.

For newer readers this whole area has become a minefield for the IMF because it thought the fiscal multiplier for Greece would be 0.5 and got involved in imposing austerity on Greece. It then was forced into a U-Turn putting the multiplier above 1 as it was forced to do by the economic collapse which was by then visible to all.

Institute for Fiscal Studies

It has provided a British spin on these events although the theme is true pretty much everywhere we look.

The COVID-19 pandemic and the public health measures implemented to contain it will lead to a huge spike in government borrowing this year. We forecast the deficit to climb to £350 billion (17% of GDP) in 2020–21, more than six times the level forecast just seven months ago at the March Budget. Around two-thirds of this increase comes from the large packages of tax cuts and spending increases that the government has introduced in response to the pandemic. But underlying economic weakness will add close to £100 billion to the deficit this year – 1.7 times the total forecast for the deficit as of March.

I suggest you take these numbers as a broad brush as it will be a long economic journey to April exemplified by that fact that whilst I am typing this it has been announced that London will rise a tier in the UK Covid-19 restrictions from this weekend. I note they think that £250 billion of this is an active response and £100 billion is passive or a form of automatic stabiliser.

They follow the IMF line but with a kicker that it is understandably nervous about these days.

But, in the medium term, getting the public finances back on track will require decisive action from policymakers. The Chancellor should champion a general recognition that, once the economy has been restored to health, a fiscal tightening will follow.

They are much less optimistic than the IMF about the middle of this decade/

Under our central scenario, and assuming none of the temporary giveaways in 2020–21 are continued, borrowing in 2024–25 is forecast to be over £150 billion as a result of lower tax revenues and higher spending through the welfare system.

They do suggest future austerity.

Once the economy has recovered, policy action will be needed to prevent debt from continuing to rise as a share of national income. Even if the government were comfortable with stabilising debt at 100% of national income – its highest level since 1960 – it would still need a fiscal tightening worth 2.1% of national income, or £43 billion in today’s terms.


As you can see the mood music from the establishment and think tanks has changed somewhat since the early days of the credit crunch.Austerity was en vogue then but now we see that if at all it is a few years ahead. Let me now switch to the elephant in the room which has oiled this and it was my subject of yesterday, where the fall in bond yields means governments can borrow very cheaply and sometimes be paid to do it. That subject is hitting the newswires this morning.

The German 10-year bond yield declined to the lowest level in five months on Wednesday as coronavirus’s resurgence across the Eurozone strengthened the haven demand for the government debt. ( FXStreet)

It is -0.61% as I type this and even the thirty-year yield is now -0.22%. So all new German borrowing is better than free as it provides a return for taxpayers rather than investors. According to Aman Portugal is beginning to enjoy more of this as well.

According to the IGCP, which manages public debt, at the Bloomberg agency, €654 million were auctioned in bonds with a maturity of 17 October 2028 (about eight years) at an interest rate of -0.085%.

Although for our purposes we need to look at longer-term borrowing so the thirty-year issue at 0.47% is more relevant. But in the circumstances that is amazingly cheap.

In essence this is what is different this time around and it is one arm of government helping another as the enormous pile of bonds purchased by central banks continue to grow. The Bank of England bought another £4.4 billion this week. So we have a window where this matters much less than before. It does not mean we can borrow whatever we like it does mean that old levels of debt to GDP such as 90% ( remember it?) and 100% and even 120% are different now.

In the end the game changer is economic growth which in itself posts something of a warning as pre pandemic we had issues with it. Rather awkward that coincides with the QE era doesn’t it as we mull the way it gives with one hand but takes away with another?

UK National Grid

It was only last week I warned about this.

National Grid warns of short supply of electricity over next few days ( The Guardian)

Good job it has not got especially cold yet.

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.


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.

Will the UK be raising or reducing taxes?

The UK Public Finances data we looked at on Friday has triggered something of a policy response. Or at least some proposals, although if we look at the Financial Times the messaging has got itself in a mess.

Rishi Sunak is planning to defer tax rises and cut public spending in his Autumn Budget after delivering a further stimulus for the UK economy.

That looks a little confused on its own with its message of a stimulus followed by what looks like a lagged version of what has become known as austerity. That leads us to something of a collision between economics 101 and likely human behaviour. Let me explain with reference to the suggested plans.

