Today brings the opportunity for us to find out not only the thinking of the Monetary Policy Committee of the Bank of England but also the state of play in UK public finances for the fiscal year 2013/14. Both of these should be reviewed in the light of the economic growth that the UK has achieved. If we look back to 2013 we see that economic growth averaged 1.7% or if you prefer the economy was 2.7% larger at the end of the year than it was at the beginning. To that we can now add this according to the NIESR (National Institute for Economic and Social Research).
Our monthly estimates of GDP suggest that output grew by 0.9 per cent in the three months ending in March after growth of 0.9 per cent in the three months ending in February 2014. This robust growth was relatively broad based.
So we advance on the public finances with the view that taxes should be on the up and if we add in the positive news and employment and unemployment that expenditure on social benefit should be lower. When the UK economy has slipped backwards these have combined to send the numbers astray very quickly so it is not unreasonable to see the reverse right now. Also there is food for thought for the Bank of England which is running an extremely expansionary monetary policy -0.5% Base Rates, £375 billion of Quantitative Easing, and the Funding for Lending Scheme- into what is now a phase of sustained economic recovery.
What next for the Bank of England?
The depressionary influence of the credit crunch is fading away and quite quickly at current rates of economic growth. From the NIESR again.
the level of economic output has almost regained its pre-recession peak (January 2008)
So the new monetary policy objective of “slack” is about to cross one threshold and of course it has already passed the redacted 7% unemployment rate threshold! Although of course the NIESR is happy to provide the MPC with another output gap bus to hop on.
a sizeable negative output gap remains
In case you are wondering how this works this is because there is a multitude of definitions of the “output gap” making it a flexible friend for fans of expansionary monetary policy. For example an extreme case would be to project forward since 2008 economic growth of 2.5% per annum as trend growth. We might then never catch up and you could argue for expansionary monetary policy for ever! Please do not laugh it has been tried by various organisations…
If we move to the detail of today’s MPC minutes we do see that the Bank of England is becoming increasingly confident about the strength of the UK recovery.
Bank staff’s central expectation of the final estimate of growth in 2014 Q1 had been revised up to 1.0%, with growth in the second quarter expected to be only a little weaker.
That is pretty much the central banking equivalent of the trumpeter for a cavalry troop signalling a charge. This has us wondering about whether monetary policy should remain so loose and expansionary. Oh and can anybody see a problem with this?
The availability of high LTV (Loan To Value) mortgages had been increasing as lenders introduced new products, some of which were backed by the mortgage guarantee component of the Help to Buy scheme.
Actually the Bank of England Funding for Lending Scheme has supported this too but I guess that slipped their mind! Also something else slipped their mind, remember all the official pronouncements that such loan equity mortgages were a bad idea? Perhaps such official statements have been redacted too not only from the media but from their memories too.
Such strong reports would normally be accompanied by either a tightening of monetary policy or plans to do so. However there has been one which is the rise and rise of the super soar away UK Pound Sterling.
The sterling effective exchange rate remained around 10% above its recent trough in March 2013.
Using the old Bank of England rule which in a theme for the day appears to have been redacted from many memories too this is equivalent to a 2.25% increase in UK Base Rates.
What about the UK Public Finances?
The presentation of these is rather akin to the Mad Hatters Tea Party these days.
“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”
“Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Actually such is the “flexibility” of the numbers these days there are six exceptional circumstances or if you prefer methodological changes in todays release which just shows how prescient Lewis Carroll was! Let me just quote you one example of the Tea Party being in full flow.
Swiss Tax Agreement: A payment of £4 million was made in March 2014 while the February 2014 payment was revised up from £4 million to £5 million.
Now back in December 2012 the Office for Budget Responsibility estimated to Channel 4 that this could reach £5 billion! Going to take quite some time at this rate is it not?
Very Slow Progress
The underlying situation can be summed up by this.
For the financial year 2013/14 public sector net borrowing excluding the temporary effects of financial interventions, the transfer of the Royal Mail Pension Plan and the transfers from the Bank of England Asset Purchase Facility Fund was £107.7 billion. This was £7.5 billion lower than the same period in 2012/13, when it was £115.1 billion.
If we look at this in the light of the economic growth we have had then this is clearly a disappointment. Frankly I hoped we could do better than £100 billion. Also you may note that 63% of the improvement came in a year end rush in March.
In March 2014, public sector net borrowing excluding temporary effects of financial interventions (PSNB ex) was £6.7 billion. This was £4.7 billion lower than in March 2013, when it was £11.4 billion.
So a year end rush was apparent here. I do hope that expenditure was not like a can kicked forwards onto 2014/15.
Austerity what austerity?
UK style austerity is apparently not all the media have cracked it up to be.
For the financial year 2013/14, central government accrued current expenditure was £640.2 billion, which was £9.1 billion, or 1.4%, higher than the same period the previous year.
So the best that can be said is that it was lower in real terms but with the official measure of consumer inflation now being 1.6% even that claim is extremely marginal.
What about tax revenue?
This is performing solidly.
This is £19.9 billion, or 3.7% higher than the previous financial year.
Indeed one area has put in a stellar performance.
Stamp duties (on shares, land & property) in March 2014 were £1.1 billion, £0.3 billion or 44.5% higher than in the same month last year.
For the financial year 2013/14, Stamp duties were £12.6 billion. This is £3.4 billion or 37.2% higher than in the previous financial year.
What about the national debt?
Here I am afraid the Mad Hatters Tea Party is really in full flow! So take your pick from these offerings.
The public sector net debt including the temporary effects of the financial interventions, at the end of March 2014 was £2,216.8 billion (132.4% of GDP), this compares with a public sector net debt excluding the temporary effects of financial interventions of £1,268.7 billion (75.8% of GDP).
Clear as mud? Well I guess if you think that 75.8% is only “slightly different” to the 89.6% of GDP reported by Eurostat I guess it is all pretty much of a muchness!
We see that the UK economy has strong upwards momentum right now which frankly means that the policy of Forward Guidance promising lower interest-rates for longer is the wrong one. At the moment a brake is being applied to the UK economy by the strength of the UK Pound which is equivalent to a rise in Base Rates of 2.5% from the lows of March 2013. This has meant that so far it has tightened Bank of England policy for it but it is now time for it to face the prospect of having to act itself. Regular readers will be aware that I have been arguing for a stop to the rolling over of QE maturities since last autumn. If it had been applied it would have been another gentle brake on things.
Meanwhile the CBI industrial trends survey tells us this.
Business optimism among manufacturers saw its sharpest improvement since 1973, on the back of strong growth in orders at home and abroad. That’s according to the latest CBI quarterly Industrial Trends Survey.
It makes Forward Guidance of Mark Carney and the Bank of England look rather like a Mad Hattters Tea Party does it not?
A happy St. George’s Day to you all and also happy 450th birthday to William Shakespeare.