Financial alchemy and the spread of food-banks seem to be going hand in hand in the UK

This week will see two set-piece events for the UK economy. The first will come on Wednesday when we get the Autumn Statement by the Chancellor of the Exchequer and the second will come on Thursday when the Bank of England has its monthly meeting. As an antidote to the hype of these two events comes the fact that yesterday when I went shopping a foodbank was collecting at the supermarket for the hungry. How long ago would that be virtually unthinkable for the UK? It also made me think of the £7.64 million pension pot of Bank of England Governor Mervyn King which in twitter terms can be summarised as #rewardsforfailure.

The UK Welfare State

The enthusiasm with which the food-bank was collecting was heartening as was the response of many shoppers. However it left me with a fundamental question which is that as the welfare state and benefits spending has risen and risen how do we have people reliant on food-banks? Somewhere,somehow something is very wrong here.

I would email my Member of Parliament Jane Ellison to tell her that yesterday I was ashamed (of our official bodies) but proud of our people and tell her that government should get its act together but as regular readers will know she invariably “loses” my emails!

The Autumn Statement

In essence two threads will cross here and they are not especially complicated although I am sure that some commentators will try to make them so. The Chancellor George Osborne based his plans on forecasts for economic growth which were much higher than what has subsequently transpired. This has issues for the fiscal deficit this year which have been summarised by the Office for Budget Responsibility as follows.

Public-Sector Net Borrowing (excluding the Royal Mail effect) in the seven months of the financial year is £5.0 billion higher than last year.

Unless up is the new down this poses a fundamental problem for a government which is looking to reduce the fiscal deficit. If we look into the growth forecasts one of the ironies is that they came from the opposition! The previous Chancellor Alaistair Darling got his pre-election numbers to add up by fantasising excuse me forecasting that the UK economy would grow by 3% per annum which the incoming Coalition government promptly followed in generic terms.

So when the furore begins on Wednesday please recall this which I wrote back on the 23rd of April 2010 before the UK election took place.

Official forecasts for growth in the UK economy are very optimistic, what will happen if these are not achieved in reality?

Well now we know! But under the political debate of who caused what it was always likely that there would be an issue whichever side won the election. Let me add to this now that as we look forwards the problem builds because a weaker present -and as a minimum an initial trajectory into the future- has considerable implications for the year to come.

If you can’t change reality change the numbers

This sort of thing has a long if not proud record.  I watched the last episode of Yes Prime Minister on Friday which aired in January 1988 and in it was an assumption that the unemployment statistics were in the current vernacular being “improved”. There are two main ways that the Chancellor could do this on Wednesday.

1. Rather than aim at the actual fiscal deficit he has set his plans for the (surprise,surprise) smaller  structural fiscal deficit. I have criticised the structural fiscal deficit before so for now let me simply say that it is a flexible concept, and that how flexible we may well discover on Wednesday!

2. I discussed back on the 12th of November the many implications of the transfer of accumulated income from the Asset Protection Fund (via its £375 billion of Quantitative Easing) of the Bank of England to HM Treasury. Let us remind ourselves of its impact.

It is envisaged that the net coupon income earned by the APF during 2012-13, expected to be around £11 billion, will be transferred to the Exchequer during 2012-13. The excess cash that had accumulated in the APF up to the end of 2011-12 (£23.8 billion) will be drawn down over the course of 2013-14.

Rather fortunate for a Chancellor looking short of cash is it not? Whilst he may claim fiscal rectitude in not taking it all now there is food for thought in the fact that such claimed fiscal rectitude leads to an outcome which will fit the electoral cycle neatly. Also one or two definitions will need “improving” for the full effect to be felt on the numbers.

So the Chancellor faces a choice between a quick hit and gain or the ability to be able to pull some pre-election rabbits out of hats.

This discussion has put aside up to now another piece of financial alchemy because it has already taken place which is the transfer of the Royal Mail pension fund into the UK government’s accounts. It goes in with more future liabilities than present assets and comes out as a £28 billion gain. Hey presto! You might say. Those with longer memories may recall that these machinations were in principle the sort of things that led to the collapse of Atlantic Computer Leasing and Enron.

Another way of looking at the UK situation would be simply to look at the amount of financial alchemy going on and from that alone you would be able to guess fairly accurately our current position.

Today’s data

Bank of England Funding for Lending

Whilst the data is only up to the end of September we can glean some information from it. For example it led to extra lending of £500 million which if I may borrow the words of Shania Twain.

