The UK Public Finances are improving but only slowly

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by Shaun Richards

We are at the point of the month where we see something of a rush of UK economic data and we can to some extent continue yesterday’s theme of inflation being on the march.

Central government receipts in May 2022 were estimated to have been £66.6 billion, a £5.7 billion increase compared with May 2021. Of these receipts, tax revenue increased by £3.4 billion to £48.3 billion.

If we look at the detail then the rise in VAT ( for foreign readers an expenditure tax) at 10.8% is rather suspiciously similar to the inflation rate. The Bank of England which announced on Monday plans to boost the housing market will be pleased to see that Stamp Duty receipts are up by 79% to £1.3 billion. Hopefully there is some economic momentum behind the 9.3% rise in PAYE Income Tax,

There was also the increase in National Insurance or what will no doubt end up being called the Sunak Error.

In May 2022, compulsory social contributions (largely National Insurance contributions (NICs)) were £14.4 billion on an accrued basis, £2.0 billion more than in May 2021.

Some of this increase is a result of the increase in the NICs rate in place from April 2022 to March 2023.

We can move on to look at expenditure which at first looks optimistic via the reported decline.

Central government bodies spent £74.0 billion on current (or day-to-day) expenditure in May 2022, £2.2 billion less than in May 2021.

With inflation at these levels the public sector pay restrictions are having an impact and in fact pay fell from £13,9 billion a year ago to £13.7 billion this time around. I assume that is because of the decline of many Covid related health jobs such as vaccination and testing and tracing.

However the £2.2 billion in decline is less than half of the £4.6 billion boost in terms of reduced expenditure via the end of the various Furlough schemes. So something somewhere boosted the numbers and regular readers will be expecting this bit.

The recent high levels of debt interest payments are largely a result of higher inflation, as the interest paid on index-linked gilts rises with increases in the Retail Prices Index (RPI).

Okay, how much?

In May 2022, central government debt interest was £7.6 billion, of which the RPI uplift on index-linked gilts contributed £5.0 billion over and above the accrued coupon payments and other components of debt interest.

The rise on last year is £3.1 billion and continuing the theme reflects higher inflation or to be more specific inflation from the spring.

To estimate the RPI uplift for three-month lagged index-linked gilts in May 2022, we reference the RPI movement between February and March 2022. RPI increases in the most recent months will be reflected in our interest estimates in due course.

There is a nuance here in that £5 billion of what is recorded as expenditure is in fact an increase in debt so a capital change ( we owe more in terms of index-linked debt) as opposed to an income one. It is officially reported like this.

These movements are reflected in the government’s liabilities, which will be realised as the existing stock of index-linked gilts is redeemed.

I like the idea of us redeeming something! But of course the big picture is that we simply borrow it again.

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Bringing it all together we get this.

Public sector net borrowing excluding public sector banks (PSNB ex) was £14.0 billion in May 2022, the third-highest May borrowing since monthly records began in 1993; this was £4.0 billion less than in May 2021 but £8.5 billion more than in May 2019, before the coronavirus (COVID-19) pandemic.

So we can sing along with The Beatles.

I’ve got to admit it’s getting better (better)
A little better all the time

Which is reinforced by this.

Since our last publication we have reduced our estimate of PSNB ex in the financial year ending (FYE) March 2022 by £0.9 billion which brought the full-year total to £143.7 billion; additionally we reduced PSNB ex in FYE March 2021 by £7.8 billion which brought the full-year total to £309.6 billion.

There is not a little humility for the numbers in this because if the numbers for around 2 years ago can be revised by £7.8 billion then we see the degree of uncertainty in current ones. The net improvement via revisions was £4.4 billion as April was revised a fair bit higher

But whilst we are getting better it feels slow progress and reminds me of the backing vocal sung by John Lennon.

(it can’t get no worse)

Looking Ahead

There will be a rise in expenditure next year due to this.

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Actually I should add on current plans as they have changed their mind on this issue before although with an election in the offing it is much less likely as pensioners tend to vote.

Bond Yields

The situation here has been like the nursery rhyme about the Grand Old Duke of York where world bond yields were marched up the hill ahead of the US interest-rate rise of 0.75%. But since then the 3.4% or so of the US ten-year yield has been replaced by 3.1% so they have been marched back down the hill again at least to some extent.

The UK has followed this pattern and our longer-term borrowing is between 2.4% and 2.5%. I would imagine that HM Treasury now very much regret not taking my advice to issue some century bonds ( 100 year) when we could issue for less than 1%.

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National Debt

These numbers are open to more doubt than you might think but these are the best guide from today’s release.

Public sector net debt excluding public sector banks and the Bank of England (PSND ex BoE) was £2,041.8 billion at the end of May 2022, or around 82.8% of GDP, an increase of £88.0 billion but a reduction of 2.1 percentage points of GDP compared with May 2021.

Comment

The situation is one which has improved but has been doing so at a slow pace. The problem is not so much the public finances themselves but the prospects for the economy which have darkened via the cost of living crisis. Although we did get some relatively optimistic business survey news earlier.

At 53.1 in June, the headline seasonally adjusted S&P
Global / CIPS Flash UK Composite Output Index was
unchanged from the reading in May and posted above the
neutral 50.0 value for the sixteenth consecutive month.

Regular readers will be aware that these surveys have their issues but they hint at some growth and were quite a bit better than those in the Euro area. Anything right now will do as we see warning signals nearly everywhere.

Still we can rely on something at least which is my first rule of OBR Club ( that the OBR is always wrong)

This required it to borrow £14.0 billion, £3.7 billion more than the Office for Budget Responsibility (OBR) forecast.

It seems that the news about higher inflation has yet to make its way up to their Ivory Tower.

with debt interest spending in the year to date a fifth higher than forecast thanks to the jump in RPI inflation

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