The UK Public Finances are a shambles of which we should be ashamed

The UK coalition government has set out its stall on economic policy with the main emphasis being on reducing the structural  budget (fiscal) deficit in the UK. However this is proving easier said than done in the stagflationary environment that has persisted in the UK economy. If we go back to the election of 2010 we see that the budget calculations of the main UK political parties were done on a (very) rose-tinted assumption that UK economic growth would be forever in sunshine and would be around 3% per annum. So if we go back to then we see that (as I was arguing back then) the UK political establishment was unwilling to face the scale of the problem in the election debates. No-one in it was willing to tell the truth so trouble was always likely. In the event we have massively underperformed the official fantasies masquerading as forecasts with economic output of 101.8 at the time of the election rising to a not so giddy 103.2 as the end of 2012.

As you can see expected tax revenues will have taken a severe knock compared to the official forecasts and there will have been upwards pressure on social security spending.

The Structural Deficit

Whilst the concept of a budget or fiscal deficit is clear in that it is public expenditure minus public revenue the addition of structural to it muddies the waters a fair bit. You may not be surprised therefore to hear that politicians have seized upon it! Here is the definition provided by the Financial Times.

A budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors

As you can see there are some terms from my financial lexicon for these times here. If we remind ourselves that the phrase “one-off” means anything which is inconvenient and that the “short-term” can in fact extend to the end of time we see the problem. Also we have the question of “fundamental imbalance” in a world where the sensible know that economic concepts come with a fair degree of doubt. An honest man or woman will admit that all of these concepts are open to considerable abuse or to use another word from my financial lexicon “interpretation”.

Accordingly we do not know what this means in practice from HM Treasury in 2010.

The fiscal mandate,,,,,,,,,, is to eliminate the structural current budget deficit over a five year rolling horizon

You may spot that “rolling horizon” gives yet more room for manipulation and manoeuvre!

We can measure the debt though can’t we?

Yesterday Eurostat kindly reminded us that the UK national debt under the Maastricht criteria was 90% at the end of 2012. The UK Chancellor of the Exchequer George Osborne must have breathed a sigh of relief that he breached the Reinhart and Rogoff threshold just as it had been largely discredited. But my point here comes from today’s Office for National Statistics release.

Public sector net debt was £1,185.8 billion at the end of March 2013, equivalent to 75.4% of gross domestic product (GDP).

Is 75.4% the new 90%?

This exposes something of a ruse that many have fallen for in that if you publish an official number the unwary assume that it is on the same basis as other official numbers. So the UK has been pulling something of a fast one. The main difference is that one uses gross government debt and the other net government debt.

Actually both of those numbers ignore the fact that the UK provided a considerable amount of support for its banking sector. If we put that in we get to this.

The public sector net debt including the temporary effects of the financial interventions, at the end of March 2013 was £2,206.6 billion (140.3% of GDP),

So it’s either 74.3%,90% or 140.3%! Aren’t you glad that it is so clear? Oh and in my view they are all wrong as the UK ONS number would be something of a laughing stock if the matter was not so grim and the middle one ignores banking support and the largest one ignores the assets that banks have.

If you are thinking that this is quite a can of worms then I guess me pointing out that these only (badly) measure explicit liabilities when we also have implicit ones such as unfunded  public pension schemes.

Mind you in the tangled web of the US Bureau of Economic Analysis a pension deficit can be a boost to economic output! But as I discussed that yesterday I will leave them floundering in their confusion today.

Can we do any better on the budget deficit?

On one level we apparently have done so but by a whisker or a hair’s breadth.

the first 2012/13 estimate of public sector net borrowing is similar in level to last year’s borrowing at £120.6 billion, £0.3 billion lower net borrowing than in 2011/12.

So I guess government ministers will now become fans of the story of the tortoise and the hare. Only another 402 years to go and the deficit will be eliminated…

The next level is to consider how reliable these numbers are as in a clear sign of the times there have been plenty of distortions. Here are the ones from the numbers above.