The Treasury is first considering a temporary cut to value added tax and specific reductions in the rate for some sectors, according to those close to the chancellor, following significant pressure from industry and Tory MPs. A lower VAT rate for the tourism sector — including pubs, restaurants and hotels — is one option being discussed.

Okay and when would it happen?

This could come as early as July as the government prepares to scrap the two-metre social distancing rule and replace it with “one metre plus” guidelines that are likely to include further use of masks and physical screens.

Okay so there is an Undertone(s) here.

Its going to happen – happen – till your change your mind
Its going to happen – happen – happens all the time
Its going to happen – happen – till your change your mind.

Economic Impact

We do have some recent evidence for the impact of what is a change in a consumption tax and it comes from Japan last autumn. So let us remind ourselves via the Japan Times.

Japan saw a 6.3 percent economic contraction in the last three months of 2019, fueling criticism of Prime Minister Shinzo Abe’s decision to carry out the tax increase at a vulnerable time for the economy. After factoring in the early signs of impact from the coronavirus, analysts now believe the economy is falling into recession.

That is in the American annualised style and as we note the further downward revision and convert we now see the economy shrank by 1.9% in that quarter, driven by factors like this.

Like many people in Japan, she isn’t planning to splash out again anytime soon, leaving the economy teetering on the edge of recession. And that was before the spreading coronavirus gave yet more cause for caution.

“These days, I really scrutinize the price tags,” Mitsui said.

The economic consequence of this change in behaviour is shown below.

Household spending fell for the third straight month in December on the continued impact of October’s consumption tax hike together with sluggish demand for winter items due to warm temperatures, government data showed Friday.

Spending by households with two or more people dropped 4.8 percent in real terms from a year earlier to ¥321,380 ($2,900), the Ministry of Internal Affairs and Communications said.

The collective impact on the quarter was for a 3% fall in private consumption on the quarter.

So we see that a consumption tax rise led to quite a drop in the economy thus we have some hope for the impact of the reverse. Indeed the impact looks really rather powerful. This reinforces the impact we saw of the VAT rise back in 2010. One area where we have less evidence is the impact of inflation which is harder to read. I would expect there to be a welcome disinflationary effect in the UK that is stronger that we would see in Japan. Why? Well price rises in Japan tend to not have secondary impacts on inflation and of course there were two other factors. The Japanese economy was slowing anyway as the consumption tax brake was applied and now we have the further impact of the Covid-19 pandemic. The Bank of Japan calculates various inflation indices to try to suggest its policies are working but the latest release excluding the effects of the consumption tax rises suggests inflation is er 0% ( actually slightly below), so if you like what is normal for Japan.

What next?

There is a possible worm in the apple of the UK plans, so let us return to the FT.

But any move to lower VAT — at considerable cost to the exchequer — would come with a sting in the tail, as Mr Sunak works up proposals for deferred tax rises and lower public spending as part of the autumn Budget.

The message switches from “Spend! Spend! Spend!” to tighten your belts which adds a layer of confusion. For younger and overseas readers the spend quote is from Viv Nicholson who won the (football) pools which was analagous to winning the lottery now and I think you have already figured her plan.

The response seems to have been influenced at least to some extent by mis-reporting like this, which I noted on social media over the weekend.

There has been some really rather poor reporting from the BBC today with analysis by @DharshiniDavid

“UK debt now larger than size of whole economy”

There were several factors at play such as the policies of the Bank of England inflating the recorded numbers by £195.6 billion whereas even in pessimistic scenario it might not be a tenth of that. Also the numbers were not only based on a forecast they were based on a forecast by the Office of Budget Responsibility which has lived down to its reputation by being wrong yet again. How much of an influence that was in this is hard to say.

Neil O’Brien, MP for Harborough and a former Treasury adviser, said: “We simultaneously need a stimulus now to fight recession, but also need to roll the pitch so that we can deal with very high levels of debt.”

Neil seems to be trying to have his cake and eat it. An excellent idea in theory but one which crumbles in practice. However his lack of realism is typical of someone who has been involved at the Treasury. Next is an anonymous effort at sticking the boot in.

Another former Tory minister said the public finances were so stretched that a fiscal tightening would be necessary before long: “The public aren’t going to like it but it feels like either spending cuts or tax rises are going to be necessary soon.”


