Thanks to QE the UK is paying less interest on a much larger debt

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by Shaun Richards

A feature of the economic response to the Covid-19 pandemic is that this time around we have seen fiscal policy deployed on a large scale. This morning we have been brought up to date on much of the UK version of this as the official numbers have been released.

Public sector net borrowing (excluding public sector banks, PSNB ex) in the FYE March 2021 is estimated to have been £303.1 billion, £246.1 billion more than in the FYE March 2020 and the highest nominal public sector borrowing in any financial year since records began in the FYE March 1947. ( FYE = Financial Year End )

So there is a guide to the size and we can look at it another way.

Expressed as a ratio of gross domestic product (GDP), public sector net borrowing (excluding public sector banks, PSNB ex) in the FYE March 2021 was 14.5%, the highest such ratio since the end of World War Two, when in FYE March 1946 it was 15.2%.

For comparison purposes we borrowed some 10.1% of GDP when the credit crunch hit. So a peak for peacetime but not war as in the main part of the first world war and the early part of the second one we borrowed around 27% of GDP pretty consistently.

Much of this has been a choice as we see below.

Central government bodies are estimated to have spent £941.7 billion on day-to-day activities (current expenditure) in the FYE March 2021, £203.2 billion more than in the FYE March 2020; this includes £78.2 billion expenditure on Coronavirus job support schemes.

We also see signs of it being voluntary in the receipts data because whilst there are falls due to the decline in economic activity we have also seen VAT and Stamp Duty cuts.

Central government tax receipts are estimated to have been £523.6 billion in the FYE March 2021 (on a national accounts basis), £34.2 billion lower than in the FYE March 2020, with notable falls in taxes on production such as Value Added Tax (VAT), Business Rates and Fuel Duty.

So an extraordinary effort and let me give you a context. Because the other party involved here has been the Bank of England which by my rough calculations bought some £310 billion of UK sovereign bonds. As it and the £303 billion are both estimates ( the Bank of England numbers are muddied by refinancing of maturing bonds) we see that if we use a broad brush it has oiled this. Care is needed as it has not explicitly financed this as it does not buy new bond issues for a Beatles week or 8 days but it has been smoothing the way. We have been fed a lot of psychobabble about how they have calculated the QE purchases but I think we have just noted the reality don’t you?

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First Rule of OBR Club

This has had yet another stormer as we note this from Julian Jessop.

On #3, in November the OBR forecast UK government borrowing of £394bn in 2020/21 (19% of GDP)

In March it revised this down to £355bn (16.9%)

The first official estimate from the ONS today was £303bn (14.5%), £24bn *lower* than the March forecast on a like-for-like basis

Actually it slightly unfair because of this.

The OBR borrowing forecast for the FYE March 2021 includes an estimated £27.2 billion in expenditure on calls under the government loan guarantee schemes whereas Office for National Statistics (ONS) outturn data does not yet include any such estimates.

You would think that by chance they would once be right but they continue to be so consistently wrong.

For newer readers the first rule of OBR Club is that the OBR is always wrong.

National Debt

This has been volatile for two reasons. The first we have been noting above and the second is the swings in economic output we have seen meaning that when we divide by GDP its changes have a big impact.

Public sector net debt (excluding public sector banks, PSND ex) was £2,141.7 billion at the end of March 2021 or around 97.7% of gross domestic product (GDP), maintaining a level not seen since the early 1960s.

Along the way we have noted that it will at times be above 100% then lose it as GDP swings and debt rises. As the economy opens up but we still borrow more it will remain tight for a bit.

Another context for this is how much we pay to run the debt and we immediately see a consequence of the QE bond buying by the Bank of England.

Interest payments on central government debt were £38.8 billion in the FYE March 2021, £9.3 billion less than in the FYE March 2020. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

The second sentence is something of a standard and our official statisticians have forgotten to update it. Yes lower inflation has reduced our debt costs via a lower RPI. But this year we have issued loads of new conventional bonds which have cost very little due to the way the Bank of England has driven Gilt yields lower. We have even had periods ( summer and autumn last year and early this) where we were paid to issue up to the 6/7 year maturities and at one point the ten-year yield fell to 0.1%. So if you want a broad sweep we borrowed a very large sum for (nearly) nothing.

This year will be harder because inflation is rising and so have Gilt yields. So there will be an impact on debt costs. We have a signal of that from the monthly numbers as the £1.3 billion of last March is replaced by £2 billion this March.

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Comment

I though I would flip over now to economic prospects as they are the main driver in what happens next regarding the UK fiscal position. The opener from the official data was hopeful and positive.

Retail sales volumes continued to recover in March 2021, with an increase of 5.4% when compared with the previous month reflecting the effect of the easing of coronavirus (COVID-19) restrictions on consumer spending; sales were 1.6% higher than February 2020 before the impact of the coronavirus pandemic.

Tucked away in the detail was another signal of times returning to a more normal level.

Automotive fuel retailers witnessed an 11.1% growth in sales volumes in March 2021, the first monthly growth reported since a 0.1% rise in October 2020.

There is scope for more in some areas and if you sell clothing you must be desperate for normal times.

Whilst the 17.5% monthly growth in the clothing sector is a significant increase in sales volumes, they remain 41.5% below the level in February 2020 before the pandemic began.

This was backed up by this via Reuters.

The GfK Consumer Confidence Index increased to -15 in April from -16 in March, its highest since a survey conducted in early March last year, before the country went into lockdown.

In the year before the pandemic, the index averaged -11 and it sank to an 11-year low of -36 during the depths of last year’s lockdown.

Also by this from the IHSMarkit PMI business survey.

The seasonally adjusted IHS Markit/CIPS Flash UK Manufacturing Purchasing Managers’ Index® (PMI®) – a composite single-figure indicator of manufacturing performance – registered 60.7, up from 58.9 in March and the highest since July 1994.

The cautionary note is that they got French manufacturing completely wrong in February ( told us it was up when it fell by 4.7%), so take care.

But the big picture is of an opening economy that is picking up speed. How it will be broken down will be interesting as several people have told me they are keen to shop in person again for things they have bought online. So let’s see what happens to this.

The proportion spent online decreased to 34.7% in March 2021, down from 36.2% in February 2021 but still above the 23.1% reported in March 2020;

Oh and some seem yo be taking this more literally than others.

Medical goods retailers also reported strong monthly growth of 29.4% with anecdotal evidence from retailers suggesting an increase in the purchase of mobility equipment from older consumers who were venturing out more following the vaccination rollout.

 

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