In 2012/13, public sector net borrowing and public sector net investment are reduced by £28.0 billion as a result of the transfer of the Royal Mail Pension Plan in April 2012

In 2012/13, public sector net borrowing and public sector current budget deficit are reduced by £6.4 billion as a result of cash transfers from the Bank of England Asset Purchase Facility Fund to Government. (Sorry if your head is hurting at all this but this £6.4 billion improvement came from a transfer of £11.3 billion! Yes I do know why but will leave it there for now…)

As you can see there has been plenty of ,ahem, assistance and muddying of the waters in 2012/13 which in many ways is the best guide to the mess we are in. But there is more as you see there were others which seem to have slipped the attention of the headline writers.

These include the £2.3 billion transfer to Government of the final profits of the Special Liquidity Scheme (SLS) and the £2.3 billion receipt from the 4G spectrum auction.

The SLS is something of a specialist subject of mine but even I have to confess to some confusion as it has spun around the public finances like a modern-day whirling dervish! Or if you prefer it has been like the song the “Hokey Cokey” where “You put your left leg in and your left leg out”. However as we move on we are aware that there was only one of it so next year it will be gone from the deficit figures.

But if you consider the £4.6 billion total above as a one-off then the £300 million improvement is dwarfed is it not?

What is happening to our banks?

A central theme of this blog is that we have not reformed our banks and that until we do economic improvements are likely to be patchy at best. The consensus official mantra is that progress has been made although as discussed last Friday they seem very keen on pouring yet more money into them for some unexplained reason. The view that they are improving was contradicted by today’s public finance figures.

In March 2012 the public-sector banking groups recorded a £2.1 billion reduction to the UK fiscal deficit but this March they drew some £1.6 billion. Not much signs of improvement there as we note they have drawn similar amounts each month so far in 2013. Indeed we see for a year as a whole that their contribution has more than halved from £27.6 billion in 2011/12 to £11.9 billion this year. This no doubt reflects  redress payments for the various scandals which pop up with alarming regularity and do not seem to be slowing down.


There are various interpretations of this. If we choose in Matrix style to take the blue pill we see a £300 million improvement year on year in the public finances. In such a world I guess 402 years may not seem long. However even they may have concerns about how things have turned out as if we go back to the forecasts of June 2010 we see that the UK budget deficit was supposed to be £106 billion in 2012/13 when in fact it turned out to be £120.6 billion post distortions.

For the rest of us we see that the numbers are troubling as no doubt there was enormous pressure to get this year’s numbers below that of last year. So we may see a corresponding response in next months numbers which of course only adds to our problems next year. But also something else popped up in March which is that for the first time there was a sign that tax revenue is dropping as it fell by £2.7 billion on last year. Up to now it has held up. As ever there are distortions but it is a bad portent for the next financial year.

Unfortunately with all the distortions and manipulations the UK Public Finances are something of a shambles right now. I guess that is the intention as I am reminded of the satirical series Soap from some years back.

Confused? You will be….

This entry was posted in Budget, GDP, General Economics, Growth, Stagflation, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • MickC

    But Soap had the merit of being amusing. The current situation is devoid of any cmedy at all!

  • anteos

    Hi Shaun

    Great article as always. I’ve noticed that the media have not cottoned onto the fact the government spending is up YoY. So there is no austerity. Any ideas as to why the media are ignoring this?

  • Andy Zarse

    Hi Shaun, I remember discussing the initial OBR forecasts with dear old Ruth Lea in 2010, after a presentation she gave at Arbuthnot Bank. She simply couldn’t understand how the projections had been arrived at. I think the phrase “tombola barrel” may have entered into the conversation at some point. She was especially baffled by the projected export growth, which despite the value of the £ falling steadily since then, simply hasn’t happened. Nor has the economy “rebalanced” (as you well know!).
    It’s difficult to see how we can get out of this mess without a lot of pain over a long period of time. Pain for gain is one thing; gratuitous pain quite another.

  • Robert S


    I read somewhere this morning that the borrowing figures were lower because they’ve pushed payments into next years finances, including not paying the World Bank. What are you going to do next year George? Rob Peter to pay Paul? Idiot! So, does that mean I can tell the tax man that I don’t want to pay part of my tax bill because I’m going to push part of the payment into next year? What’s good for the goose is good for the gander. Sorry, all animals are equal…


  • Anonymous

    The “Hokey Cokey”, that famous German knees-up song…….

