The Office for National Statistics has produced new figures for the national finances for March 2024 this morning. In their release, they say:
- Borrowing in the financial year ending (FYE) March 2024 was provisionally estimated at £120.7 billion, £7.6 billion less than in the same twelve-month period a year ago but £6.6 billion more than forecast by the Office for Budget Responsibility (OBR).
- Compared with the annual value of the UK's economy, borrowing in the FYE March 2024 was provisionally estimated at 4.4% of the UK's gross domestic product (GDP), 0.6 percentage points less than in the same twelve-month period a year ago.
As most readers here will know, I do not think these figures are credible for reasons that I have previously explained.
However, there is an issue to note: The borrowing (if we are to call it that) was £120 billion last year. According to the Office for Budget Responsibility, investment in the year should turn out to be £133 billion. See page 152 here. So, the current budget balances. Borrowing has already all been for investment, and there is no reason for anyone to obsess about debt, even by their own artificially created standards. So why are they?
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Why do we (the UK) have to borrow money?
Is it a mechanism for keeping governments honest (i.e. ‘the markets’ will decide if your doing the right thing or not)?
Or is it just to create jobs for certain types of better off folk in the City?
Or both?
Or something else?
Surely there must be a better way.
We don’t borrow monery
We take desposts from the City and elsewhere
The givernment is a savings bank, but it is dressed up as something else
Indeed, I always like to think about the people and companies who are buying treasury bonds.
Why are they buying them (after all no-one is forcing them to):
1.) To put their money in a totally safe place (compare that to buying Thames water bonds)
2.) To receive an income over a long period
The additional questions would be if the Governments no longer sold treasury bonds where would these investors place their savings without risk?
Back years back when I worked in the city some firms bought treasury bonds which they then split into the par and the coupons. They could sell the par as a guaranteed sum at a defined number of years in the future, then sell the coupons as a guaranteed income for the same number of years.
I think there can only be two possible reasons Richard
Either they understand macroeconomics and how a fiat currency works and they are lying to keep the whole neoliberal roadshow going,
or they have no idea how a modern economy functions and honestly believe the stupidity they spout
That’s my two penny worth anyway
I suspect in most cases it is the second. Brexit and the arguments they made, points to that
Of the others, they have an incentive to ignore what doesn’t fit. And saying it would lose them status.
It often takes a disaster for people to make major changes in their thinking.
It communicates well with the enormous number of voters who will identify with the idea while not at all understanding the issues involved. It has good optics, as the cool kids are saying these days.
I have been looking at the tables in the OBR link you provided. I don’t have any accounting expertise so apologies if I am missing something obvious here.
As you say, investment exceeds borrowing, but this is gross investment. Borrowing exceeds net investment, which means the current budget is in deficit. Is Labour’s fiscal rule that borrowing should only match gross investment or net investment?
The counterpart to borrowing covering investment is taxes covering current spending. Depreciation has to be put somewhere for the fiscal rule, but I can see reasons for why it should not be included in either part. It makes sense when talking about borrowing covering investment that you are talking about the actual amount of money spent in a given year on investment, which would exclude depreciation. But you wouldn’t include depreciation in current spending, because it’s an investment value, so it would be left out of consideration altogether.
I am guessing that for the purposes of Labour’s fiscal rule that borrowing is only allowed for net investment, because it gives a better representation in the actual increase in investment for that year and because depreciation is an investment value and so should be included with investment in determining the rule, and because if gross investment was used it would make it so easy to meet the rule that it would be almost pointless having it as a rule. You could also add that Labour believe government borrowing is bad and so they wouldn’t want the version that allows them to borrow more.
So for the purposes of Labour’s fiscal rule, is borrowing only allowed for gross investment or net investment?
You raised a good point that I deliberately chose to ignore for now – optinmg for a simple one
Let me muse on this – I will be back to you
I am curious about the weight being attributed to depreciation, when it is typically dependent on a forecast of the life of the asset, and may have a very loose relationship with it’s market value, or real inflation and an even looser relationship with the economic value to the firm of the asset being deprecated. Apart from all that, depreciation is just hunky dory.