That Don’t Impress Me Much!

However in another example of what we may label,surprise,surprise, the banks seem to have done much better out of it. They received an extra £4.4 billion of cheap funding.

I do hope that none of this cheap money went to Lloyds Bank, Royal Bank of Scotland or Santander as they actually reduced lending during the quarter. Odd is it not that political rhetoric is for extra lending that the two main banks we control are in fact lending less not more? And let me answer my own point as £1.75 billion of the cheap funding went to Lloyds and RBS for lending less!

So rather than more lending we seem to have retreated to this.

the total is cut back by less than would otherwise have been the case.

If you can quantify that you are a better man (woman) than me.

Manufacturing

This is one of those better but still shrinking reports as the Purchasing Manger’s Index has improved to 49.1 but it still indicates a contraction.

Conclusion

So we see that we are in an era where reality is fast becoming far too inconvenient for the UK’s political class. Perhaps it always has been and it is the change in circumstances which has exposed them. As Warren Buffett put it.

It’s only when the tide goes out that you learn who’s been swimming naked

So should we see a rosy picture presented this week please remember the rise of  food banks in the UK.

Fiddling the numbers

The Retail Price Index “Improvement” Consultation closed on Friday and I replied both personally and via my membership of the RPICPI User Group at the Royal Statistical Society. I pleased to report that the User Group responded thus.

Over 80% of the members of the User Group (UG) responding to our survey preferred Option 1 (no-change), with the remaining responders spread evenly across the other options.

Getting 80% of any group of individuals with often strongly held views to agree particularly on a complicated issue is quite revealing in itself I feel.I will keep you in touch with the official response.

This entry was posted in Financial crisis, General Economics, Gilts, Growth, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues and tagged , . Bookmark the permalink.
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  • Anonymous

    ‘Over 80% of the members of the User Group (UG) responding to our survey preferred Option 1 (no-change), with the remaining responders spread evenly across the other options.’

    And the Sir Humphrey Appleby Golden Share on behalf of the BoE/Treasury voted for ……. ?

  • Anonymous

    On the topic of food banks, the welfare state refuses to pay out to those who have saved or bought houses. Ergo if you work and then get made redundant you can get in a catch 22 situation – no money available. Career beneficiaries who have never worked a day in their lives get council houses and regular benefits. this is distinctly unfair.

  • Drf

    “The Chancellor George Osborne based his plans on forecasts for economic
    growth which were much higher than what has subsequently transpired.” Hardly surprising then at the present point on the Laffer curve that his insatiable continuous increases in UK taxation have made the Depression worse? Anyone with a brain would know that the only economic stimulus which would actually work in this scenario is a significant reduction in overall taxation! Of course to achieve that and avoid complete and utter national insolvency would also require an even bigger reduction in public spending. Of course the problem is that the brain of Osborne became too damaged by all that extensive Bullingdon booze, which the present government now wants to make too expensive for ordinary consumers with its minimum alcohol pricing.

  • James

    Almost ALL of the rhetoric is about putting taxes up (mansion taxes, taxing the super rich, Starbucks etc) and about fiddling the accounts (all the things in Shaun’s article, for example, but you might as well chuck in PFI and public sector pensions) and about the devastating effect of the cuts. Never a day goes by when some special interest group doesnt ask for more money on the radio (today was firemen, hospitals, the care system) and the journalists NEVER ask the pleader for what they would cut to pay for this new expense.
    Basically, we have got ourselves into a state where expectations are high and resources seem to be infinite to those who don’t have to pay.

  • Drf

    Hi James,

    Well yes of course I agree, but that cannot continue indefinitely since the UK no longer has sufficient real wealth to fund it! There have not in fact been any cuts; only further continued increases in public spending. There is thus only one real solution – to cut taxes to stimulate the UK economy balanced by an even larger reduction in total public spending to reduce the deficit and debt. So the truth is that all these left-wing types of demands which you mention must be ignored. The present majority party in government have always in the past followed sensible policies to clean up after a government of the opposite persuasion, yet in this case with Cameron and Osborne they persist with the same idiocy which got us into this mess in the first place! What do you believe is the answer then? It is no good attempting to explain why the government does not do what should be done without suggesting an alternative solution.