    I had not thought of it as a financial allegory.

  • DaveS

    So just so I can be a little less confused

    ONS official deficit was 86.2B, stripping out “one-offs” gives deficit of 120.6B i.e. one-offs of 34.4B which is 28B from Post Office pension transfer and 6.4B QE profits (how can I write that…). So to be clear “one-offs” do not include 2.3B profits from SLS and 2.3B profits from 4G sale.

    So if we strip out the other “one-offs” deficit is 125B i.e. the real headline is “Deficit Increased from 120.9B to 125B” !

    Anyway its splitting hairs – billions is the new millions – whats a few more. I am sure there are plenty of other tricks being used to massage the numbers.

    The point is NO democratic government is going to successfully cut spending. The demographics and the welfare state won’t allow it even if they were serious about it. If austerity Tory George has failed wait and see what that genius Ed Balls has in store for us. Even Thatcher the Snatcher didn’t cut real terms spending – on average it rose by 1.1% a year under her brilliant leadership

    They have bet the future on growth – and if you are starting to believe the economy isn’t going to rebalance to manufacturing and exports then where is that growth going to come from ? Financial Services ? Retail ? Construction? i.e.. the sectors that gave us the pre-2008 boom ? Sectors that were reliant on ever increasing debt flowing into the country – does anybody think we can repeat that trick ?

    Real growth isn’t coming either.

    We are headed past 100% debt/GDP whatever measure you use and it won’t stop there. We’ve spent the North Sea dividends. We’ve spent the globalisation dividends. Now we are spending the capital.

  • Mike from Enfield

    You are right about austerity.

    If you think of news stories as the media’s “product” then I think the media have simply decided, en masse, that austerity is the easiest “product” to market. It comes with no requirement for them to explain anything as everybody thinks they understand it, there is an enemy to blame and it gives the impression that this is perhaps as bad as things will get. It also makes for easy headlines and can be relied upon to spark off childish rows among politicians and intellectuals.

    So much less bother than actually thinking about it.

  • Grumpy Old Paul

    So right. I haven’t seen an attempt at a proper analysis of government expenditure which shows what proportion has been ring-fenced and what proportion is subject to “austerity cuts”. Given the ageing population, the triple lock on state pensions plus the other benefits which pensioners receive together with the increases planned in other welfare benefits, there must be a lot of annual increases in government expenditure “baked in”. And that’s in addition to other “ring-fenced” departmental spending.

    I understand the same thing applies in the US with welfare, Medicaid and Medicare.

  • JW

    Hi Shaun

    Rebalancing of the economy will put this all right, wont it?

    Oh , hang on, the CBI chief economist when commenting on the fall in manufacturing confidence to its lowest level since 2010, cited ‘the chilling effect of the Cyprus crisis’. Crikey ,didn’t realise how much stuff we sold there!
    Never mind , its going to be fine if we all just stop saving as much as we do….honest.

  • Anonymous

    Hi Dave S,

    The Canadian liberal govt successfully cut spending in the 1990s and subsequently got re-elected.

  • DaveS

    I guess its possible then – although I see the Canadians are back to running deficits and betting on growth to fix them.

    But then even the US under Clinton managed to run a surplus in late 90′s – what do you think the chances of that happening now are ? I even remember the speculation back then that the entire US debt would be paid off by 2010 – hahaha.

    But back in the UK, the Tories demonstrably can’t cut spending and you can be damn sure Labour won’t. We could easily have 125B deficits for the rest of the decade and beyond – more if Ed gets his way. Thats another trillion+ of debt and the demographic time bombs are only just starting to explode – it gets worse from here on in as the baby boomers retire and start to fall apart,

    Still, I shouldn’t be so pessimistic – maybe cold fusion will save us after all…..

