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Is the UK seeing a pre-election stimulus rather than more austerity?

Is the UK seeing a pre-election stimulus rather than more austerity? Mindful Money

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Today [yesterday] sees the UK produce its data for its national debt and fiscal deficit for the month of August 2014. These have some fundamental changes in them which I will outline in detail in a moment, but first I wish to take us back to the heady days of the last general election when the UK was given the choice of a variety of ways of reducing its fiscal deficit and applying austerity. It found itself with a coalition government which, in its first formal Budget, promised us this for what was the future then but is the present now:

"Public sector net borrowing (PSNB) to fall from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16"

Just to ram home where we were supposed to be, the last fiscal year was supposed to have a deficit of 3.5% of gross domestic product (GDP) and this year (2014/15) 2.1% of GDP. So much lower and falling fast. What we actually have is a situation where we borrowed 6.6% of GDP last year and the forecast is for us to borrow some 5.5% this fiscal year. Therefore, we see that the deficit is much higher than planned - and as to the falling part, well that is struggling too:

"Over the first four months of the financial year, underlying borrowing was £1.8 billion higher than last year. Over the remaining eight months of the financial year, the underlying deficit would need to be £12.2 billion lower than last year to match the 2014-15 EFO forecast."

There have been various excuses made for this but let me add another factor into the situation. If we look back, a major problem with the UK fiscal deficit has been that our economy barely grew at all compared with official forecasts of economic growth of around 3%. If it seems hard to believe that such forecasts were made then, I can point out that I challenged them back then on this blog. However, my theme here is that if we allow for the fact that over the past year, and indeed a little more, the UK economy has grown at a rate of around 3% then why has the fiscal position not improved more? I am left with the thought that the fiscal noose has been loosened into the election somewhat and perhaps it has contributed to our growth spurt.

The continued failure on the fiscal deficit front means that the UK has ended up with a larger national debt than expected. It was expected to have peaked in 2013/14 at 70.3% of GDP and believe it or not was supposed to fall to 69.4% this fiscal year. Instead we are faced with the prospect of it rising to 77.3% at the end of this fiscal year. So we will be paying debt interest on an extra 7.9% of our GDP, meaning that we should be very grateful that our government bond yields are historically very low. Much of the pain from our failure is being taken away by that fact.

What is stimulus and austerity?

I ask this because my subject of yesterday, Ireland and the UK, are both still running high levels of fiscal deficit and yet are being accused of applying austerity. On the stock level, running such deficits is a stimulus and yet at the same time trying to reduce the fiscal deficit is considered austerity. Of course, at the moment the UK fiscal deficit is not falling as we mull the hints of a pre-election stimulus.

Ch-Ch-Changes

The numbers above have been on a like-for-like basis as far as is possible and excluding the bank bailouts as we note how much meddling there has been (Royal Mail pension scheme for example). However, as of today’s [yesterday's] release the numbers will change with the national debt as presented by the Office for National Statistics rising considerably. The main drivers of this are shown below:

"For 2013/14, PSND (Public Sector Net Debt) excluding banks is £128.6 billion higher than the previous measure."

That is quite a chunky rise and the main components of it are shown below:

"Classification of Network Rail as part of Central Government under ESA2010 increases PSND by £32.7 billion;

From the PSF Review a Consistent treatment of illiquid assets increases PSND by £51.4 billion;

Including the net debt of the Bank of England APF and Special Liquidity Scheme’s net debt increases PSND by £44.5 billion."

As you can see, this makes a fundamental change to how the UK’s position is recorded as it involves an increase in our official measure of our national debt by around 10%. Those who have thought that the new accounting standards (ESA 10) would improve our debt ratios, as for example they did for Italy yesterday (by around 5%), by raising measured GDP missed out that our recorded debt was going to rise faster! Slightly awkwardly, today’s [yesterday's] numbers will be exacerbated by the fact that we do not get the higher GDP numbers until the end of the month. Sorry, but joined up thinking is rare in such matters.

What about the fiscal deficit?

This will be measured in a completely different way to before. Going forwards, we will have a measure which excludes the banks and is not the same as what we had. Upwards pressure will be placed on the fiscal deficit by including the borrowing of Network Rail and by new pension calculations but downwards pressure will come from the Royal Mail pension scheme and the sale of mobile phone licences. Overall, from this impact we get this:

"In 2013/14 PSNB excluding banks is £3.8 billion higher than PSNB excluding temporary interventions from the financial crisis."

However, another larger change is happening at the same time and it muddies the waters by going in the opposite direction. This is yet another recalculation of how we should account for the quantitative easing operations of the Bank of England.

"For the PSF Review, including the Bank of England APF decreases borrowing by around £12 billion, as under the new excluding banks measure the interest payments to and from the APF no longer impact on borrowing."

And there you have it. As the television series Soap put it some time ago:

"Confused? You soon will be…"

You would almost think that this was the intention, to make the water so muddy nothing can be compared.

The numbers

The first number confirms the short-term stimulus theme as after all we are in quite a boom right now:

"Public sector net borrowing (PSNB ex) from April to August 2014 was £45.4 billion, an increase of £2.6 billion compared with the same period in 2013/14."

There should be more publicity given to the fact that we are borrowing more in a boom period rather than seeing it fall. We keep being told that there are special factors at play, and the latest was the bonus season for spring, but of course these numbers are for August.

If we move to the official measure of our national debt, I note that it has been pushed higher:

"Public sector net debt excluding public sector banks (PSND ex) was £1,432.3 billion in August 2014."

However, the publishing of national debt-to-GDP ratios has been suspended until we also have the new (higher) GDP figures. I guess they did not want to scare the markets:

"A further update to include 2012/13, 2013/14 and 2014/15 will be published on the 30 September when QNA (Quarterly National Accounts) are published."

Comment

It is conventional to argue that the UK is in the grip of what is regularly reported as severe austerity. I do not doubt that people are affected by it and yet the deficit has risen in a boom which looks rather like a pre-election loosening of the purse and wallet strings to me. That used to be called a fiscal stimulus.

Meanwhile the “improvements” to our statistics go on and on making comparisons on a like-for-like basis, even more difficult and in some cases impossible. Whilst I welcome some updating we do seem to be getting rather a lot right now. Care needs to be taken that we do not destroy what credibility the official statistics have left.

Number Crunching

It is in line with such attempts around arithmetic and mathematics that I present you these choices from Tesco in Battersea yesterday:

"3 Mars Bars for £1.56

Or 4 Mars Bars for £1

Or 7 Mars Bars for £2.89"




This article was written by Shaun Richards and originally published on September 24, 2014, in Mindful Money under the title: Is the UK seeing a pre-election stimulus rather than more austerity?


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