Monday, 20 October 2008

UK public sector borrowing numbers are just awful

There are times when economies deteriorate so fast that the regular policy debate simply doesn't keep up. For example, over the weekend, Darling proposed accelerating public expenditure in order to prevent the economy from drifting into recession.

Today, the treasury published the public sector borrowing numbers for for the first nine months of the year. The figures were just horrible, and made Darling's expenditure plans look positively irresponsible.

The public sector deficit during the first nine months of the year were broadly equivalent for the entire deficit for last year. Since March, the public sector borrowing requirement is running at ₤3 billion more than last year. If this trend continues, then 2008 deficit is likely to be close to ₤60 billion, or about 4.3 percent of GDP.

Darling might be talking about a fiscal stimulus. Others might think that we need a few rate cuts. That debate was left behind at the station. The economy is spinning out of control. The monetary transmissions mechanism has broken down, base rates are negative in real terms, the fiscal deficit is rising to historically unprecedented levels, personal debt levels are off the chart, inflation is at a 16 year high, the economy is in a recession, and we have a banking crisis.

Remind me again, how will an interest rate cut will sort this mess out?

12 comments:

mitch said...

But on the bright side Gordon is smiling for once.

sobers said...

We are screwed. Seriously screwed. Labour are running a scorched earth policy. There will be nothing left in the cupboard by 2010. Borrowing will be off the scale, beyond the level that led to the IMF being called in in 1976. Tax will have to rise significantly. Spending may have to be cut in actual terms, the first time ever since WWII. This will of course be blamed on the incoming Tory govt, giving Labour another 20 years ammunition of accusations of 'Tory Cuts'.

It is conceivable that the IMF might have to get involved again. If the amount of debt required rises too fast, with no action by Labour to address the ballooning deficit before 2010, the Treasury may find it impossible to raise the money on the open market without massive rises in interest rates to attract buyers.

Rick said...

They say this is even worse than 1946 when Britain was on the verge of insolvency.

Hitler would be turning in his grave if he could see how easily Gordon Brown has ruined this country!

vado said...

You can't spend your way out of a recession.

Gordon is a moron said...

Who is borrowing Brown and Darling the cash? Is it the banks? How does that work? The governments puts money into the banks and they lend it back? I'm confused.

dearieme said...

Don't forget all Broon's Enron accounting - the off-balance sheet items make the reality far worse.

Anonymous said...

Alice, I can't follow the graphs. The blue 2007 graph starts at +10 billion (so we are borrowing that?) then turns negative (ending the year at -35 billion. Does this mean that we borrowed 45 billion net in year 2007? The 2008 graph jumps back to +15 billion and falls to -35 billion by October. What exactly is being plotted? It can't be "cumulative borrowing" because that should be rising (negative borrowing normally means money in the bank). Enlightenment welcome.

Cheers, David

Anonymous said...

Doesn't look too good eh campers !
Thanks for voting New Labour to one and all !

Anonymous said...

David,

The chart shows cumulative deficits, like a running total. So the number for January shows that the government collected more taxes than expenditure. That month it ran a surplus. The number for february represents the deficit for the first two months and September for the first nine months.

Anonymous said...

From Willem Buiter, I thought this article could just as easily apply to the UK:

The US tax payer is getting a terrible return on the $125bn worth of capital that was injected on his behalf by US Treasury Secretary Paulson into the nine largest US banks. This is surprising to me, because the complete or partial nationalisations of a number of US financial behemoths earlier in the year represented rather better value for money for the tax payer.

The nationalisation of Fannie, Freddie, AIG and pieces of the nine largest US banks (with more to come) was necessary to prevent a complete collapse of the house of cards we used to know as the American financial system.

Unfortunately, Treasury Secretary Hank Paulson’s injection of $125 billion into the nine banks (out of a total capital injection budget provisionally set at $250bn (but bound to rise to probably around twice that amount), carved out of the $700 bn made available (in tranches) by the 2008 Economic Stability Emergency Act, was almost a free gift to these banks. In this it was different from the case of AIG, where the Fed and the Treasury imposed rather tough terms on the shareholders and obtained pretty favourable terms for the US tax payer generally. It was also unlike the case of Fannie and Freddie, where the old shareholders are likely not to recover anything.

In the case of the Fortunate Nine, the injection of capital is through (non-voting) preference shares yielding a ridiculously low interest rate (5 percent as opposed to the 10 percent obtained by Warren Buffett for his capital injectcion into Goldman Sachs). Without voting shares, the government has no voice in the running of these banks. It also has no seats on their boards. By contrast, in the Netherlands, the injection of €10bn worth of subordinated debt into ING bank comes with a price tag that includes two government directors on the board and a government veto over all strategic decisions by the bank.

In addition, in the the case of the Fortunate Nine, there are no attractively valued warrants (options to convert, at some future time, the preference shares into ordinary shares at a set price or at a price determined by some known formula). Quite the opposite, the preference shares purchased by the US state, can be repurchased after three years, at the banks’ discretion, on terms that are highly attractive to the banks. The US tax payer is not only getting a lousy deal compared to private US investors like Buffett, (s)he is also doing much worse than the British tax payer in the UK version of Paulson’s capital injection (£37 bn so far out of provisional budget of £50bn). The UK preference shares have a 12 percent yield and come with government-appointed board members.

Even in the cases of AIG, Fannie and Freddie, unsecured senior creditors did not have to take an up-front haircut. Worse than that, even holders of junior debt and subordinated debt could come out of this exercise whole. There were no up-front haircuts, charges or mandatory debt-to-equity conversions.

That, I would argue, is scandalous, both from a fairness perspective and from the point of view of the moral hazard this creates, by boosting the incentives for future reckless lending to elephantesquely large financial enterprises. Unless not only the existing shareholders of the banks benefiting from these capital injections but also the holders of the banks’ unsecured debt (junior and senior) and all other creditors of the bank (with the possible exception of retail depositors up to some appropriate limit) are made to pay a painful penalty for investing in excessively risky if not outright dodgy ventures, we are laying the foundations of the next systemic crisis, even as we are struggling to escape from the current one.

Markbaldy said...

They are trying to re-ignite the housing bubble to "create" wealth.
They would be better letting house prices find their own level ie halve !
We would then have a more balanced society where your average working man could afford to buy a decent semi, run a Mondeo, have that week in Spain etc...
They need to stimulate investment in projects for the good of the country - new rail links, build our own power stations (burning coal mined HERE) etc..
All this lot are doing is putting off the inevitable - ie to bankrupt the UK and then blame it all on the next government.
Anyone who voted for New Labour deserves to get shafted... and they will be !!!!

sobers said...

It occurs to me that the people who are blithely adding massive amounts to our public debts, which will need financing from our children's taxes, are the very same people who exhort us to fight 'climate change' in order to protect the earth for (yes you guessed it) 'the children'.

So we must protect the poor mites from a rise in temperature of a couple of degrees (possibly), but decades of heavy taxation? Hard luck boys and girls, you're on your own with that one. We want to spend the cash now!