The situation is on one level quite simple. Will a VAT cut boost the economy? Yes it will both directly as people spend more and then via a secondary effect of lower inflation via some lower prices. The second bit is awkward for the inflationistas so we may not seem them for a day or two. The undercut is the impact on the public finances which will be added to the £8.6 billion fall in VAT receipts in the year so far. There will be some amelioration as for example people dash for a haircut or a pint of beer at their local pub, but overall receipts will be lower. The overall impact depends on the economic boost and how long it lasts and the evidence we have is positive.

Switching to the public finances the numbers are not as bad as some have claimed, partly because of a factor which should get more publicity. In the fiscal year so far (April and May) the cost of our debt fell by £1.1 billion to £8.4 billion due to lower inflation and the fact our ordinary debt is so cheap to finance. I would be switching as much debt as I could to the fifty-year maturity at a yield of around 0.5% and in fact would issue some 100 year Gilts. In the long run we will have to deal with the capital issue of the debt we are issuing at an express rate but as it is cheap the interest implications are relatively minor. What we need to squarer the circle is some economic growth. That will reduce the tax increases required.

Let me end by looking at the other side of the coin from the slice of humble pie i put in front of myself on Friday. So a slap on the back for this.

Regular readers will be aware that I wrote a piece in City-AM in September 2013 suggesting the Bank of England should let maturing Gilts do just that. So by now we would have trimmed the total down a fair bit which would be logical over a period where we have seen economic growth which back then was solid, hence my suggestion.

Because it seems to be on the radar of the present Governor.

#Monetary policy – significant change of approach suggested by #BOE governor #Bailey – says may be best for the bank to start reversing its asset purchases before raising interest rates on a sustained basis. Opposite view to that which has been held at BoE ( @HowardArcherUK )





The UK Public Finances hint at a strong underlying economy

Yesterday saw the IMF join the chorus expecting better economic times ahead.

The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010…….Global growth for 2017 is now estimated at 3.7 percent, 0.1 percentage point higher than projected in the fall. The stronger momentum experienced in 2017 is expected to carry into 2018 and 2019, with global growth revised up to 3.9 percent for both years (0.2 percentage point higher relative to the fall forecasts).

Part of this was due to revising the US economy upwards( ~0.4%) due to the Trump tax cuts. This was obviously so painful to the IMF that it could only get some relief by revising the UK down a little in 2019. In reality the UK is likely to be pulled higher too by the global upswing as even Lord O’Neil formerly of the Vampire Squid now admits. From the BBC.

Britain should prepare for a much more economically optimistic 2018 because global growth is better than predicted.

That’s the argument of Lord Jim O’Neill, the former Conservative Treasury minister and Remain supporter.

He said Britain’s growth forecasts are likely to be upgraded as China, the US and Europe show increased activity.

Fair play to him for having the courage to correct past mistakes and the only worrying part of all this is that too many establishment groups and figures are telling us the future is bright! Just look at their track record……


Moving to the public finances there has been a fair bit of news on the Public Finance Initative or PFI front post the Carillion liquidation which I looked at on Monday last week.  The National Audit Office pointed out the scale of the issue late last week.

There are currently over 700 operational PFI and PF2 deals, with a capital value of around £60 billion and annual charges for these deals amounted to £10.3 billion in 2016-17. Even if no new deals are entered into, future charges which continue until the 2040s amount to £199 billion.

These schemes have brought some benefits but they have also brought problems mostly because the real rationale as I have pointed out many times was this.

However, most private finance debt is
off-balance sheet for National Accounts purposes.

The politicians doing this in effect get a benefit such as a new hospital but shift the burden of paying for it into the future and thus worsen the future public finances.

Unlike conventional procurement, debt raised to construct assets does not feature in government debt figures, and the capital investment is not recorded as public spending even though it is for the public sector.

In essence the projects are driven by the rules of our national accounts ( more specifically avoiding being measured….) rather than any economic gain.

PFI can be attractive to government as recorded levels of debt will be lower over the short to medium term (five years ahead) even if it costs significantly more over the full term of a 25–30 year contract.

You don’t say!

Today’s Data

The news opened in positive fashion.

Public sector net borrowing (excluding public sector banks) decreased by £2.5 billion to £2.6 billion in December 2017, compared with December 2016.

There were strong performances on the receipts side with Income Tax receipts up by £700 million and VAT ( a sales tax) up by £600 million. There are hints there of underlying economic strength and of course the higher VAT receipts give a rather different picture to what we were told by the retail sales numbers. On the expenditure side there was something to give a wry smile in the circumstances.

