A feature of the credit crunch era is the way that the same or similar stories get recycled and this is what I was thinking of when the proposed NHS ( National Health Service) spending boost was announced by Theresa May at the weekend.
There has been a change of Chancellor as George Osborne was removed and replaced with Phillip Hammond and it looks as though the new government will be fiscally looser.
That was from October 3rd 2016 and you may recall it was in tune with the mood music as even the IMF which had helped impose so much austerity on Greece had come out in favour of fiscal stimuli. However like with so much about the current government it never really happened on any scale. In fact if we look at the numbers I quoted then we see that the UK has continued to reduce its deficit and as ever confound the forecasts of the Office of Budget Responsibility or OBR.
In the financial year ending March 2016 (April 2015 to March 2016), the public sector borrowed £76.5 billion. This was £18.9 billion lower than in the previous financial year and less than half of that in the financial year ending March 2010 (both in terms of £ billion and percentage of GDP).
That was the picture then and it has been replaced by a deficit more like £40 billion in the fiscal year just completed. So whilst there has been an ongoing stimulus as we have had a persistent deficit the annual amount has been reduced partly due to growth in the economy which has made the national debt situation look more contained and to some extent better.
Public sector net debt (excluding public sector banks) was £1,777.3 billion at the end of April 2018, equivalent to 85.1% of gross domestic product (GDP), an increase of £56.8 billion (or 0.3 percentage points as a ratio of gross domestic product (GDP)) on April 2017.
As you can see it is rising in amount but the growth in the economy means that relatively it has changed much less.
This morning has brought borrowing figures which are very good.
Public sector net borrowing (excluding public sector banks) decreased by £2.0 billion to £5.0 billion in May 2018, compared with May 2017; this is the lowest May net borrowing since 2005.
Of course monthly data can be erratic but the fiscal year so far seems set fair as well.
Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to May 2018) was £11.8 billion; that is, £4.1 billion less than in the same period in 2017; this is the lowest year-to-date (April to May) net borrowing since 2007.
Should we continue on anything like such a trajectory this year will see a solid fall in the fiscal deficit.
The NHS Proposal
If we skip the foaming at the mouth over the phrase “Brexit Dividend” it was reported like this by the Financial Times.
The NHS financial settlement — which could be unveiled as soon as next week, ahead of the taxpayer-financed system’s 70th anniversary — is expected to provide increases to the £150bn UK health budget of at least 3 per cent above inflation every year.
As you can see implementing such a policy would be a boost in real terms as at least 3% is circa £5 billion a year. The Institute for Fiscal Studies puts it like this.
Yesterday’s announcement implies that day-to-day spending by NHS England will increase by £16 billion in real terms between now and 2022–23 (with a further £4 billion in 2023–24).
Paying for it
There are three routes. One is simply higher economic growth which in the short-term is problematic as we are in a soft patch which the monetary numbers are signalling will remain through the autumn. Taxes could rise but this government ha shad trouble with that as the debacle over national insurance for the self-employed showed. This leaves borrowing more which in the circumstances seems feasible.
In terms of amount we are borrowing less as discussed above and the cost of our borrowing remains cheap. The UK ten-year Gilt yield is a mere 1.3% and the more relevant for these purposes thirty-year yield is 1.77% . This is of course more expensive than in the late summer of 2016 when Bank of England Governor Mark Carney spent £60 billion on in this respect kamikaze style purchases driving the market to all-time price highs and yield lows including in the madness some negative ones. But it is in terms of the thirty-years I have been following this market certainly low and in fact ultra low.
The Institute of Fiscal Studies is rather dismissive of this route.
But a significant increase in forecast borrowing would mean that the government was not taking its stated commitment to eliminate the deficit by the mid-2020s seriously. The deficit is already forecast to be £21 billion in 2022–23, implying further consolidation measures – in the form of tax rises or spending cuts –would need to be implemented. The Government could decide to abandon its fiscal objective, as its predecessors have frequently done in the past.
Actually the recent fiscal data suggests that they probably would not have to do that as we see yet another Ivory Tower lost in the clouds of its own rhetoric.
What has today’s data told us?
For all the talk of a fiscal stimulus something of a squeeze has been going on.
In the latest financial year-to-date, central government received £112.9 billion in income, including £82.6 billion in taxes. This was around 3% more than in the same period in 2017.
Over the same period, central government spent £123.6 billion, roughly equal to that spent in the same period in 2017.
In terms of controlling public spending we have come to learn that this is about as good as it gets. We are mostly incapable of reducing it in nominal terms but we do have phases of reducing it in real terms.
Also the receipts data hint at the economy having been stronger than we thought. What I mean by this is that income tax receipts have risen by £2,5 billion to £25,5 billion in the latest couple of months. Indeed even the much maligned retail sector may be getting some support as VAT ( Value Added Tax) receipts rose by £1.1 billion to £23.2 billion. In case this seems like over explaining the rise the numbers are influenced by Bank of England QE from which dividend or coupon payments are taken as receipts and that was a -£0.9 billion influence.
Oh and the spending numbers have been boosted by a fall in debt costs as the rise in ( RPI) inflation washes out of the system.
There is a lot to consider here so let us start with the UK public finances. Back in October 2016 they were disappointing in the circumstances and now they are good in the circumstances. As some tax receipts represent past activity there may be at least some logic at play as it takes time for the numbers to reflect it. If the data carries on like this then those who use tax receipts as a measure of the economy may feel it is out performing what the GDP data tells us and fits the employment numbers.
The catch is the current slow down and the one we expect from the money supply data which will weaken the above trends. However we find yet another situation where the first rule of OBR Club has hit the cricket ball for six.
and £5.7 billion less than official (Office for Budget Responsibility) expectations;
So as we stand the UK Public Finances might shrug off a fiscal boost for the NHS although as ever recession would change that. As to how much of a good idea it is remains open to question. On a personal level Frimley Park Hospital gave good care to my father and on less serious matters my mother and I am grateful to Chelsea and Westminster for the work on my knee. Yet there is also an institutional problem.
An expert on hospital mortality data has said scandals such as the deaths at Gosport War Memorial Hospital could be being replicated elsewhere in the NHS.
Prof Sir Brian Jarman told the Today Programme he thinks “it is likely” similar situations are happening in other hospitals.
An inquiry found doctors at the hospital gave patients “dangerous” amounts of powerful painkillers.
More than 450 older patients’ lives were shortened as a result. ( BBC)