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.
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.
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.
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.