In December 2017, the UK’s net contribution to the European Union (EU) was £1.2 billion lower than in December 2016.

Okay why?

December can see atypical payments between member states and the EU. December 2017 saw a credit to the UK of £1.2 billion following the adoption of agreed amendments to the 2017 EU budget which reduced the size of the 2017 budget and adjusted member states’ contributions to reflect updated economic forecasts.

Or maybe someone has a sense of humour as it will all come out in the wash anyway. Also we need to note that a regular feature was still there as debt costs were higher by some £500 million which will be mostly driven by higher payments on index-linked Gilts affected by the fact that the Retail Prices Index has pushed over a 4% annual rate of growth.


This too as you might imagine was given a boost by the December data.

Public sector net borrowing (excluding public sector banks) decreased by £6.6 billion to £50.0 billion in the current financial year-to-date (April 2017 to December 2017), compared with the same period in 2016.

This means that the first rule of OBR Club had yet another good year in 2017 as you will note from its November review of the state of play. The emphasis is mine.

That said, the public finances have performed better than expected. The ONS has revised borrowing in 2016-17 sharply lower, relative to its initial estimate and our March forecast. And the deficit has continued to fall in the first half of 2017-18. We have revised borrowing down by £8.4 billion to £49.9 billion for the full year,

Thus the OBR is left in the awkward situation of hoping that the UK Self-Assessment season for Income Tax is a poor one. Such a view will not be helped by the December data being good although the data can be erratic.

Here is a breakdown of both sides of the ledger.

In the current financial year-to-date, central government received £504.0 billion in income, including £376.8 billion in taxes. This was around 4% more than in the same period in the previous financial year.

Over the same period, central government spent £538.9 billion, around 3% more than in the same period in the previous financial year.

As some of the expenditure increase is caused by the rise in inflation via its impact on index linked Gilts then we do indeed have austerity if you define it as expenditure rising by less than the rate of inflation.

What about the National Debt?

We come into the real lies, damned lies and statistics section here. But let me try and shin a little light. Over the past year it has risen but mostly that has been due to some credit easing ( Term Funding Scheme) by the Bank of England. Over the past year it has raised the National Debt by £89.1 billion and as you can see below this makes a difference to whether it is going up or down.

Public sector net debt (excluding both public sector banks and Bank of England) was £1,591.4 billion at the end of December 2017, equivalent to 77.2% of GDP, a decrease of £26.8 billion (or 3.6 percentage points as a ratio of GDP) on December 2016.

Sadly there is still a lot of manipulation and misrepresentation going on as the main cause of the fall is what happened to the Housing Associations.

As of the end of October 2017, English HAs’ net debt amounted to £65.5 billion, which from November 2017 is no longer to be counted as public sector debt.

It is rarely reported that we use a completely different system to that used by the ratings agencies and the Maastricht criteria so here is the latter.

general government gross debt was £1,720.0 billion at the end of March 2017, equivalent to 86.7% of gross domestic product (GDP); an increase of £68.1 billion on March 2016…general government deficit (or net borrowing) was £46.9 billion in the financial year ending March 2017 (April 2016 to March 2017), equivalent to 2.4% of GDP; a decrease of £29.0 billion on March 2016.

It is like a numerical equivalent of alphabetti spaghetti isn’t it?


As we try to peer through all the attempts to deceive us about the UK public finances then we get a perspective on this announcement from the UK government. From The Times.

Theresa May is set to authorise the creation of a rapid response unit to stop fake news spreading online.

The team, which will be based in the Cabinet Office, will be tasked with monitoring social media to identify and challenge disinformation.

Time for some Depeche Mode.

It’s too late to change events
It’s time to face the consequence
For delivering the proof
In the policy of truth

Never again
Is what you swore
The time before
Never again
Is what you swore
The time before

The reality is that things are getting better albeit we are still a fair way away from the “promised land” of a surplus which we should be used to by now. As ever it is just around the corner. As to the underlying economy even the CBI seems optimistic looking ahead.

The survey of 369 manufacturers revealed that optimism about both business conditions and export prospects improved at an above-average pace.

