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….