  • Patrick, London

    Sorry, but I still chuckle when people describe New Labour as left wing…

  • James

    Were I dictator, my solution would be to start every programme on TV and radio with some facts along the lines of:
    1. We have borrowed another £400 million since YESTERDAY
    2. That is £8 each.
    3. For a family of four, that is £224 a WEEK
    4. That is £11,468 per four -person family a year.
    5. To put it another way, we don’t pay a penny of the costs of the NHS at all – we are borrowing the whole amount every year.
    6. Government spending is UP on last year.
    Now, we can discuss the cuts sensibly…

  • Anonymous

    Unilaterally cutting taxes is NOT a solution – GW Bush tried this and created a disasterous deficit during a boom.

    In principle I agree taxes are way too high, but we need to balance the budget and bring down the debt first. Unfortunately it will probably take horrific inflation and punitively high interest rates to teach the electorate that free lunches do not exist …

  • Drf

    Hi Expatin, That was surely because Bush did not also cut public spending by an even greater amount to offset the reduction in taxation and to achieve a balanced budget? That is what has been the lead in to the USA’s problems now, as with the UK. When any country continues to spend more than it can afford in the long term there will be economic disaster ultimately. Minimal government with minimal public spending and the lowest possible taxation to balance the budget is the only route to a prosperous, growing and healthy economy.

  • Drf

    Hi Patrick, I think it is just in terms of relativity to the original right wing party! Imagine referring to the present government as right wing! Almost all current politicians are left of centre, but again it depends upon what you take as the datum.

  • Bones

    Hi Shaun,
    I wish to take this opprtunity to congradulate the English rugby team on their impressive win over the ABs. Well done!

  • pavlaki

    All that funding for lending appears to have achieved is a significant cut in the interest earned by prudent savers. This of course makes them reduce discretionary spending even further ( that’s why they are prudent) so there is less money going to restaurants, on new cars or replacing furnishings etc. A bit of a ‘shot in the foot’ as far as the government is concerned?

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi DLinneridge
    There are 3 stages to that
    1.ONS decision
    2. Bank of Enland rules on if it is a “material change” as this was in the prospectus of 8 of the UK’s index-linked Gilt stocks.
    3. The Chancellor decides.
    It is of course possible that the rubber stamp for 2 and 3 has already been manufactured……
    I replied both as part of a group and singly because in the CPIH deliberations the ONS was influenced by the number of replies for each option.

  • Noo 2 Economics

    Hi Shaun,

    The real purpose of Funding for lending is now becoming apparent – £1.75 billion goes to RBS and LLoyds and £2.65 billion to others with £500 million lent out. So that leaves £3.9 billion to roll over existing bank debt and help the balance sheets to meet the looming Basel 3 requirements. Yet another Bank Bailout! How many different names have the authorities come up with for the phrase “Bank Bailout”?

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi Bones

    Thank you for a very gentlemanly response,which I note was shared by your compatriots at the New Zealand Herald. I had from time to time wondered if you were still reading down there. When I was back on my own so to speak I could look at the numbers and saw there were Kiwi readers (as well as readers from 71 other nations) so I suspected you might be.

    The first half was not a surprise as we had played powerfully versus the Aussies and SA and then blown it (nice assist for an Aussie try from Danny Cares kick) or had bad luck with SAs try. The second half when we were pulled back by your two tries was a revelation and seeing Chris Ashton stop hiding and take a try like he was doing 2 year s ago was happy days again.

    It was also a priviledge to see players like Ritchie McCaw and Dan Carter who have been giants of the sport and I think your fullback Israel Daag is a great runner with the ball.

    See you in the world cup 2015 and I hope to see an all white versus an AB final.

  • Noo 2 Economics

    Hi Expat, “welfare state refuses to pay out to those who have saved or bought houses”.

    Maybe in Bulgaria but not UK – Mortgage interest paid after 13 weeks unemployment unless you have payment protection ins. If you own your house outright you still get Unemployment benefit. If you have savings above £6000 but less than £16000 you still get Unemployment benefit tapered by a notional amount of income on savings supposed at 20% on savings between £6000 and £16000 (if only!). Over £16000 then you do indeed get nothing.

    It’s supposed to be a safety net for very poor people, although given Shaun’s comments about Food banks today it’s clearly failing even in that very limited respect.

  • http://twitter.com/notayesmansecon Shaun Richards

    Hi pavlaki

    It was not a good start for the scheme. I had naother look at the numbers later and the six banks who received the £4.4 billion of cheap funding collectively increased their lending by minus £1.035 billion! So poor. And the bank of England press release was misleading..

    On the other side Barclays (not often mentioned favorably these days), Nationwide,Virgin and the Coventry seemed to be playing honestly.

