Today’s UK Public Finance bulletin is 51 pages of spin, obfuscation and misrepresentation

As we move further into 2013 we will see if the UK will find that its experience will mimic that of the peripheral Euro area countries who have found it virtually impossible to continue to cut their fiscal deficits in an economic slowdown. Such an event would pose a problem on many levels starting with it being the reverse of the stated main aim of the UK’s coalition government and also of course reflecting a disappointing economic performance. Also we have the issue of how to get out of such a position as the Euro area experience has been one of deterioration rather than improvement. For example yesterday the Prime Minister of Spain Senor Rajoy talked of her fiscal deficit for 2012 being 7% of GDP (Gross Domestic Product), as I mulled 7% being the new 6% I was reminded that the target was originally 4.3%!

How have we been doing?

If we look at the figures up to December 2012 we see that rather than falling the UK fiscal deficit has been rising.

For the period April to December 2012, public sector net borrowing (excluding the capital payment recorded as part of the Royal Mail Pension Plan transfer in April 2012) was £106.5 billion; this is £7.2 billion higher net borrowing than in the same period the previous year, when net borrowing was £99.3 billion

We learn several things from those numbers. Firstly that as our economy has not grown we have a fiscal deficit that is growing relative to the size of our economy. We also get a hint to the ruses and financial alchemy that are being deployed to hide this! In many ways it is the financial alchemy which is the best guide as it displays the fears of our leaders. The £28 billion improvement via the Royal Mail pension fund transfer is because the assets are counted but the liabilities which are in fact larger by around £10 billion are ignored. So by being poorer we measure ourselves as being richer!

Also we have the transfer to come of the “profits” from the Bank of England’s Quantitative Easing operation which will deploy some £35 billion from the interest received just in time for the next election. Of this it looks as though some £11.5 billion will be deployed this fiscal year. Plus another £2.3 billion was slipped into the numbers from the ending of the Bank of England’s Supplementary Lending Scheme. I have covered the SLS in detail in the past but whilst the windfall looks good the ending of it was another Bank of England policy error as the Funding for Lending Scheme’s existence proves.

What about the 4G auction?

We can cover off two issues here. The first is that it is not wise to spend money you have not raised yet and the second is that it is even more stupid to do so on the basis of a forecast from the UK Office of Budget Responsibility which has got virtually nothing right in its short lifespan!

We assumed in the December EFO that the spectrum auction would raise £3.5 billion,in line with published estimates by outside industry experts.

These “experts” were in fact out by a third as the amount raised was only £2.34 billion. So as expert gets another new mention in my financial lexicon for these times the UK taxpayer has a conundrum. On the one hand he will probably have to pay more tax to make this up and on the other he may be paying less “tax” via his or her mobile phones charges. Oh what a tangled web and all that! Hidden and deferred taxation anyone?

What about the national debt?

This is something where the waters are also deliberately muddled. Let me explain with reference to today’s numbers from the Office for National Statistics.

Public sector net debt was £1,162.8 billion at the end of January 2013, equivalent to 73.8% of gross domestic product (GDP).

This makes us look good compared with countries in Europe but I am afraid that it is a very long way from a like for like comparison. Under their definition we would be more like 90% which is the danger level in the Reinhart-Rogoff paper and theory. So as you can see a very different number provides a completely different perspective even though reality is unchanged.

Also if we include the number I have favoured but the ONS has tried to bury we see another picture which excludes much of the financial alchemy and misrepresentation. You might be thinking that this is the reason why it gets buried and you would not be alone in that. Via it we get this.

The public sector net debt including the temporary effects of the financial interventions, at the end of January 2013 was £2,188.1 billion (138.9% of GDP),

Now this number is not perfect either as calling it “net debt” is challenge-able but it does help explain our position. If you are in the mood for a wry smile take a look at the share price of Royal Bank of Scotland compared to what the previous UK government paid for it and re-read “the temporary effects of the financial interventions”.

This measure gets virtually ignored by the media and its very existence seemed to surprise Stephanie Flanders at the BBC only a few months ago. You do invariably have to read the  bulletin to the bottom to find it.