  • forbin

    I think in the end it will be a dose of hot fusion all round for the final bout

    “we’ll all go together when we go” Tom Lehrer

  • ernie

    Unfortunately, given the tone of them, I have to largely agree with all the other posts. Really, how the hell do we get out of this? We had a great opportunity in 2010 in that we had a new coalition govt( broader-based) inheriting a complete shambles. They could have at least tried to get to grips with the spending. Same happened with Obama in the US. Now it’s hard to see any way of escape. I am one of the retiring boomers, so it goes against my personal interests – but we just have to cut spending. There really isn’t any other realistic way. Wish there was…

  • Rods

    Hi Shaun,

    Another excellent article.

    The entry you missed from your financial lexicon is that the new down is up! Once you strip out all the Enron accounting, the 2012-13 deficit was higher than 2011-12, which is what the Government are trying to hide! It is not good PR or politics to have a deficit reduction program that increases the deficit. Although, with plenty of practice the EU with the Eurozone countries have got it down to a fine art! :-( (

    With current Government policies I can’t see a way out of this that does not involve forced cuts by external third party lenders like the IMF or lampposts and piano wire as none of the political parties will make or take the difficult decisions required.

    The easy route is to continue to kick the can down the road hoping something will turn up and when the economy hits the buffers, blame the nearest scapegoat, last time it was the banksters, next time maybe the burden of the retired baby boomers and then wheel out the head of the BOE to say it couldn’t have been foreseen. Well, it worked in 2008, so the opposition now top the polls!

    Once the UK Government has run out of credibility and lenders, the only other route is to confiscate capital and assets, Cyprus style to keep the plates spinning and also to have the printing presses working overtime. Hyper-inflation and even higher state spending as a percentage of GDP, will be ugly with its associated economic depression and mass unemployment. Where the UK needs hard currency to buy 50% of its food, where is that going to come from? Make sure you have a few acres of land somewhere to grow some crops and corn for popcorn as you sit out the forthcoming disaster!

  • forbin

    you do realize plan B is to save the economy by joining the Euro…..


  • Anonymous

    Hi Anteos

    I do have some thoughts on this. Some journalists only peruse the press release which of course contains what the authorities want them to see.

    Those who want to do some research are often misled by the Institute for Fiscal Studies which compares the out-turn with forecasts (for higher spending) rather than the previous year. I discussed this back in December in the article linked too below.

    For the IFS it use of a cut in spending is what most of us would call a cut in spending growth and in the game of Chinese whispers this becomes overall spending cuts in the media.

  • Anonymous

    Hi Robert

    Yes there were suspicions on this front which probably come from the suspicions at the time of the Budget of some can kicking into the future.

    However I recall something from Italy’s figures which must also apply to the UK which I copy below.

    “The needs of the month are also affected by the subscription of the capital increase of the European Investment Bank (EIB) for the shareholding of 16.17 per cent, with its payment in a single tranche of about 1,600 million ..”

    If we paid ours I saw no mention of it so the plot thickens.

  • Anonymous

    Hi Kit

    If only Kraftwerk had written the song, if only….

  • Anonymous

    Hi JW

    Well it might if we had any of note….

    Sounds like the CBI chief economist was desperate for any excuse as the UK is a a big influence on the Greek part of Cyprus (behind Russia and presumably Greece) but what would you say is the effect of Cyprus on the UK? The mind boggles….

  • Anonymous

    Hi Rods

    Don’t worry the concept gets an early billing in my financial lexicon as the letter A has of course Austerity aka a policy that in theory reduces fiscal deficits whilst in practice it increases them

  • Andy Zarse

    Here you go… Ja, das hokey kokey by Bill Bailey!

  • Anonymous

    It takes a brave (and often cornered & desperate) politician to cut spending as harshly as the UK needs.

    I don’t regard the coalition as a tory govt, the Libs would also need to vote for harsh cuts – does anyone see some flying pigs ?

    Balls is in financial denial. If he becomes the finance minister, I expect the bond markets cause him a “Hollande” style dilemma – he gets the choice of a u turn or a melt down.

    the truth is that the UK isn’t as rich as we believed in the new labour years. It was borrowed wealth, a property bubble and a false belief in the “end of boom & bust”