Yesterday brought a surprise announcement of a General Election in the UK. I say surprise because the present government has been polling a very long way behind the opposition Labour party. Also rather curiously the Prime Minister seemed to want to sing along with Travis.
Why does it always rain on me?Is it because I lied when I was seventeen?Why does it always rain on me?Even when the sun is shinning I can’t avoid the lightning
A type of metaphor for a rather hapless term in power although someone who I assume was Steve Bray was playing “Things can only get better”. Good song although a slightly curious choice for him personally as his job will soon be over.
It does give us an opportunity to look at an economic issue that will be in the background of the election debate. It had looked as though the public finances release would be drowned out by the inflation figures but now they assume more importance, so let us take a look.
Borrowing – the difference between public sector spending and income – was £20.5 billion in April 2024, the fourth highest April borrowing since monthly records began in 1993.
Actually it was a day for metaphors as another high borrowing figure was rather symbolic of this government’s term. Indeed the Prime Minister indirectly boasted about it as he tried to bathe himself in goodwill from his largesse during the Furlough period. He will no doubt be much less keen to discuss the extra debt it created nor the cost of living crisis it contributed to.
In fact there was an upwards revision adding to the general theme.
Since our March 2024 publication, we have increased our initial estimate of borrowing in the financial year ending March 2024 by £0.8 billion to £121.4 billion, now £7.3 billion more than the £114.1 billion forecast by the OBR.
Not a large one but it does add to the upwards revision we saw last month. Also as it gets a mention above and its forecasts will be quoted as facts by the mainstream media let me remind you of this.
The first rule of OBR Club is that the OBR is always wrong.
The Office for Budget Responsibility
Over the time of its existence the two most spectacular errors have been around bond yields and wages but there is plenty of competition. The point needs to be reinforced because it is not only the media who want to reinforce the OBR. The rather extraordinary word salad from the International Monetary Fund below shows this.
Second, the credibility of fiscal plans should be enhanced…..requiring that an OBR forecast accompany each fiscal event; and extending the OBR’s forecast horizon for its Economic and Fiscal Outlooks to ten years to better capture longer-term spending pressures, as well as dividends from growth-enhancing measures (especially public investments and the impact of private investment incentivized by the recently-implemented capital allowances), which will help provide a more complete picture of the sustainability of public finances.
The emphasis is mine and highlights the air of fantasy economics.If we look back over the longer-term predictions of the OBR as I am a polite man I shall call them hopeless. Also it is revealing that the IMF has just got the UK economy in 2024 completely wrong as we grew by 0.6% in the first quarter exceeding their forecast for the year.
As you are all aware, first quarter GDP surprise was on the upside, 0.6 percent, allowing us to upgrade our growth forecast for this year from 0.5 percent as it was in April to 0.7 percent today.
The only reason the change in the growth forecast was so small was to prevent too much embarrassment. But for our purposes today it is a reminder that the IMF is also a hopeless forecaster and thus sees nothing wrong in boosting the role of the OBR. Under the likely new Chancellor Rachel Reeves this seems to be a plan.
Shadow chancellor Rachel Reeves has announced a new ‘fiscal lock’ to guarantee that the Office for Budget Responsibility (OBR) will publish a forecast to accompany any major decision on tax and spending, with the aim of avoiding the events of last autumn where an apparent disregard for objective evidence led to a loss of faith in the UK’s fiscal policy.
That is from the Institute for Government who seem to be yet another think-tank that are short on thinking.
The shadow chancellor has set out an approach to fiscal policy which has long been called for by the Institute for Government but, says Olly Bartrum, a government committed to fiscal policy making could still go further
That shows a quite extraordinary ignorance of the forecasting errors made by the OBR which is quite something when you consider how frequent they have been. A bit more than the one blind eye turned famously by Nelson as they appear to have two blind eyes. A person of a more cynical disposition than myself might wonder if they anticipate being appointed to the OBR gravy train.
If I may inject a note of realism into the fantasies expounded above new Chancellors are often keen on bathing themselves in fiscal rectitude of a rules in this case set by the OBR. However these seldom survive long when economic reality hits ( political desire for more spending or weaker growth) so I do not expect it to last that long.
Back to the April Numbers
Actually we can stay with the air of unreality of the IMF review of the UK economy as they claim this.
On fiscal policy, the government has done well to follow the prudent fiscal plan that it set out in November 2022.
Yet the very next day the public finances tell us this.
the fourth highest April borrowing since monthly records began in 1993.
In terms of the detail it seems to simply be more spending.
Public sector receipts grew by £1.6 billion compared with April 2023, however, this growth was outstripped by a £3.1 billion increase in spending over the same period.
That theme is reinforced by the national debt figures.
Public sector net debt excluding public sector banks (debt) at the end of April 2024 was provisionally estimated at 97.9% of gross domestic product (GDP); this was 2.5 percentage points more than at the end of April 2023, and remains at levels last seen in the early 1960s.
These numbers have been distorted by the Term Funding Scheme which is about half of the difference between the number above and below.
Excluding the Bank of England, debt was 89.9% of GDP, 8.0 percentage points lower than the wider debt measure.
Those who follow the comments section will note a discussion of what the Bank of England means by a “small number” of extensions to this, so its end and improvement in the debt numbers looks set to be delayed.
Inflation
Next up on recent news is something that is specifically the responsibility of this government but I think is really likely to be unchanged. Our political class mostly have the same beliefs regardless of party. It is going to be ever harder work claiming renewables to be cheap after this.
Today is a defining moment for National Grid as we announce a significant step up in energy infrastructure investment that cements our position as a leader in the energy transition on both sides of the Atlantic. We’re investing around £60bn in networks in the next five years, with over £30bn of that in the UK. ( National Grid)
Also there is the issue of water bills.
12th June @Ofwat
will announce its latest water bill increases. Here’s an update on what the out of control WCs are asking for. Southern Water – 91% to £915 Thames Water – 59% to £749 Severn Trent – 50% to £657 Wessex Water – 50% to £822 etc etc
In rather a twist of role the tweet above was from the former lead singer of The Undertones.
Comment
As you can see our political class seem addicted to both borrowing and inflation. So let me end with some better news which is that we look to be set for another quarter of economic growth following the 0.6% GDP rise last time. In the end that is the biggest issue and comes from a backdrop of very little growth.
Those interested in the debate on UK inflation statistics I will be talking at the Better Statistics conference this afternoon. Sadly it is yet another area where the establishment have egg ( actually a lot of it) on their faces.
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