Your Autumn Statement check-list
Fraser Nelson 9:16am
I very much doubt today’s Pre-Budget Report will be memorable; a shame, given the
circumstances. The supplementary Office for Budget Responsibility document will be more interesting — and relevant to people’s lives — than the Budget itself. Sure, everyone
focuses their attention on the Red Book (or Green Book, as it is for the PBR) and GDP projections. But even GDP isn’t really useful. You can manipulate GDP by printing money, or by borrowing
money. Gets you nowhere. GDP is only useful insofar as it’s a proxy for national prosperity. And thanks to the OBR we’ll have other, more useful metrics today. Here's my guide to
them:
1. Net debt: up or down? How much will national debt rise by? It’s due to hit £1.36 trillion in 2014/15 — what will that figure be after today? Osborne should
tell us in the Budget statement. If it doesn’t rise, then Osborne will have done well.
2. The percentages. By what percentage will net debt rise over this parliament? Darling’s plans would have increased debt by 60 per cent; Osborne’s March plans suggested 51 per cent. Will the already small gap between Labour and Tory narrow further still? (By the way, it’s rich for Cameron and Osborne to say you can’t borrow your way out of a debt crisis when they’re doing precisely this)
3. The DEL cuts. Departmental spending — aka, DEL — is due to go down by 3 per cent a year, only slightly higher than Labour’s planned 2.2 per cent. What will it go down by now? (HMT will be careful not to publish this figure — you wouldn’t want to actually quantify the cuts, would you?! But you can work it out by putting the new DEL totals through the OBR’s GDP deflator. All this sounds dull, but it’s pretty easy).
4. The effect of Budget measures on jobs. Will the OBR produce an assessment of what today’s budget measures will mean for employment? If not, someone should ask Robert Chote this question in the press conference. I’ll be happy to be proved wrong, but I suspect today’s Budget measures will have precisely zero effect on jobs or growth.
5. The Gilt Scam. How much money will Osborne have saved, in forecast borrowing costs, due to lower gilt yields? This is why Chancellors like QE: it lowers yields, ergo lowers
borrowing costs — and gives them extra cash to play with (hence the infrastructure, nursery places, etc). But if Osborne's getting extra cash, due to an artificial manipulation of UK bond
yields (or ‘safe haven’ as it's cleverly being spun), then where does the money come from? Who's being screwed? The answer is savers, who are getting less for their ISAs , and pension
funds, and who will suffer shortfalls due to lower yields in the bonds they invest in. And while it is possible to guess how much our pension funds will be hit — it’ll be a 12-digit
figure — you’ll find the OBR will not be encouraged to make inquiries. This really is an inconvenient truth: that QE, the only tool the government can think of, is in effect a massive
raid on our pension funds) The below graph show’s Citi’s estimates of Osborne's secret stash, or how much he’ll have saved on cheaper gilts:
6. Cost of Living. This is the killer. The OBR will release new forecasts for average pay, and for prices. Over what period of time will the latter outstrip the former? And will
this be the longest sustained squeeze on living standards since the Great Depression? Something tells me Osborne’s 2015 slogan will not be ‘You’ve never had it so good’.
7. Jobs. What’s the OBR’s new forecast for employment, preferably broken down by public and private sector?
8. Blame it on the Eurozone? When the OBR lays out its new growth figures, will it explain how much of the downward revision is due to domestic and foreign influences? That is, how much can you really blame the Eurozone?
9. The Underspend. Yes, tax revenues have been lower than expected. But so has state spending, which is why some new spending projects have emerged from thin air. Sleekit, wee
Osborne has been spending less than the OBR expected him to, and by quite some margin. Core spending (i.e. excluding debt and dole), is down 0.2 per cent year-in-year, and the OBR had expected it
to rise by 2.2 per cent. Graph below:
10. Market reaction. What will the cost of insuring Britain’s sovereign debt (the so-called Credit Default Swap) be by the end of the day? This, not the FTSE100, is the
better indicator of market reaction — although still far from perfect.
One final thing. I'd also caution against getting too excited/giving a hoot about the changing estimated size of this ‘structural deficit ’. This is a classic language, being used — as Orwell would have put it — to give the appearance of solidity to pure air. All it means is an estimate of how big the deficit will be when the economy has recovered.Your guess is as good as mine. It's a far smaller figure than the deficit itself, so it suits the government to have journalists using this fake metric.
God knows how many hours were wasted worrying about Brown's just-as-spurious Golden Rules. Deficit should be measured in simple terms: what the government spends, minus what it raises. And that's something no one can spin.