  • Rods

    Hi Shaun,

    I think you will find some (many?) of the people using food banks will be the self employed.

    Many self-employed during this depression have been stretched, especially in the construction industries. So at anytime they only have very limited resources, they are reliant on work materializing, but even more so on getting paid, which is often a major problem these days, so if this is delayed or becomes a bad debt, it becomes a major problem. Now many of the self employed I know are very proud with a strong work ethic and are not interested in becoming a welfare dependent, and prefer to spend their time, looking for work, getting work, and doing work rather than learning how to claim, what to claim and when to claim.

    So when things are stretched through a short period of no work or more likely a late payment or bad debt, they would rather resort to a food bank so their family is fed, rather than trying to claim.

    Many self-employed sub-contractors also supply materials for doing a job, so if the contractor goes under, not only do they not get paid, but they still owe the suppliers. Not a good position for them or the suppliers.

  • jacqui

    The welfare state does pay off mortgages for buy to let ‘investors’ via the housing benefit system, and in doing so supports above market rental levels.

  • Andy Zarse

    Hi Shaun, here in Antigua the headline on the local rag shouts ” Egg pric hike, price of eggs to surge 25% Chicken up too!” Of course the price is controlled centrally, and it’s the first increase since 2008. No increase in rum prices though!

  • Anonymous

    Shaun.. The answer you are seeking is because these people needing the food banks have been “sanctioned”.

    Go and have a look at the numbers for sanctions and you will find the food banks customer base…Sanctions can last up to three years now and that is with no money whatsoever to live on…

    There is so much being hidden that is going on and people do not care or want to know what is being done to our poorest members of society..

    Government admits Job- centres set targets to take away benefits
    Department of Work and Pensions backtracks on denial of Guardian investigation
    that some job-centres have been taking people off benefits amid pressure
    to meet targets

    The Department of Work and Pensions (DWP) initially dismissed revelations in the Guardian last weekend that Jobcentre Plus employees were tricking vulnerable claimants into losing welfare entitlements. A whistle-blower said staff at his jobcentre were given targets of three people a week to refer for sanctions, where benefits are removed for up to six months.

    http://www.guardian.co.uk/politics/2011/apr/08/jobcentres-benefits-sanctions-targets

  • Anonymous

    Wrong…..

    This help is paid as part of your benefit and is called Support for Mortgage Interest (SMI).

    SMI is normally paid direct to your lender. You can’t get help towards the amount you borrowed – only the interest.

    And the largest amount of people getting local housing allowance(used to be housing benefit) is people who are working..

  • Bones

    Hi Shaun,

    Your blog is compulsory reading.

    I was thinking of coming up for 2015 however I do not think I can stand another
    27 years of disappointment every four years!

    Cheers

  • Anonymous

    Yes, it should be mandatory for interviewers to ask how they propose to fund their ideas. And ‘soak the rich’ is not a valid answer! Soak them by all means, but don’t expect to make enough profit to solve all our ills.

  • Anonymous

    Now, then James. You and I know perfectly well that half the UK population pays no direct taxes so that the numerator you mention is spread around a much smaller denominator. Result: a lot of people are unaffected by direct taxation and could not care less (though they are stung by fuel and other duties and VAT) and of course those who do have to pay are on average earning less and less each year as fiscal drag pulls them into the net. This is neither sustainable nor a long term solution. Something will have to change. Politicians think it’s growth that will rescue them, or possibly inflation. Others, like me, have doubts, at least about the growth.

  • Anonymous

    And after waiting 13 weeks (it used to be 39). In any case, savings are usually at least semi-liquid. They are there for ‘rainy days’, no?

  • Anonymous

    Regarding food banks, Shaun. I understand the concern of those who see them as a bit of a slur on the reputation of the UK. But it’s not all that simple. Many families in the UK are used to the high standard of living of the decade that ended in 2008 and now cannot sustain it. Things like running cars (in some places, hard to manage without now that buses are more or less abolished in the countryside), and eating out. The basic state benefits are just about enough to live on and were never conceived as a long term, multi-year support for existence. If that is what they are to be, either the state will have to turn a very blind eye to those working for cash on the side (extremely common in southern Europe) or they will have to be increased. Whatever happens, I will scream the next time a naive journalist asks how Mr or Ms X manages on JSA! The answer is that they don’t! They get all manner of other benefits from housing benefit (grotesquely expensive) to child tax credits and benefit to free council tax. Yes, it’s hard to live on, but it does not require food banks!