Today the UK public finances are in the news but as well as the monthly update we have something even more significant for it.
The British government unveiled a multibillion-pound bailout to help companies with their energy bills this winter amid soaring prices that threaten to put many out of business. ( Bloomberg)
We are going to borrow the money for this so it will flow into or rather more literally out of the public finances, so let us examine the details.
The cap for businesses is set at 21.1 pence per kilowatt-hour for electricity and 7.5 pence for gas, the government confirmed, after Bloomberg reported the numbers on Tuesday. That would impose a discount of roughly 50% on the winter contract for electricity and 25% on gas for next month, but the exact discount depends on when a contract was agreed.
What will this cost?
The government is trying to shield British businesses from the worst effects of energy prices that have soared since Russia squeezed pipeline flows to Europe after being sanctioned over its invasion of Ukraine in February. Wednesday’s package, which may cost in the region of £40 billion ($46 billion), comes on top of a separate, £130 billion plan to help households with their power and gas bills.
The problem with presenting fixed numbers as Bloomberg have done is that we are facing a dynamic moving situation. For example there is a continuous UK natural gas futures contract which reached a peak of £8.80 at the end of August. As we are at £5,85 this morning things have improved considerably. Still much higher than last year when the price was just below £2.
In fact the volatility of the situation has been added to this morning with the partial mobilisation announcement by President Putin of Russia. Today’s price is up just under 8% in response. Because the UK is imposing a domestic cap and a fixed price for business the cost to the taxpayer is a variable one.
Actually there is an undercut to this as well which is how many businesses would simply have folded under the new much higher energy prices? The hospitality industry would have taken yet another pounding. Also whilst the company below is French the UK has its own glass manufacturers with one being on BBC Breakfast TV earlier.
Doing so requires intense heat to melt sand into glass in furnaces that must stay lit 24 hours a day. In summer, Europe’s power crunch propelled Arc’s energy bill to $75 million, from 19 million euros a year ago. On top of that, consumers suddenly stopped buying items like candleholders and washing machines, for which Arc makes glass windows, sending orders plunging. ( New York Tines)
Here is the impact so far.
This month, 1,600 workers were asked to stay home two days a week to cut costs.
So doing nothing and just letting energy costs for businesses rise would have led to lower tax revenues as some businesses would cut output and employment and others would just close.
House Price Pumping
I do keep warning you they will never stop!
Liz Truss will announce radical plans to cut stamp duty in the government’s mini-budget this week in an attempt to drive economic growth, The Times has been told.
The prime minister and Kwasi Kwarteng, the chancellor, have been working on the plans for more than a month and will announce them on Friday. ( The Times)
The argument in favour is this.
Truss believes that cutting stamp duty will encourage economic growth by allowing more people to move and enabling first-time buyers to get on the property ladder.
The problem is that house prices usually rise to make up the difference and the last time around which was only last year they rose by more. So in fact first-time buyers were made worse off. Also there is the issue of why we have a tax we apparently keep on needing to cut!
So far this tax year ( so since April) it has raised some £7.8 billion which is up £2.1 billion on last year. So it does raise a decent amount of revenue for the government. Well when we are not cutting it,anyway!
August
We can start with some good news.
Central government receipts in August 2022 were estimated to have been £69.6 billion, which was £5.6 billion more than in August 2021. Of these receipts, tax revenue increased by £3.9 billion to £51.4 billion.
However this is good news for the public finances it is not as good overall for the economy. This is because if we look at the VAT ( sales tax) revenue we see that it is up by 10.9% on last year which is suspiciously like the inflation rate. Even the £1 billion rise in employee ( PAYE) income tax will have some influence from wage rises influenced by inflation. Oh and it is hard not to have a wry smile at Stamp Duty receipts which were up by £700 million to £1.7 billion. If policy leak from The Times is correct then that rally is over for now anyway. Plus as we we seemingly keep needing “cuts” and “holidays” or whatever it will be called there is the question of what is the point of it.
Overall expenditure is in many ways under control or at least it was until the energy support plan we looked at earlier.
Central government bodies spent £73.2 billion on current (or day-to-day) expenditure in August 2022, which was £0.1 billion more than in August 2021.
However if you follow my work you will be expecting one area to be seeing quite a change and here it is.
Central government debt interest payable was £8.2 billion in August 2022, £1.5 billion more than in August 2021 and the highest August figure since monthly records began in April 1997; the volatility in interest payable is largely because of the effect of Retail Prices Index (RPI) changes on index-linked gilts.
Care is needed because the media do not understand what this means so let me explain a bit more via this.
In August 2022, the interest payable on central government debt was £8.2 billion, of which £4.7 billion reflected the impact of the RPI.
Much of the RPI “interest” is a future obligation rather than a cash payment now. This is because there is an uplift in the price to reflect inflation that is paid on maturity of the bond.
National Debt
As I get regularly asked here is the most relevant number.
Our public sector net debt excluding the public sector banks and the Bank of England (PSND ex BoE) measure removes the debt impact of these schemes along with the other transactions relating to the normal operations of the BoE. Standing at £2,107.4 billion at the end of August 2022 (or around 83.8% of GDP), PSND ex BoE was £320.2 billion (or 12.8 percentage points of GDP) less than PSND ex.
Comment
We are in a situation where we keep being asked to take hits to the public finances. Just like with the housing market which seems to permanently need “Help” I think that we should stop and think where we are going? Otherwise we are going to end up in an even bigger mess. The reality of the new situation for our public finances is that it is in fact our failed energy policy which has put them in trouble this time around. We have an establishment which chants repeatedly about the virtues of both wind and solar power but ignores the fact that they are unreliable and thus makes us even more dependent on the gas and coal they tell us are bad.
So the metrics for our public finances come from the fact that as I type this UK wind and solar are producing some 7 GW. That is a long way short of the 50 GW claimed capacity. Another example of the madness is that because of the gap between 7 and 50 we are burning 1 GW of coal. As an island we have lots of coal but that is “bad” so instead we pay others to mine it and ship it here. So the environmental argument collapses and we contribute to this.
In recent days,global coal prices have jumped to an all-time high, with the Asian benchmark in Newcastle surging to an all-time high of nearly $450 pert tonne, up from less than $150 per tonne earlier this year ( @JavierBlas)
So the solution to the public finances is to sort out energy policy. The problem is that both our political class and the media are clinging to their version of the Titanic as it sinks.