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DavidDP
November 29th, 2011 9:41am Report this comment"Osborne has been spending less than the OBR expected him to, and by quite some margin"
Sorry, I though your argument was that he wasn't?
Julian F
November 29th, 2011 9:50am Report this comment"This is why Chancellors like QE: it lowers yields, ergo lowers borrowing costs — and gives them extra cash to play with (hence the infrastructure, nursery places, etc). But if Osborne's getting extra cash, due to an artificial manipulation of UK bond yields."
Do you think gilts traders are stupid, Fraser? As a former trader myself, I can tell you that the market is quite capable of seeing through short-term monetary manipulations. Long-term gilt yields reflect the market's assessment of - surprisingly enough! - the long term outlook for inflation and government borrowing. Yields at the long end of the curve often rise in response to the printing of money, not fall. The current yield curve is an honest reflection of the market's positive assessment of current government policy and the fact that the economy is expected to grow only slowly, thus curbing inflation trends. The government could easily throw this away by printing money more aggressively or relaxing its deficit reduction plans (by the way, you persist in writing about debt when the plan is to bear down on the deficit, with longer-term implications for the debt burden). But, at the moment, it has the balance about right.
It seems to me that you have adopted an intellectual position and are loath to adjust it, whatever happens.
Nickle
November 29th, 2011 9:55am Report this commentThe best measures are.
1. Deficit as a percentage of tax revenues. It's the government with the problem. It's accounts are shot.
2. Total debt as a percentage of tax revenues. That includes the pensions and guarantees. 7,000 bn on an income of 550 bn. Very very highly geared.
3. Percentage of tax revenues spend on core spending. The spending that can't or won't be cut.
Structural deficit, GDP and other figures can be fudged. Even the present value of pensions gets fudged by using discount rates derived from assets to discount liabilities, because it makes them smaller.
Hugo Chav
November 29th, 2011 10:10am Report this commentFraser,
Event Horizon is approaching. Sovereign bond markets are blowing up and contagion is rampant, it is only a matter of time before the UK is infected.
Cynicus Economicus nailed it between 2007 and 2011, now it is time to focus in on Detlev Schlichter and his Paper Money Collapse blog. Because he worked in the bond markets he gives a deeper perspective than Cynicus and a better feel for the timing of events.
Fraser Nelson
November 29th, 2011 11:15am Report this commentJulian F, as a former gilt trader you can imagine what what would happen if the Bank of England announced it would buy £200bn of bonds - but only in the second-hand market. You'd buy shedloads of bonds, and make a turn selling them to the BoE. Central bank interference in bond market always manipulates yields, this is the central argument for ECB intervention in the Eurozone. To lower the cost of ten-year debt notes.
Julian F
November 29th, 2011 11:29am Report this commentTo expand on my earlier point, given that the BoE has been buying gilts across the maturity range, it is instructive to look at whether the curve has been flattening. It has. Since QE1 ended in January 2010, the spread between 30 year yields and 6 month yields fell by just over 100 basis points (1%). It is particularly striking that the majority of this fall took place prior to the announcement of QE2. So, on two counts, it would be difficult to argue that the fall in yields has been due primarily to Bank purchases, though there will undoubtedly have been a short term effect.
DavidDP
November 29th, 2011 11:41am Report this commentHonestly, there's really little he can do, anyway.
He's hit what could be disasterous economic waters having inherited not only no money but a deficit so high that he needs to pay too much regard to the bond markets.
Its easy to make lemonade if you are given lemons, but George was given some skins, pith and the pips.
Cameo Parkway Kid
November 29th, 2011 12:10pm Report this commentFraser. Put up as many graphs as you like. But you can't defend the indefensible.
Simply, the Boy George gambled on shoving all 'our' eggs in one basket, and hoped that ramping up taxes and exports alone would engender a situation for tax-bribes in 2014.
This ideolised C-grade economist has led us up a blind alley with the wolves at our arse. And when it's all too obvious that the chubster has been barking up the wrong tree and put our cash on the wrong horse(s), all too late, he comes up with Plan P.
Julian F
November 30th, 2011 11:34am Report this commentFraser at 11.15 - Indeed. As a one-off effect. But much of the fall in yields came between the two bouts of QE. And my point about the flattening yield curve remains extant, measured between 30 and 5 years as well as measured between 30 and 6 months. In the end, the market will always reflect the fumdamentals. There is an old but very apt saying that "you can't buck the market".
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