The UK Public Finances continue to underperform the economy

A feature of the modern era is that way that the establishment economic debate has changed. There was a spell post credit crunch that we were told that fiscal deficits were a bad idea and most countries then set about trying to reduce them. The UK headed on that road although the reductions in the deficit came more slowly than promised and the surplus that was supposed to be achieved now somehow found itself some 3/4 years away. More recently there has been a shift in favour of fiscal stimuli both generally and in the UK. Even Mario Draghi of the ECB (European Central Bank) was at this game yesterday.

Fiscal policies should also support the economic recovery, while remaining in compliance with the fiscal rules of the European Union………At the same time, all countries should strive for a more growth-friendly composition of fiscal policies.

This is of course the same ECB which has enforced exactly the reverse in places like Greece and still supports the Growth and Stability Pact that even Germany ignores! Also Mario has driven many bonds including corporate ones into negative yields but still has the chutzpah to proclaim this.

so far we haven’t seen evidence of bubbles.

Although should Portugal be downgraded later it will fall out of the ECB QE criteria and would be forced to head in the opposite direction.

The UK

The impact of the vote to leave the EU was likely to have two impacts according to the Institute for Fiscal Studies. First a gain.

In principle, the UK’s public finances could be strengthened by that full £14.4 billion a year if we were to leave the EU. However, the EU returns a significant fraction of that each year. The amount varies, but on average our net contribution stands at around £8 billion a year.

But as they forecast a weakening of the UK economy there was also a loss depending on how much it weakened.

We estimate that if NIESR has broadly the right range of possible outcomes for GDP, then the budget deficit in 2019–20 would be between about £20 billion and £40 billion higher than otherwise.

Earlier this month The Times waded into the issue with a claimed leak of cabinet papers that actually turned out to be the pre vote Treasury analysis.

The net impact on public sector receipts – assuming no contributions to the EU and current receipts from the EU are replicated in full – would be a loss of between £38 billion and £66 billion per year after 15 years, driven by the smaller size of the economy.

There are obvious issues looking so far ahead and depend on the assumptions made. What we know so far is that the UK economy has not been plunged into a recession as some claimed but here at least we expect an impact next year as inflation rises in response to the lower UK Pound. Although of course indirect taxes gain from inflation on the one hand and index-linked Gilts mean the government pays out more so the picture is as ever complex.

Today’s numbers

Actually one is left wondering whether the proposed plan for an easing of fiscal policy in the UK is already in play.

Central government expenditure (current and capital) in September 2016 was £57.2 billion, an increase of £2.4 billion, or 4.3%, compared with September 2015.

As we look into the detail we see that expenditure is indeed higher but that there was another factor at play.

debt interest in September 2016 increased by £0.9 billion, or 34.6%, to £3.3 billion;

This initially looks odd because as I pointed out on Tuesday UK Gilt yields remain extraordinarily low in spite of the efforts of the Financial Times on Monday to convince us that the end of the world is nigh. Of course it may be but not this week (so far)! However just as I was remembering that September is a “heavy” month for index-linked Gilts Fraser Munro of the ONS kindly reinforced my thoughts.

We are seeing the recovery of the RPI impact on the uplift on index linked gilts and pushing up interest.

So we are already seeing costs arise from higher inflation and I do hope that fans of higher inflation will admit this rather than parking it at the back of their darkest cupboard.

Actually revenue growth was not to bad at 2.6% but the increased expenditure meant this.

In September 2016, public sector net borrowing (excluding public sector banks) was £10.6 billion; an increase of £1.3 billion, or 14.5% compared with September 2015.

This meant that the official plan to chop another £20 billion or so of UK annual borrowing is struggling so far this financial year.

In the financial year-to-date (April to September 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £45.5 billion; a decrease of £2.3 billion, or 4.8% compared with the same period in 2015.


Over this period the debt interest position is much more favourable showing that we will continue to benefit from low conventional Gilt yields ( assuming they stay low) but see an upwards push from index-linkers from time to time. Those of you with longer memories will recall that several years ago I suggested that if the UK was to borrow it should be via conventional Gilts when Jonathan Portes was arguing we should use index-linked ones. If you take his forecasts going forwards ( inflation and maybe a recession) you will see why.

What about the national debt?

An objective of the previous Chancellor George Osborne has been achieved again but of course to late for him.

This month debt as a percentage of GDP fell by 1.0 percentage point compared with September 2015. This is the fourth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than net debt excluding public sector banks.