Today’s numbers

Let us first have the numbers with the spin and the spin today is worthy of Shane Warne and Murali.

Public sector net borrowing was -£11.4 billion (a repayment) in January 2013; this is a £5.0 billion higher net repayment than in January 2012, when net borrowing was -£6.4 billion (a repayment

Wow that’s good we are turning for the better,hooray! Er well not quite as there is a shark in the water.

January 2013 public sector net borrowing and public sector current budget figures include the first cash transfer from the Bank of England Asset Purchase Facility Fund to Government of £3.8 billion, which took place on 7 January 2013

So the £5 billion presented has shrunk alarmingly already and let me add something else. Last year the deficit was originally presented as £7.75 billion and if we add the QE money to that we find that on a pure like for like basis we are in fact worse off!

Since then there have been revisions to last year’s number and we do find we are better off by £1.2 billion on them.

If we look for some perspective we see that in the fiscal year so far our apparent improvement soon fades. As this.

If this one-off effect is removed then PSNB ex for April 2012 to January 2013 is actually £1.5 billion higher than in the same period in the previous year

Becomes this.

If these two additional effects are removed then PSNB ex for April 2012 to January 2013 is £7.5 billion higher than in the same period in the previous year.

The QE “profits” and the SLS account for the difference here and an outstanding monthly improvement vanishes into the ether.

There is maybe a little glimmer or maybe not

I was wondering if the trend to self-employment might improve the revenue figures for January. For those unaware of the UK tax system those who are self-employed have their tax payments deferred for a while and then catch-up in a rush and as we have more self-employed as discussed only yesterday then perhaps we might get a boost from it in tax revenue.

But at first sight there is no great sign of any real impact.

accrued current receipts in January 2013 are £0.7 billion higher than in January 2012


So we conclude as we peer through the attempts to mislead us that there has been only a marginal improvement in the UK’s underlying public finances. This contrasts wildly with the headlines published and which I noticed being transmitted by the media. Actually I do have a little sympathy for the media as there are an extraordinary amount of manipulations going on here. But it looks as though we will remain mired in stagflation and our public finances will remain a building issue.

There has been a technical change in even the calculations I have described above concerning the effect of QE on our public finances. In a nutshell a limit of £9.1 billion has appeared from nowhere and a reclassification of the SLS means that the actual limit is in fact £6.8 billion. Confused? Do not worry so are the people at the ONS I have spoken too! I will update if and when I get a reply (they are often very helpful….).

Still we find on Quangowatch these boys and girls are responsible.

National Accounts Classification Committee (NACC)

Amazing when there is trouble how they emerge out of the woodwork is it not?

Update 1:45 pm: What changed today?

I will stick to the salient points and will ask the question why was the Office of Budget Responsibility wrong (yet again)?

It assumed that the payments from the Bank of England to the UK Treasury would be an “interim payment” which would mean that all of the payment would count against the fiscal deficit.

However there is an alternative route where you have “final dividends” and “super-dividends” and even more bizarrely “entreprenuerial income” but don’t worry as the crucial point here is that what you can count against your fiscal deficit depends on your income from last year.

And there is the “rub” as the income which counts was lower last year and restricts what can be counted this year. Next year will also be handicapped by this year and so on. Accordingly this may remain an issue if the Bank of England votes for more QE as looks likely after yesterdays minutes told us the vote is tightening.

Added to this the funds from the Supplementary Liquidity Scheme were reclassified -from capital to current- and another £2.3 billion was lost from this years deficit numbers. This is however a one-off change.

The changes were suggested by Eurostat.

Aren’t you glad that’s clear?!

Now repeat after me

You put your whole self in

your whole self out

In, out, in, out,

You shake it all about.

You do the Hokey Cokey and you turn  around

That’s what it’s all about…


This entry was posted in General Economics, Quantitative Easing and Extraordinary Monetary Measures, Recession, Stagflation, UK Inflation Prospects and Issues and tagged , , , . Bookmark the permalink.
Subscribe Find an Adviser