UK fiscal fail

[ASusilovic]

Anyone for Plan B?

Or just for knuckling down on fiscal cuts?

This is not what the market was expecting from the latest UK public finances data on Tuesday — £22.8bn of public sector net borrowing in November, versus consensus forecasts of £17bn.

Which has left us with the biggest public sector deficit on current budget since records began and also the biggest public sector net borrowing (PSNB) figure since records began. This presents quite a reality check on whether UK austerity has bitten yet — and whether it really can work over the make-or-break 2011/12 fiscal year.

Full details via the Office of National Statistics:

Provisional estimates of the public finances show that the public sector had:

• a current budget deficit excluding the temporary effects of financial interventions of £19.9 billion in November 2010 (a deficit of £19.4 billion including interventions)

• net borrowing excluding the temporary effects of financial interventions of £23.3 billion in November 2010 (£22.8 billion including interventions

For measures excluding financial interventions:

the public sector current budget was in deficit by £19.9 billion; this is a £6.0 billion higher deficit than in November 2009, when there was a deficit of £14.0 billion;

public sector net borrowing was £23.3 billion; this is £5.9 billion higher than in November 2009, when net borrowing (excluding financial sector intervention) was £17.4 billion;

public sector net debt at the end of November 2010 was £863.1 billion (58.0 per cent of GDP) up from £708.6 billion (50.0 per cent of GDP) at the end of November 2009

Here’s a chart of HM Government’s accounts which might be of particular interest (click to enlarge):

It shows that interest payments rose to £4.5bn from £3bn on a year-to-year basis — or by 50 per cent, while current receipts have only really crept forward. Therein was the UK’s fiscal problem. Howard Archer of IHS Global Insight noted both points on Tuesday. As he observed (emphasis ours):

The public finances were truly horrible and much worse than expected in November. This is dire news for Chancellor George Osborne to digest over Christmas and is likely to reinforce the government’s belief that there must be no let up in the fiscal consolidation efforts. Indeed, there is now a very serious risk that the government will miss its fiscal targets for 2010/11. Much will depend on how well growth holds up over the rest of the fiscal year, and any serious hit to economic activity coming from the prolonged bad weather will only make things harder.

A tiny crumb of comfort for the government is that the public finances still show marginal overall improvement during fiscal year 2010/11. Specifically, the PSNBR excluding financial interventions edged down to £104.4 billion during April-November from £105.1 billion a year earlier. Nevertheless, if current trends are replicated over the whole fiscal year the PSNBR would come in around £155 billion, meaning that Chancellor George Osborne would miss his target PSNBR of £149 billion in 2010/11. In late November, the Office for Budget Responsibility edged down the forecast PSNBR in 2010/11 from £149 billion to £148.5 billion.

And with data like these you really have to wonder what happens to the UK austerity experiment in 2011. It’s a year that’s promising reflation, interest rate rises, more worries in the big trading bloc next door to the UK — and throughout, feeble growth. That is not a great outlook for the government, we think. And let’s not even go into the eurozone exposure facing Her Majesty’s banks.

At least the Treasury’s response to the figures wins points for spinning bad news into good:

RTRS-UK TREASURY-NOV PSNB DATA SHOWS WHY GOVT HAS HAD TO TAKE DECISIVE ACTION TO TAKE UK OUT OF FINANCIAL DANGER ZONE

Just consider whether we might still be walking into another one.

http://ftalphaville.ft.com/blog/2010/12/21/443766/uk-fiscal-fail/

Fiscal desaster made in the UK...Maybe a hgher bank tax would help?

 

[Ghost of Cutten]

Short the pound is still looking like a very attractive proposition. It is as plain as day that there will be massive cuts, union strikes, street riots, popular unrest, further fall in house prices, and quite possibly the government coalition will collapse leading to an early general election. I struggle to see how the pound can do anything other than collapse disastrously to 1.30 and lower under those scenarios. Markets being markets, they will remain totally oblivious to this until the events actually start happening, then you'll get a major downtrend ending in an eventual deluge of panic selling like 2008.

Why own any UK assets right now? Just wait for the coalition to collapse and a snap election to be held. Wait for the street riots a la 1968. Wait for the IMF bailout. Wait for rates to rise in a few years, sounding the death knell for the property market. Wait for the housing bubble to burst a la Miami and Vegas. Wait for the non-dom tax exemption to be abolished. Wait for corporation tax to be hiked to 35%. In the meantime, short the crap out of the pound and don't keep so much as a single penny in the country.

 

[Martinghoul]

The solution: http://macro-man.blogspot.com/2010/12/tmm-solves-uk-structural-deficit.html

 

[fundjunkie]

Quote from Ghost of Cutten:

Short the pound is still looking like a very attractive proposition.

Perhaps, but not for the reasons you suggest.

Quote from Ghost of Cutten:
It is as plain as day that there will be massive cuts, union strikes, street riots, popular unrest, further fall in house prices,

None of these will spark a knee jerk currency collapse in the way you imply. And readers should not confuse "popular unrest" with the idea that the general public does not buying into the need for tackling the deficit. I've encountered noone, other than those defending their own self-interest, who does not agree that the deficit has to be dealt with.

Quote from Ghost of Cutten:
and quite possibly the government coalition will collapse leading to an early general election.

You're getting into the realm of fiction there. Are you actually British? If you are, then don't fall into the trap of wishful (political) thinking. If you're not, you have no idea what you're talking about. It could happen, but it's very unlikely in the timescales you seem to be suggesting.

Quote from Ghost of Cutten:
I struggle to see how the pound can do anything other than collapse disastrously to 1.30 and lower under those scenarios.

The only thing I see that could "collapse" the pound is political instability or sovereign debt contagion and a flight to safety. But since there is relative political consensus on dealing with the deficit even that isn't such an issue. I find the idea that protests on the streets and/or union unrest will, in itself, dramatically undermine the currency quite laughable.

I see sovereign debt as the real threat - and not just to the pound.

Quote from Ghost of Cutten:
Wait for the street riots a la 1968.

I'll watch in amusement as those interested minorities rage against that which the public psyche has already accepted. They'll be wasting their time.

Quote from Ghost of Cutten:
Wait for the IMF bailout.

A bailout won't happen for the reasons you're giving. If it happens for the reason I suggest then Britain won't be the only country getting bailed, negating the thinking behind this thread, and currency volatility will be through the roof (again).

I don't disagree that the pound can be shorted depending on your time horizon. But my view is more pragmatic. That is, it seems to be unstated Govt and BoE policy to devalue the currency and so there would seem to be more downside to the GBP than upside. But hey, at least Britain has that freedom of action, unlike the prisoners of the eurozone.

Thx,
D