The official numbers tell us this.

Public sector net debt (excluding public sector banks) at the end of September 2016 was £1,627.2 billion, equivalent to 83.3% of gross domestic product (GDP); an increase of £39.5 billion compared with September 2015.

However these are different to what is the usual international standard so here is that version.

At the end of the financial year ending March 2016, UK government gross debt was £1,651.9 billion (87.8% of GDP).

Unfortunately those numbers are from further back but whilst the total is rising the percentage ratio to GDP has also been falling.

Term Funding Scheme

The new bank assistance scheme of the Bank of England will raise the national debt but reduce borrowing.

that (all else being equal) Public Sector Net Debt will be increased by the liability relating to the creation of the central bank reserves and Public Sector Net Borrowing will be decreased by the net interest flows relating to the TFS loans and central bank reserves.

So far it amounts to £1.279 billion.


We find ourselves noting yet again that the UK fiscal performance is disappointing. Or at least it was under the old plan! Maybe now borrowing a little extra is considered a success. Of course this means that the room for extra borrowing by the Chancellor Phillip Hammond in the upcoming Autumn Statement declines. Oh what a tangled web and all that. Also because we have had economic growth we have seen our national debt to GDP ratio fall as growth exceeds borrowing.

The next challenge will come in 2017 as inflation continues to pick up and the UK faces a benefit as indirect taxes are on nominal not real spending but also a loss as it will have to pay extra on index-linked debt. The government could win as the ordinary person loses but the bigger picture depends on economic growth. If we continue to grow then there will be a range of choices,if we do not then it will get harder. Meanwhile it is hard not to have a wry smile at one of the reasons for the increase in government expenditure both in September and in the fiscal year so far.

along with subsidies and contributions to the EU


Have our banks got better or instead have they got worse?

One of the fundamental issues of the credit crunch era is what to do about our banks? The Too Big To Fail or TBTF strategy has left us in a situation where the banking sector is one with a moral hazard at its core. Everybody now knows that there will be privatisation of profits and socialisation of any losses giving directors of banks something of a one-way bet. Heads they win and tails we lose (with them usually still winning). As this was implicit in the past rather than explicit as it is now we find that we may in fact be worse off contrary to all the official denials. After all we know what to do with official denials.

This privatisation of profits and socialisation of losses was most marked in the UK at Royal Bank of Scotland with its purchase of ABN-Amro as highlighted recently by Andrew Bailey of the Bank of England.

The low risk weights assigned to trading assets suggested that only £2.3 billion of core tier 1 capital was held to cover potential trading losses which might result from assets carried at around £470 billion on the firm’s balance sheet.

We know of course what happened next.

In fact, in 2008 losses of £12.2 billion arose in the credit trading area

This meant that for the rest of us a measure of the UK National Debt soared into the stratosphere. At the end of 2006/07 the UK’s National Debt to GDP ratio was an apparently fiscally conservative 36%. By the time we fully accounted for the various bailouts it was this in December 2010.

net debt excluding the temporary effects of financial interventions was £889.1 billion, equivalent to 59.3 per cent of gross domestic product (£2322.7 billion, equivalent to 154.9% including interventions).

First of all we have the impact on the headline figure and then boom! Apologies for those of a nervous disposition as our debt shot higher. I was one of the very few who covered these numbers and have written before of their many flaws but they give a ballpark idea of our potential exposure.

A Name Change

One of the most ominous developments in a situation is a name change as the Public Relations industry tries to solve the problem of a toxic brand by rubbing it out and introducing a shiny new one. On this road the leak prone nuclear reprocessing plant Windscale became the initially leak-free Sellafield. Well TBTF has made a similar journey as it is now called SIFI or Systemically Important Financial Institution.Do we feel better already?


These are of course fines but I think that the banks treat them as a bill just like the Destinys Child lyric or a cost of doing business. Yesterday saw Barclays and RBS  hit with these and we fined Barclays ourselves.

The Financial Conduct Authority (FCA) has imposed a financial penalty of £284,432,000 on Barclays Bank Plc (Barclays) for failing to control business practices in its foreign exchange (FX) business in London.

Whilst on the face of it seems like action there are various problems here. Current Barclays shareholders are paying for a problem which they really had no control over and of course may not even have been shareholders then. What about punishing those who did this? After all some were openly admitting to fraud.

