The UK public finances are seeing outright austerity

by Shaun Richards

The UK Public Finances are something that have been quietly improving over the past year or two. This has been taking place mostly outside the news headlines partly because the numbers are much smaller than they were. From the Office of National Statistics or ONS.

Over the next 12 months (April 2018 to March 2019), the Office for Budget Responsibility, which produces the official government forecasts, expects the public sector to borrow £37.1 billion; around one-quarter of what it borrowed in the financial year ending March 2010 (April 2009 to March 2010), at the peak of the financial crisis.

Another reason why this has been in the shade rather than daylight is that it has to some extent come in spite of our economic performance. If we look back regular readers will recall times when UK economic growth was a fair bit stronger than now but the public finances were slow to respond whereas now we are seeing some catch-up. Of course an alternative view is that maybe we were not doing quite so well back then and perhaps are doing better now than we are told.

In terms of economic growth the position looks as though it has improved slightly with the NIESR suggesting this.

Building on the official data, our monthly GDP Tracker suggests that growth is set to nudge higher to 0.5 per cent in the third quarter.Recent survey evidence suggests that the manufacturing and construction sectors are recovering after a particularly weak start to the year and the dominant services sector is set to maintain a similar rate of growth in the third quarter.

Should this turn out to be true it will provide a more favourable back drop for the public finances than the first half of this year. Tucked away in the detail was something else which in terms of economic theory and to some extent practice was hopeful.

Growth is now close to our estimate of potential.

They think the economy can grow at 0.6% per quarter which is a fair bit higher than the 1.5% per annum “speed limit” produced by the Bank of England Ivory Tower. It would be helped considerably if any of this came true. From the BBC.

Britain can be a “21st Century exporting superpower”, Liam Fox is expected to say in a speech detailing the government’s post-Brexit ambitions.

The international trade secretary will say he wants exports as a proportion of UK GDP to rise from 30% to 35%.

Of course we all want lots of things and the real issue is what plan there is to achieve this.

A Helping Hand

I have pointed out before how the policies of the Bank of England and QE (Quantitative Easing) in particular have been very government friendly. This issue was taken up by Toby Nangle yesterday.

Back in 2010 it was thought that UK debt service costs would soar, but lower rate rates (Gilt & BoE) have meant massive undershoot while debt level overshot big time.

It will come as no surprise that it was the Office for Budget Responsibility was completely wrong but the difference in the numbers is stunning. Using Toby’s projections we can estimate debt costs per annum at around £80 billion whereas in reality it is in the low forty billions. Also per unit the move has been even larger because we have borrowed much more than the OBR projected.

So we have two factors here the first is the impact of lower Gilt yields due to the low official interest-rates and QE sovereign bond purchases and the second is the fact that the Bank of England owns around 22% of the Gilt market and refunds the money ( minus costs) to the government.

Whilst we looking at Gilt yields they have been falling again recently with the ten-year yield down from 1.4% when the Bank of England raised Bank Rate to 1.24% now. This seems set to reduce debt costs further as well as meaning that Governor Carney’s bazooka looks reduced to one of those potato guns I used to play with as a child.

Today’s data

The good news keeps on coming to coin a phrase. From the ONS.

Public sector net borrowing (excluding public sector banks) was in surplus by £2.0 billion in July 2018, a £1.0 billion greater surplus than in July 2017; this is the largest July surplus for 18 years (2000).

For those wondering about the surplus this is because July is a month for Self Assessment payments and therefore has a favourable wind behind it. But if we move to the financial year so far the picture remains good.

Public sector net borrowing (excluding public sector banks) in the current financial year-to-date (April 2018 to July 2018) was £12.8 billion; that is, £8.5 billion less than in the same period in 2017; this is the lowest year-to-date (April to July) net borrowing for 16 years (2002).

As you can see this is quite a drop and moves us into a zone where we can for once dream ( or for some as I will discuss later have nightmares) about an actual surplus. If we look into what is driving this we see that revenues are strong rising by 5% and in particular income tax is up by 6.1% perhaps hinting the economy has been stronger than we thought. On the other side of the coin we get an insight into cooling in the housing market in the way that Stamp Duty receipts are down by just under £400 million to £4.3 billion.

Austerity

We have often debated how much of this we have seen but the year to date figures show one of the clearest signals of it we have had.

Over the same period, central government spent £246.9 billion, around 1% less than in the same period in 2017.

After all we have found ourselves mostly discussing austerity allowing for inflation whereas at the moment we have outright austerity. Also those looking at the problems various councils are facing ( e.g Northamptonshire) will find their eyes alighting on this.

 while local government borrowing was in surplus by £4.9 billion.

National Debt

We can expect an aggressive headline today from the London Evening Standard once its editor spots that the current Chancellor is achieving one of his great hopes. The emphasis is mine.

Public sector net debt (excluding public sector banks) was £1,777.5 billion at the end of July 2018, equivalent to 84.3% of gross domestic product (GDP), an increase of £17.5 billion (or a decrease of 1.7 percentage points as a ratio of GDP) on July 2017.

Comment

The situation we find ourselves in is one which we were promised for 2015/16 so it has come Network Rail style. Also there is a space oddity element about it as the previous chancellor was supposed to be the man for austerity and Phillip Hammond was one for a more relaxed view yet reality looks the opposite. An alternative view is that the numbers are much less under their control than they would like us to think. But such as they are and judging them on their own basis they now look pretty good. As ever they depend a lot on economic growth but should that continue the trajectory is for a surplus and a declining debt to GDP ratio and maybe even some falls in the national debt.

There are three challenges to this. The first is the most basic which is the inability of politicians to keep their hands out of the cookie jar. That brings us to the second which is to some extent related which is that some areas such as local councils seem to have an especially tight noose around their neck at the moment highlighted by the fact they are in surplus so far this year by £4.9 billion. Something odd is going on there. We can take this forward more generally as to whether tight now we want or need outright austerity? Even without the impact of lower inflation on debt interest we would be spending the same as last year.

Next comes the issue of the reliability of official statistics which has been raised recently by the Resolution Foundation.

When we first looked at the data, back in 2012, we came up with a clear answer: the corporate sector had been sitting on too much cash for too long……..By June 2017, a series of data revisions had lowered the scale of the corporate surplus across the entirety of the period, by a relatively uniform average of 2.4 per cent of GDP per year.

That is quite a lot but it was not the end of the story.

But a change of 4 per cent of GDP in both 2015 and 2016 – worth roughly £80 billion a year – is huge. At the very least, it might better be considered a correction rather than a revision.

Impacts on the public finances are usually from a different route in terms of how you define things but for example if you added up the impact of the Housing Associations and the Term Funding Scheme of the Bank of England you end up debating around £190 billion in national debt terms.