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The UK public finances continue to disappoint us

The UK public finances continue to disappoint us Shaun Richards

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One of the features of the credit crunch era is the way in which statisticians have kow-towed to the so-called elite. For example, it was only last July that the US Bureau of Economic Analysis decided on a redefinition of US economic output that raised it by 3.5%. Much more of that, and the problems of the credit crunch will disappear! However, it is not just an American issue, as Eurostat plans a similar definition change for the European Union that will add some 2.4% to economic output there on average. UK readers will be particularly intrigued by an increase in economic output there expected to exceed 3% at a stroke of a statistician’s pen. The main driver of this is a change in the accounting for research and development, which rather resembles double-counting in my opinion.

Alchemy involving the UK public finances

This new move which, at a stroke, will improve the UK’s Gross Domestic Product (GDP) will also improve its GDP to debt measure. How convenient! But this is only one in a long line of manipulations of data that have taken place in recent times. An example of this was the transfer of the pension liabilities of the Royal Mail to the public-sector ahead of its privatization. Somehow, an estimated net liability for the future of around £12 billion became a net asset of £28 billion and reduced both the UK fiscal deficit and the national debt by that amount.

Added to this has been the treatment of payments received from the Bank of England as it passes on to Her Majesty’s treasury the coupons from its UK Gilt holdings acquired via its £375 billion of quantitative easing. You see some count towards reducing the fiscal deficit and national debt and some, which fall foul of the “entrepreneurial income”, do not. So, in Orwellian terms, some coupons are indeed more equal than others.

The UK economy is in a boom

This misrepresentation and manipulation of the numbers has happened just as the UK economy has improved and, according to the Bank of England, is set to improve further:

Business surveys had remained strong and pointed to growth of around 1¼% in both the fourth quarter of 2013 and the first quarter of 2014. The Bank staff’s central expectation of GDP growth, which also took account of other factors including the ONS monthly output indicators, was a little weaker at just under 1% a quarter over this period.

So, the UK public finances should be improving considerably right now. Those who recall the double whammy effect of slow downs in the past, where revenues fall and spending rises, will not unreasonably be expecting the reverse of this.

However the numbers remain disappointing

So far, the performance has not been something to put a smile on the face of the Chancellor of the Exchequer or indeed anyone else. The latest release which covers up to the end of December tells us this:

For the financial year to date 2013/14, public sector net borrowing excluding temporary effects of financial interventions and also excluding the effects of the transfer of the Royal Mail Pension Plan and the transfers from the Bank of England Asset Purchase Facility Fund was £96.1 billion. This was £4.8 billion lower than the same period in 2012/13, when it was £100.9 billion.

We learn two things here: firstly, all the exceptions illustrate my point about misrepresentation and manipulation of the statistics; and secondly, the improvement is a disappointment when we consider the economic growth trajectory of the UK. All things being equal, they should be better than that.

Spending is rising and not falling

If we look into the detail, we see that tax revenues for the UK government are rising - and in fact have risen by 4.1% so far in this fiscal year. Those wondering about a UK housing boom will wryly observe that stamp duty revenues were up by 57.1% in December. Accordingly, we are already expecting expenditure to be higher - and indeed it is, by £6.6 billion or 1.4% over the same time period. This may be confusing to those who receive a media diet of “cuts, cuts, cuts” and an austerity mantra, but the best that can be said is that spending is rising slightly more slowly than inflation. Please do not misunderstand me; I know that, in some areas, there have been cuts and individuals have lost their jobs - but there has been more spending somewhere else to more than offset it.

The National Debt

As a final thought, the Office for National Statistics tells us this:

Public sector net debt excluding temporary effects of financial interventions (PSND ex) was £1,254.3 billion at the end of December 2013, equivalent to 75.7% of gross domestic product (GDP).

Eurostat today declared it to have been 89.1% at the end of September. Aren’t you glad that is so clear?!

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Tags: austerity , Bank of England , credit crunch , cuts , debt to GDP ratio , EU , European Union , Eurostat , GDP , housing boom , inflation , Office for National Statistics , ons , pension , privatization , QE , quantitative easing , Royal Mail , stamp duty , statistics , tax , UK
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