“If you aint cheating, you aint trying”

Yet again there seems to be something of a shortage of criminal prosecutions as we wonder if any sort of banking financial crime would get a jail sentence. We do seem to treat other types of fraud such as benefits fraud much more harshly. From Poole Council’s website.

A Poole man was given a 12 month custodial sentence for stealing over £88,000 from the public purse.

Meanwhile there is the issue of whether the shareholders were in fact punished. From Adam Parsons of the BBC.

Shares then go up up 3.37% Means Barclays now worth £1.5bn more than it was before the £1.5bn fine.

Next if we look at the international issue is a wealth transfer from the UK to the United States as the fines from it to UK banks go on and on.

Barclays, which was involved from as early as December 2007 until July 2011, and then from December 2011 until August 2012, has agreed to pay a fine of $650 million;RBS, which was involved from at least as early as December 2007 until at least April 2010, has agreed to pay a fine of $395 million.

The US Federal Reserve fined them too for US $342 million (Barclays) and US $274 million (RBS). This is particularly awkward in the case of RBS which has of course the UK taxpayer as a majority shareholder. Exactly what guilt does the average UK taxpayer have?

Market Manipulation

Often forgotten in the melee is the impact on financial markets. We have seen that foreign exchange and interest-rate markets (LIBOR) have been rigged to the banks benefit which begs the question of what other markets have been? For example was it a coincidence that the oil price and indeed the price of several other basic commodities fell after many banks closed their commodity trading desks. By the time that central banks have manipulated so many markets too what is left.

Of course central bank market manipulation is treated as welcome rather than illegal but even Andrew Bailey of the Bank of England admitted that there seem to be “side-effects”.

On 15 October, 10 year US Treasury yields moved intra-day by around 8 standard deviations of preceding daily changes. On 15 January, the Swiss Franc moved by more than 30 standard deviations. For rough scale, an 8 standard deviation move should happen once every three billion years or so for normally distributed data.

Of course we had the flash crash in Euro area bond markets only recently.So what is proclaimed as making us safer is at best making markets more skittish.

What did governments do for revenue before they fined banks?

As the fine revenues pile up let us not forget that there were other type of fine imposed on the banks in the UK which were the bank payroll tax and the banks levy. As of the end of the 2103/14 tax year we had received some £8.8 billion. This has its issues as of course we were in some cases fining banks we then owned!

What we used to do was tax banks via Corporation Tax but receipts have collapsed from £7.3 billion in 2006/07 to £1.6 billion in 2013/14. There is of course a much wider problem with corporate taxation as companies shuffle money around the globe to avoid it. I saw an odd BBC interview with Bono and the Edge from the band U2 who apparently approve of this,well for their own affairs anyway! But conventional revenues like this from the banks took a heavy knock. So we now fine them which is often a sort of fining ourselves. are we fining the profits they have made from the cheap funding given to them by the Bank of England in a form of “round-tripping”?

Of course we could follow the American model and mostly fine foreign banks….

What about the regulators?

One more time we face the famous latin phrase.

quis ipsos custodiet custodes (Juvenal)

Who watches the watchmen? This is a very relevant question as time and time again we see evidence of “regulatory capture”. This involves regulators later moving to banks for example. From Sky News.

Barclays has hired the former chief executive of the Financial Services Authority (FSA), Hector Sants, as its head of compliance.

We are continually told “this time is different” and yet more and more scandals emerge. Perhaps the “exhaustion and stress” from which the newly knighted Sir Hector suffered was from the emergence of all the scandals on his watch.

Frankly regulators seem to have more enthusiasm for suppressing scandals than investigating them.


The essential problem is how much has improved over that past eight years or so? We get regularly told this both openly and more subliminally.  Yet we remain in a situation where as I discussed yesterday where interest-rate rises seem impossible and the housing market has been pumped up one more time to improve the balance sheets of the banks. As so often before we find ourselves asking what happens if we go in a recession again? After all the numbers keep getting larger. From Andrew Bailey.

Financial market activity has grown rapidly. There are many statistics that could be quoted, so to choose one, over the last 15 years, global bond markets have grown from around $30 trillion in 2000 to nearly $90 trillion today.

I fear that we have gone backwards rather than forwards after all the cavalry of the Vickers Report will not arrive until 2019. That is of course assuming that the cavalry do not suffer from regulatory capture on their amazingly slow journey.