Introduction

The Office for National Statistics data for the UK’s public debt in June 2024 was duly published, and there was a turnaround in the direction-of-travel, of sorts anyway.

June borrowing was another disastrous £14.5 billion, but this resulted in Debt/GDP being ‘provisionally estimated’ at 99.5%, when the equivalent Debt/GDP number in May was 99.8%.

How 2 + 2 = 3

The number of £££ owed by the UK increased in June by around 0.63% of GDP (Base GDP £2,300 billion; borrowing £14.5 billion). As May’s Debt/GDP number was 99.8%, June’s extra borrowing of 0.63% should have resulted in 100.43%, not 99.5%.

It can only have been the case that the numbers resulting in the 99.8% for May were revised so that May’s figure was lower. It is very hard to see how that was possible but still.

The ONS persists in not stating GDP and debt numbers outright in £££ in their headlines. There is no reconciliation visible with the Debt Management Office’s numbers for the exact amount outstanding on 30th June 2024 in the form of UK government securities (short and long term; discount basis; interest accrual basis; index-linked). The ONS varies the GDP number apparently as it pleases.

By this insane logic and creative accounting, June’s continued fiscal incontinence brought debt down as a function of GDP, when the number of £££ owed has increased.

This smacks of desperate accounting adjustments, like an Enron would have done in order not to breach a loan covenant, trigger a cross-default of all their financing documents, and bring the roof down on top of themselves.

It fits the narrative

The result is another obfuscation, which serves the narrative. The ONS an independent institution? UK public finances under control and improving? Don’t make me laugh.

This bonkers narrative is in line with Liz Truss being criticized by name in the civil service briefing for the King’s Speech,[1] with small boats carrying migrants miraculously now being returned to France once the Labour Party are in power,[2] with the Tories being totally responsible for COVID now that the Labour Party are in power,[3] and so on: a Left-leaning civil service and public sector generally, the ‘grown-ups’, and the bien-pensant/cente-left establishment acting in concert and from many centres of power to reinforce a single narrative.

£14.5 billion – the excess of government expenditure over its receipts in a single month. That is the only thing here that doesn’t obfuscate, or misrepresent, or rely on the re-writing of yesterday’s weather to create the desired impression.

Additional costs

Now Labour have initiated a drains-up review of the public finances, claiming they had no idea things were so bad, despite the UK’s public finances enjoying a high level of transparency.[4]

Perhaps they have started getting the dossiers on their desk for the items listed in my previous blog.[5]

Perhaps they have delved below the ONS figures and found out that those figures had been window-dressed at their source. For example there appears to be a £3 billion ‘black hole’ in NHS budgets, even after reserves and special funds have been accessed to cover current spending.[6]

Perhaps they have begun to factor in what they want to increase spending on. For example, Labour appears willing to agree to above-inflation pay rises for the public sector, without requiring increased productivity to pay for them.[7]

Perhaps they have begun to realise that some of the measures introduced by the Tories, and which Labour may have wanted to double down on, are not producing the extra money that was expected, and may even be producing less. For example, additional council tax on second homes is being side-stepped by homeowners switching their properties into businesses that are eligible instead for Business Rates – and there is a Business Rates Relief scheme for an owner’s first business.[8]

Laffer Curve[9]

For all the sneering disdain accorded by Labour to supply-side economics, and for their promotion of ‘modern supply-side economics’ (which is the opposite of the traditional version), they may be starting to realise that the UK has reached the inflexion point between tax scope/rates and tax revenues identified by the supply-side economist Arthur Laffer.

Labour ideology requires savers, asset owners, and holders of private pension funds to be punished as a matter of principle, but Labour have the problem that they – at least for now – have to operate within the rule of law and they need money, not just ideological satisfaction.

Widening the scope of Capital Gains Tax and increasing its rate will produce a perfect Laffer Curve outcome. It will act as a deterrent to individuals and businesses selling assets such as to realise a capital gain, or will cause them to avoid engaging in a scheme on which the profits would be subject to Capital Gains Tax. The first response causes current takings of Capital Gains Tax to fall. The second response both reduces investment, causes an economic slowdown, and reduces future takings of Capital Gains Tax.

In addition to that we have a phenomenon that Labour almost certainly have not factored in: their accession to power causing asset prices – notably house prices – to fall, reducing or eliminating capital gains and the Capital Gains Tax on them.

Labour talk about economic growth, but their ‘modern supply-side economics’ foresee growth being driven by increased government funds – raised by taxes or by borrowing, when the UK is up to the limit on both.

Conclusion

The UK public finances are in a terrible condition, their plight subject to window-dressing at source and obfuscation at the summarising level in order to keep to the narrative of the centre Left – first under Sunak and now under his doppelganger Starmer.

[1] https://www.theguardian.com/politics/article/2024/jul/17/liz-truss-complains-about-mini-budget-being-described-as-disastrous-in-kings-speech accessed on 25 July 2024

[2] https://www.independent.co.uk/news/uk/politics/border-force-channel-migrants-small-boats-b2582449.html accessed on 25 July 2024

[3] https://www.theguardian.com/uk-news/live/2024/jul/18/uk-covid-19-inquiry-live-report-to-reveal-how-brexit-and-austerity-affected-pandemic-planning accessed on 25 July 2024

[4] https://www.ft.com/content/d45f94b9-5fb5-45f5-8be0-a2ba3fabe69c accessed on 25 July 2024

[5] https://www.lyddonconsulting.com/the-grown-ups-have-all-but-ensured-that-uk-debt-will-exceed-100-of-gdp-and-that-the-only-way-from-there-is-down/ accessed on 25 July 2024

[6] https://www.telegraph.co.uk/news/2024/07/23/hospitals-cut-jobs-beds-3bn-nhs-black-hole-wes-streeting/ accessed on 25 July 2024

[7] https://www.telegraph.co.uk/politics/2024/07/21/reeves-signals-above-inflation-public-sector-pay-rises/ accessed on 25 July 2024

[8] https://www.msn.com/en-us/money/realestate/second-homes-tax-raid-to-backfire-and-cost-treasury-172m/ accessed on 25 July 2024

[9] https://www.tutor2u.net/economics/reference/laffer-curve accessed on 25 July 2024