One area that seems to be keen to follow the inflationary theme of these times is the number of claims that the world is about to end! However I intend to assume that the Mayans are incorrect and wish today to present an analysis of where the UK stands in terms of its public finances. This does key in with Tuesday’s update on the under performance of the UK government-bond or Gilt market as clearer evidence of weak UK public finances has coincided as you might expect with poor Gilt performance. On that subject the French benchmark ten-year bond yield (1.99%) nearly equalled the UK Gilt equivalent (1.96%) yesterday. Of course it is not the only reason as our economic growth and inflation trajectories are in there too but it has been a factor.
The Institute of Fiscal Studies view
This body is treated with reverence by many and sometimes correctly so but it is not always right and I intend to challenge the consensus which it has spread. Let me first explain their position via their update on the October public finance numbers.
It is revenues (taxes) fault
As was the case last year, a worse-than-expected decline in corporation tax receipts in October has contributed to an overall picture of lower-than-expected growth in revenues so far this year.
Spending is not at fault
Spending on the administration and delivery of public services has also again grown more slowly so far than forecast for the year as a whole.
Leaving an expected problem of
If the trends in central government receipts and non-investment spending were to continue for the remainder of 2012−13, borrowing would come in £13 billion higher than forecast by the Office for Budget Responsibility in March.
Have you spotted what the IFS have done?
Let me point it out.
higher than forecast ……..lower-than-expected
Their numbers are compared to the forecasts of the Office of Budget Responsibility. The OBR could forecast anything and it often feels like it does! It already has established a very poor track record on this front which is quite an anti-achievement considering its brief lifespan.
The mainstream media invariably follows this line as it does not appear to have taken time to stop and think about what is actually happening.
Now let me use the actual numbers and not the forecasts
Government revenue has been rising.
Central government current receipts in October were 1.8% higher than in the same month last year. Receipts over the seven months April to October were 0.4% higher than in the same months of 2011
So on the year it is up if only marginally. If you look at our economic performance this should not be too much of a surprise. However October was slightly better if you look at the actual numbers rather than being worse than forecast.
Central government current spending in October was 7.3% higher than in the same month last year. Spending over the first seven months of 2012−13 was 2.3% higher than over the first seven months of 2011−12.
Now we get to what has been something of the nub of the UK debate as we get to what type of austerity we have and in particular for all the media screams of “cuts,cuts,cuts” I note that spending up to October was up 2.3% on the year before. For my purposes here I will simply point out that spending is higher than in the year before and that October with its 7.3% increase in spending was a particularly poor performance.
Just to confirm the point the IFS feels it can argue that the UK government is in fact underspending because the 2.3% increase in it is less than the number below.
The OBR’s forecast at the time of the March 2012 Budget implied that central government current spending for the whole of 2012–13 would be 3.0% above 2011–12 levels
So in a nutshell I look at the actual numbers whereas the IFS look at comparative forecasts. How often are forecasts particularly official ones correct these days? I am surprised it is only me challenging this but there you go.
We do agree that this fiscal year looks on course for an overshoot in UK public-sector borrowing.
We now also have the November figures from the Office of National Statistics
Public sector net borrowing was £17.5 billion in November 2012; this is £1.2 billion higher net borrowing than in November 2011
This means that the year as a whole is now even worse.
For the period April to November 2012, public sector net borrowing (excluding the capital payment recorded as part of the Royal Mail Pension Plan transfer in April 2012) was £92.7 billion; this is £8.3 billion higher net borrowing than in the same period the previous year
We find ourselves reviewing yet another version of austerity which seems to have increased and not reduced public-sector borrowing.
How did it break down?
Revenues rose again
In November 2012, central government accrued current receipts were £39.1 billion, which was £0.2 billion, or 0.6%, higher than in November 2011
Although on a year on year basis (there must have been revisions) we are in fact facing taxes 0.1% lower than last year.
But look at spending.
In November 2012, central government accrued current expenditure was £55.0 billion, which was £3.3 billion, or 6.3%, higher than November 2011,
So yet another month which shows a surge in public-sector spending which has had its impact on annual growth in this area which has risen from the previous 2.3% to 2.7%.
So the underlying issue here is that the UK government looks as though it has lost control of its spending. Against that we see that taxes which had been growing in 2012 up to now have now lost that growth. Accordingly the pattern for our fiscal deficit has been poor and it looks ever more likely that there will be a considerable overshoot for the year as a whole.
This poses various questions as “austerity” suddenly looks rather like “fiscal pump priming” does it not? Suddenly there is a long list of candidates for my financial lexicon.
Or you can take the IFS style view that as long as you forecast that something will grow the fact that it does is not of much importance at all really……
A Wry Smile
Regular readers will be aware that I have made the case for UK deficit and national debt figures including our financial interventions, basically on the ground that we have made them. They were officially sidelined and slipped ever further down the report. However whilst they do show a much higher national debt of 138% of our economic output it has fallen over the past year. I bet they wish they had not put it so far down the report now….
UK Economic Growth
Glass Half Full
On a year on year basis UK economic growth was revised up from -0.1% to flat this morning.
Glass Half Empty
On a quarter on quarter basis UK economic growth was revised down in the third quarter of 2012 from 1% to 0.9%. Both industrial production and service production was revised down which a small upwards construction revision was unable to offset.
Oh and confirming today’s theme the fastest growing influence on economic growth was government spending.
How can they be simultaneously true?
Apparently the past was better than we realised at the time as the last two quarters of 2011 were revised upwards.
Oh and as you consider revisions from a year ago can you spot the possible flaw in nominal GDP targeting?