Largesse - Economics Weekly
Pressure eases on public finances, but not enough to finance a big birthday gift without recourse to higher taxes.
29 June 2018
Hammond, I shrank the deficit. Another welcome surprise for UK public finances, with the amount of borrowing needed to plug the deficit falling by £5bn in May, £2bn lower than a year earlier. We’ve just two months of data, but borrowing this fiscal year is £11.8bn, an 11-year low and some £4bn lower than last year. Most of this improvement is due to weaker spending growth, primarily lower debt interest payments. Further revisions to last year’s borrowing shaved another £1bn off the deficit. Every billion counts. The Chancellor is determined to decrease the deficit to secure £20bn for the NHS. Some birthday present. Despite being ahead of plan, Philip Hammond stills needs more taxes. Taxing times.
Worth it. An apt moment then, as the NHS reaches 70, to review our tax and benefit system. So, before taxes, the income of the richest fifth of households (that’s one in five!) is 12 times the income of the poorest fifth. Taxes halve that to six times. Add in benefit in kind such as health, education and plane-less aircraft carriers, it’s four times. So while tax and benefits may not be everyone’s preferred moderator, they’re not doing a bad job.
6-3. No, not a prediction of England’s final group game against Belgium. Rather it was the vote split between members of the Bank of England’s MPC at last week’s meeting. Six voted to hike, three dissented. Two of the minority were familiar culprits, but somewhat surprisingly the Bank’s chief economist made it a triumvirate. A swing into an outright majority voting for hikes might not be far away. The Committee collectively pointed to better economic data of late, seemingly confirming its judgement that Q1 weakness was temporary. Market-implied probability of a hike in August duly rose, from 48% to 70%.
Kryptonite. Justice Potter Stewart created legal history when admitting that, while unable to define obscenity, “I know it when I see it”. Indeed he may. But he crafted a useful phrase that aptly applies to money, especially in the age of cryptocurrencies. The BIS (the central banks’ central bank) has opined that, in addition to the usual functions of store of value and unit of account, money must also offer cost-effectiveness, scalability and trust, and that digital, decentralised, money does not. Although to expect the BIS to conclude otherwise may demonstrate naivety equal to turkey’s buying cranberry sauce in November.
Soft patch. The Euro area economy clearly lost momentum in early 2018. The EZ PMI composite index has fallen from a peak of 58.8 in January 2018 to 54.1 in May, an eighteen month low. Weakness was widespread. Rising fears of a global trade war and increased political tensions in Italy pose downside risks but the softer Euro is a supportive factor particularly for manufacturers. The European Central Bank are predicting a temporary slowdown, pointing to QE exit by end-18.
Gauntlet. US economist Larry Summers was characteristically provocative at the ECB’s annual research conference. Much of the focus centred on why unemployment could now fall so far without sparking inflation. But Summers’ contribution was more broadly based. He highlighted that central banks are still thinking about monetary policy today in the same terms as they did before the crisis, largely an inflation targeting mindset. But that following equivalent shocks in the last century (Great depression of the 1930’s, inflation shocks in the 70’s) there’d been much more regime change. Summers’ challenge therefore: central bankers need to try to do more and they should start by targeting maximum sustainable employment.
One ‘Lady’ to rule them all. The powers at Threadneedle Street continue to grow. Having subsumed the FSA, established the PRA, controlling the entire money system, managing the payment system and overseeing banks, and indeed, all of finance, the Chancellor of the Exchequer still thought the Bank of England was insufficiently equipped to deal with future risks. So he used his Mansion House speech to gift the Bank a further £1.2bn in capital and allow it keep a greater share its dividend income. The point in relation to financial stability is to ensure the bank can quickly and comprehensively provide liquidity as lender of last resort. Arguably one of the more important of its numerous functions.
North-South Divide. An FCA (the financial regulator) survey highlighted another north-south divide, in savings and investments. One in eight (12%) adults has no savings or investments at all, ranging from 17% in the North East to 8% in the South East. And just one in sixteen have more than £10k. Debt is less clear-cut. The South (notably London), understandably has the highest levels of mortgage debt and were most likely to be dissatisfied with their financial circumstances. Yet Northern Ireland had the highest level of unsecured debt and the highest proportion of over-indebtedness.
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Big, expensive, marred by controversy and inherently political. No, not the World Cup. QE. And the final whistle for this extraordinary period for monetary policy is approaching. At least for this round. And there’s always the chance of extra time.