Today sees two important pieces of economic news for the UK and we can look at the state of play for both by taking a look at the UK Gilt or government bond market. Only last Monday I pointed out this.
there is a small or medium-sized island depending on your perspective which has seen its bonds doing well over the last week or so. It is the UK where the ten-year Gilt yield has fallen from above 1.71% to 1.53%.
Since then the good news has carried on coming to coin a phrase because the ten-year Gilt yield has fallen to 1.37%. If we look back to see what has happened we see that there was a change since around the tenth of this month as up to then bond yields around the world had been rising and took the UK Gilt with them. Actually it is not far off an example of groundhog day as we are pretty much where we were this time last year.
The UK Budget
What the development above means is that the media needs a large slice of humble pie after majoring on this issue.
British Prime Minister Theresa May declared on Wednesday that her government’s austerity push was over after nearly a decade of spending cuts in many areas of public services. ( Reuters on October 3rd).
They then cherry picked this part of the IFS Report from the middle of the month to give a cost for this.
Keeping to the spring statement plans, combined with the commitments to spending on the NHS, defence and aid, would mean that a total of £19 billion would be cut from the day-to-day budgets of unprotected public services by 2022–23.
This had two problems. The first was that this government declared the same thing back in October 2016 but then seemed to suffer from an outbreak of amnesia. The next and to be fair to the IFS they did mention this the public finances are performing well so the mentions of tax rises were not well thought out.
Thus we advance on today’s Budget noting that the recent fall in equity markets has had a much larger impact on Gilt yields than expectations about the Budget and also all the rhetoric about the implications of Brexit. Also it gives us another perspective on the 0.25% Bank Rate rise to 0.75% as Gilt yields are back to where they were then. It took Mark Carney four years to summon up the courage to do something which looks an ever smaller pea shooter.
There may be another impact of this which is on the housing market via fixed-rate mortgages. This is because they tend to track the five-year Gilt yield which has fallen below 1% to 0.96% from the recent peak of 1.26%, meaning there may be some cheaper deals in the offing.
As ever we see that various details of the Budget have been leaked. The plan for higher spending on the National Health Service was announced a while back and the last week has seen hints of help for business rates for smaller businesses and more money for road potholes. As the troubled Universal Credit program rumbles on it would not be surprising if money was found to oil its wheels either. As the underlying public finances are good there is scope for the Chancellor to pull a rabbit from the hat should he wish.
Every Budget has the following feature.
Mechanically extrapolating the percentage change in net borrowing that we have seen so far this year over the full fiscal year would imply a deficit for 2018-19 about £11 billion lower than we forecast in March. But that would not take account of the fact that the recent strength of cash corporation tax receipts has yet to be reflected in the accrued borrowing measure.
This is the Office for Budget Responsibility ( OBR ) which has confirmed my first rule of OBR Club once more. This is around a £13 billion error if we allow for the corporation tax changes they mention which they have managed in spite of the economy doing nothing spectacular. Please remember that when their figures are being quoted later along the lines of this from the Colonel in Full Metal Jacket.
Son, all I’ve ever asked of my marines is that they obey my orders as they would the word of God.
The reality is that in this instance “the word of God” as expressed by the media over the next few days will be wrong again.
This has been heading in the opposite direction recently as in a similar pattern to the Euro area we have seen money supply growth weaken. Today;s update for September was mixed on this front. The annual rate of M4 growth fell to 2.5% but the amount of M4 lending rose by £16.5 billion raising its annual rate of growth to 3.1%. So we know that the trend is weak but due to the erratic nature of these numbers we are still not sure how weak.
Next comes something we have been looking for through most of 2018.
The fall on the month was due to weaker net borrowing for other loans and advances, which fell from £0.7 billion to £0.3 billion. Within this, new borrowing for car finance fell sharply, consistent with very weak car registration numbers in September,
That was from the Bank of England earlier and I hope readers will forgive me for putting the cart in front of the horse here. But we have been waiting for it to admit to this for some time! After all car registration numbers have been weak all through 2018. So let is now look at the overall data in this area.
The net amount of new consumer borrowing, excluding mortgages, fell to £0.8 billion in September, down from £1.2 billion in August……….The annual growth rate of consumer credit slowed further in September, to 7.7%, reflecting these weaker monthly lending flows. The annual growth rate was the lowest since June 2015, and well below the peak of 10.9% in November 2016.
There are various ways of looking at this. After all a 7.7% growth rate is not far off treble the rate of growth of wages and around quadruple economic growth. Although of course a few months back Sir Dave Ramsden did call an annual rate of growth of 8.3% weak. But apart from car finance other sectors of unsecured credit are still maintaining quite a rate of expansion as for example credit card debt is still rising at an annual rate of 8.7%.
Unlike consumers who seem to thirst for bank lending especially if it is unsecured businesses seem to be turning away from it.
The fall in bank lending to businesses was driven by lending to large businesses, which fell £2.0 billion in September following three months of positive flows. Bank lending to small and medium sized businesses (SMEs) increased by £0.4 billion in September. These flows left the annual growth rate of lending to large businesses unchanged at 2.2%, while the growth rate for SMEs remained close to zero for the ninth consecutive month.
I do not see this being reported elsewhere but it does beg a question of the bank bailout culture and also measures such as the Funding for Lending Scheme which gave banks yet another subsidy but crucially to help them boost business lending.
The UK public finances have more room for manoeuvre in them than we are being led to believe another sign of that has been given by the OBR.
Public sector net debt (PSND) fell by 2.4 per cent of GDP between September 2017 and September 2018.
Care is needed as such waters are always muddy rather than crystal clear. For example the August 2016 Sledgehammer actions of the Bank of England continue to inflate the national debt whereas the latest stage of the “hokey-cokey” dance of the housing association sector went the other way. Current Gilt yields will help the numbers and it is in HM Treasuries favour to have them as up to date as possible. So the Chancellor has room and will be happy that the media has suggested the reverse.
On the other side of the political fence from what is called the Progressive side is this from Ann Pettifor.
£50 billion added to the 2019/20 Budget would add £13 billion to the NHS; £12 billion to the social security budget and £12 billion to local government services. £13 billion would be added to other government departmental services.
Via the multiplier effect this would ripple through the economy.
So an injection of £50 billion could generate another £25billion of income – thereby expanding the economic ‘cake’.
So a multiplier of 1.5. Let me address that by going back to Friday where in the case of Italy the multiplier was suggested to be less than one partly through higher bond yields. As the series SOAP regularly informed us.
Confused you will be!
Let me offer some guidance. Is the UK in a situation where the fiscal multiplier is more than one? Yes I think so for two reasons. We have an economic growth record much better than Italy’s and Gilt yields start much lower. At some point the Gilt market would respond unfavourably but the tipping point depends on what we call “confidence”. Also the reference to “cake” tells us it has shrunk which it only has if you compare to pre crisis trends. So that bit is misleading.
It would not be a UK Budget without some form of a stealth tax. This time in comes in the form of a cut in likely interest for savers. From National Savings & Investments.
From 1 May 2019, existing holders of Index-linked Savings Certificates who renew into a new term will receive index-linking based on the Consumer Prices Index (CPI) measure of inflation, rather than the Retail Prices Index (RPI)