As recently as late November, UK Chancellor of the Exchequer George Osborne was extolling the superiority of Britain’s post-crisis recovery; economic growth since 2010 “three times faster than Japan … faster than Germany and at the same rate as the United States.”
Osborne made the statement as part of the UK’s Autumn Spending Review, in which he reiterated a pledge to bring the government’s finances into surplus by the end of the 2020 fiscal year.
What a difference a month makes. Last week, third quarter growth was revised lower by a tenth of a percentage point to just 0.4%, or by 2.1% over the same period of 2014. For those keeping score, the Japanese economy expanded by 0.3% between the second and third quarters, matching the rate of German growth.
It was an unexpected slow-down in the UK service sector – which comprises nearly 79% of total output -- that explained the downgrade to growth. The fourth quarter is off to a shaky start; output of services rose by just 0.1% between September and October.
But that wasn’t the most shocking data to cross Osborne’s desk before the start of the Christmas holidays. More concerning, perhaps, for a chancellor who has staked his reputation on fiscal prudence, was a staggering deterioration in government finances. Public sector borrowing soared to $21 billion in November, 10% above the same month a year ago, well ahead of economists’ forecasts. The borrowing blow out left debt at a near-record 80.5% of gross domestic product.
Buried in the fine print of November’s borrowing numbers was a footnote suggesting that the chancellor’s deficit reduction to date is not solely the result of a systemic improvement in the public finances.
In November of 2014, the Financial Conduct Authority, which regulates securities firms, pocketed $1.6 billion in fines from a large number of banks, the penalty for failures in foreign exchange operations. That one-off levy dramatically flattered borrowing numbers in the 2014/15 fiscal year, making a difficult comparative for results in the current fiscal year.
The independent Office for Budget Responsibility has put a brave face on a deterioration in public finances over the past several months, forecasting a “sharper fall in the deficit over the rest of the [fiscal] year than we have seen to date,” mostly due to a projected increase in income tax receipts in January.
But that may prove to be optimistic, given the slowdown in the UK economy. Even with employment hovering at 5.2%, the lowest level since 2008, remuneration has failed to keep pace. Wage growth has only moved above the rate of inflation within the past twelve months, and after a spike at midyear, growth in average weekly earnings fell to 2.4% in the three months to October.
With wage growth sluggish, hopes of a surge in tax receipts defraying borrowing costs may prove to be wide of the mark. George Osborne may revel in his reputation as an iron chancellor, but he’s had a helping hand from the miscreant bankers he aims to expunge from London’s financial district.