It is, in my opinion, always one of the most dubious numbers in the accounts. It is exceptionally arbitrary – and even more so if provided on revalued assets. That’s a made up number based on a made up number.
“depreciation – dependent on a forecast of the life of the asset,”
How long is a piece of string? Example from the elec networks.
In 1973, I started work (as a student apprentice) with the local electricity board. 1st job, get in the way of a jointer and mate installing a link box. One of the cables connected was a repurposed tram cable dating from circa 1905. The link box is still there ditto the cable. Most of the metal-cald switch gear then installed & still there (perhaps the breakers themselves re-conditioned to SF6 or vacuum) has a life of perhaps centuries. & for the avoidance of doubt – I’m not offering a forecast, I describing realities.
Water supply? – concrete or plastic pipes – buried – century? 2? 3?
This carries with it the implication that depreciation in some (important) sectors is very small. Why would you “write-off” an asset that still functions and will do so for decades or possibly centuries. Perhaps for tax purposes?
Depreciation is ignored for tax purposes, entirely. Long ago tax authorities realised that it was nonsense and out different rules in what are called capital allowances in place.
Glasgow’s water supply, Loch Katrine to Milngavie, 24 mile gravity feed, 1mph through a pipe system: 1850s, based on the great WR Rankine’s conception. Still working very well. How do you depreciate that? The problem is we have spatchcocked annual reporting onto Pacioli’s double entry system that was best understood as a closed single project concept. Most of modern reporting is to create nonsense ti fit and annualised profit. It doesn’t really work; it never did. It is not much better than a legalised scam
Some videos on that nonsense might be coming soon…
I am still trying new to this and trying to understand what the various parts of the accounts mean, so correct me if I am wrong on any of this.
Table A9 on page 154 of the OBR link lists total managed expenditure as being made up of current expenditure, depreciation, and net investment, i.e. depreciation is considered as separate to current expenditure. But then the current deficit is stated as being determined by current expenditure + depreciation – current receipts. The current deficit is defined as being the difference between current spending and revenues, and so here “current spending” is current spending + depreciation, so here depreciation is considered part of current spending. So depreciation is both separate to current spending and part of current spending in different places.
For Labour’s fiscal rule, taxes cover current spending, borrowing covers net investment, and which out of taxes or borrowing covers depreciation has not been made clear.
We have two options for which covers depreciation:
1. Borrowing. Borrowing covers gross investment, i.e. including depreciation. On the one had this is fine, because you are using borrowing to only cover the amount of money you are actually spending on investment and not spending any on current spending. But, at the same time, this means that we end up with the “current spending” used to determine the current deficit as being mostly covered by taxes with a bit (depreciation) covered by borrowing, so according to the Labour narrative, this is BAD, because you are using borrowing to cover this “current spending”. So which is it? is borrowing to cover depreciation OK because it’s not being used to cover current spending, or is it bad because it’s being used to cover “current spending”?
2. Taxes. Borrowing only covers net investment, which means taxes cover depreciation. This is fine for the “current spending” used to determine the current deficit, because all of it is covered by taxes, and so is all very neat. However, we now end up with gross investment where part is covered by borrowing (net investment) and part is covered by taxes (depreciation). Now this entity is the one messily covered in part by taxes and in part by borrowing.
So Labour have a choice: end up with a messy situation where borrowing is not used to cover any current spending but is used to cover part of “current spending” (which is BAD because it’s current); or have a messy situation where the actual amount of money spent on investment in a given year is in part covered by borrowing and in part covered by taxes. You have to choose one entity that is messily covered in part by taxes and in part by borrowing: either “current spending” or gross investment.
You long ago convinced me that Labour’s fiscal rules are bad, but I hadn’t realised how much of a mess they are until I started to think about depreciation, which is the source of all this mess due to being both an investment cost and a current cost depending on how you look at it.
Am I missing something here from my lack of expertise in this area? Is there some reason why either of these options is fine and perfectly neat and not in any way messy at all?
Thanks for raising this
I will definitely be giving it more attention, probably quite soon.