21st February 2012 by Simon Ward
Today’s public sector finances numbers for January – a key month for tax receipts because of self assessment returns and quarterly corporation tax payments – cast further doubt on the upward revisions to borrowing forecasts by the Office for Budget Responsibility (OBR) in its November 2011 Economic and Fiscal Outlook.
With the January number better than expected and borrowing in earlier months of 2011-12 revised down, the targeted PSNB ex measure (i.e. public sector net borrowing “excluding the temporary effects of financial interventions”) was £15.7 billion lower over April to January than in the corresponding period of 2010-11. PSNB ex is on course to total about £119 billion in 2011-12 compared with an OBR forecast of £127 billion – wrongly revised up in November from £122 billion despite satisfactory year-to-date developments.
The suggested £119 billion outcome, indeed, is close to the OBR’s £116 billion forecast for 2011-12 made at the time of Chancellor Osborne’s first Budget in June 2010. It would equate to 7.8% of GDP compared with peak borrowing of 11.1% of GDP in 2009-10.
A bigger story that may go unreported, however, is the faster decline in the “old” PSNB measure that includes the surplus of the public sector banks and net interest income of the Bank of England’s Asset Purchase Facility (APF). PSNB is on course to fall from £109 billion last year to about £85 billion – £16 billion lower than the OBR’s November forecast and equivalent to “only” 5.6% of GDP.
QE income accounts for about £9 billion of the estimated £34 billion difference between PSNB and PSNB ex in 2011-12 and should rise further to about £11 billion in 2012-13, based on announced plans to expand the APF and assuming no change in Bank rate. (A previous post argued that the Treasury should “book” this income by requiring the APF to pay an annual dividend. Such a treatment would be equivalent to that adopted in the US, where the profit of the Federal Reserve, including its net income from QE, is distributed to the Treasury. The Fed has estimated that the distribution relating to 2011 will be $76.9 billion, up from $31.7 billion in 2008, with the increase mainly reflecting the expansion of its balance sheet due to asset purchases.)
PSNB includes the entire surplus of the public sector banks and their subsidiaries – an estimated £25 billion in 2011-12 – but the government’s economic ownership of Royal Bank of Scotland and Lloyds Banking Group is 83% and 41% respectively. (It also owns the mortgage books of Northern Rock and Bradford & Bingley.) Only about 60% of the banks’ surplus, therefore, should be attributed to the public sector. Such a treatment suggests “true” net borrowing of about £95 billion in 2011-12, or 6.2% of GDP. (The attributable surplus, of course, is not available to finance immediate government spending. With no dividends being paid, however, the surplus results in a rise in the book value of the government’s shares, an increase that should be reflected in the proceeds of the banks’ eventual sale.)
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