Author: johnredwood

      The slim Green Book reveals that total spending will increase 2% in 2015-16 over 2014-15. Within this pensions and welfare spending is forecast to rise  by £15.3bn or 4.45% (AME) whilst departmental expenditures will decline by just  £0.9 bn.(DEL including depreciation).

       The Green book suggests that this will be a real terms reduction of 0.4%. However, with a continuing wage control allowing only 1% pay growth, with productivity gains and with proper control of general inflation, these figures could end up delivering a small real terms increase if properly managed.

The 2012-13 Accounts for Network Rail make interesting reading. This public sector owned company escapes most comment and attention, because Ministers seem to think it is not their responsibility to tell us about its profits and losses or explain in any detail its peformance. It is a so called independent company, but one which in effect is taxpayer owned.

Taxpayers indirectly supply much of its income through the subsidies to the railways, routed into Network Rail via the access charges it places on operating companies. Most in the press seem to ignore what is a most interesting document, accounting for billions of public investment and cost.

Network Rail’s debts now stand at a large £30.3bn, an 11.3% increase over the last year. Operating costs rose by 9.5%, in part reflecting the big increase in capital. Capital expenditure ran at £5050 million for the year, an increase of 9.8%.

The current value of its large portfolio of derivative financial instrument liabilities is a negative £1208 million. Its current value of derivative assets is £673 million. Is this a good portfolio of assets and risks for taxpayers to own? Operating profits fell 5.5% in the year.

At a time when Ministers are planning further increases in rail expenditure, and are keen to promote more railway construction, they would be well advised to examine these accounts. They should be asking why costs went up so much last year, why profits fell, and how the balance sheet is constructed. They should be asking how much more of their planned future programme Network Rail could finance out of improved cashflow from improved financial performance. The debt build up is fast and large.

I am in favour of Network Rail improving its stations and facilities for travellers. I am also in favour of Network Rail financing more of this from property transactions bringing more railway property into more productive use, and harnessing private improvement, finance and development adjacent to the stations and tracks where there is land available.

On the day when the government is going to announce a reduced rate of increase in spending, proper demands for improved efficiency and effectiveness at NR would be a good idea as there is a lot of public money at risk here.

Before Mr Bernanke spoke about the need to curtail and then  stop Quantitative Easing the markets behaved as if there was no cloud in the investment sky. Since he spoke, they have behaved as if we would never see the investment sun again. Both positions seem unrealistic.

As the market declines have continued for longer, we need to ask could the markets talk and move themselves to a crisis?  There is no immediate prospect of the kind of credit crunch and banking crisis in the west that drove the markets down in 2007-8. There is no-one forecasting a recession in the USA to match the crashes of the last decade.  On that basis the  Stock market reactions to higher bond yields looks overdone.

There are some problems out there which in its current mood the world Stock market takes more seriously. There is the trouble on the streets of Turkey and Brazil, once fast growing emerging market economies in favour. In China, still growing at more than 7%, suddenly the authorities seem to want to teach the banks and financial instituutions a lesson about controlling their lending instead of making easy liquidity available. Will they judge that right, or could they start to do damage to the very institutions which power and finance the growth?

Worse still, in Euroland, the markets are now driving up the cost of government borrowing again. For the time being Spain  and Italy will have to pay 1% more to borrow, but the levels are still below the panic levels of the past. However, again market watchers will get more nervous if bond yields continue to rise, placing bigger  question marks over the capacity of these governments to afford the money they need to raise from the bond markets.

The Uk has seen the 10 year cost of borrowing rise from 1.7% to 2.56% yesterday. It’s still low, but means a bit more cost to taxpayers as the government continues to expand its borrowing.

For the time being the markets worries have not done enough to interest rates and to the financial system to cause justified major worries. However, the more they slide, the more we need to look at the collateral damage it does. Mr Bernanke may be pleased with his work, as the US economy is strengthening and he needed to blow away some of the exuberance. He also seems to have knocked parts of the world like Euroland that are still struggling,  and hit emerging market economies that are slowing anyway, which is not such a great result.

              I do wish people would report the public spending discussion accurately. In the last Red Book the government  planned current spending of  £694.2 bn in 2015-16  compared to £672.9 bn this year. Now they plan to make the 2015-16 figure £682.7bn. This is still  an increase of £9.8bn over this year, though a smaller increase than the previous plan.  

        Capital spending was already planned to increase from £47.2bn to £50.4bn, and is apparently to increase by more under the revised  plans.  Endless media discussion of cuts of 10% are very misleading in the overall context of these figures and the large borrowings needed to sustain them.

Several bloggers have complained that homes are too dear in the UK. They have advocated policies to bring the prices down further, following the falls of recent years outside London.

I have been finding out if there are better value homes already available in the Uk that individuals on average income or below could afford. I accept that London is now very dear for all of us.  I am pleased to report that there are numerous cheaper homes in our larger cities outside the capital.  On one site I found 398 homes for sale  under £60,000 in Liverpool, 108 under £60,000 in Manchester, 52 under £60,000  in Nottingham and 59 under £60,000 in Birmingham. Any of these could make homes for people with a job or  going  into business in these great cities.

Nearer to London things do get dearer. Even here there are 35 homes for sale under £100,000 in Wellingborough, 51 in Corby, 55 in Swindon and 63 in Hastings on the one internet site.  Close to London there are park homes and shared equity properties in the lower price ranges.

The UK’s housing problem is not a simple case of too few homes in London and the hotspots. It is also a case of more homes in some places than there are people wishing to live there. Policy needs to find more ways to encourage people to make their homes and find their employment in the great northern towns and cities and in other locations outside London, where there is more residential property available at more affordable prices. All three main parties in the Commons want a better balanced UK. There are policies being followed to create one. The debate needs to be about how we can accelerate that process, so more of the empty homes on the market can be used.

Earlier this week  we saw the May figures for UK spending, tax revenues and borrowing. The figures are complex and have taken me a little while to understand, as there are so many special factors at play.

In April-May this year current public spending is 6.2% higher than in April-May the previous year.  The leap was large in April, with current spending at £62.2bn compared to £53.2 bn a year earlier. The explanation given is more rapid payments to local government. I cannot find a figure to compare between years  allowing for timing differences in these grant payments. It does mean, however, Councils received  a large cash flow injection in April. The benefit bills are rising much less quickly than a year earlier, as this year’s uprating is less than half the previous year’s 5.2% rise.

Receipts are well up, mainly owing to two special factors. The first is the Treasury now receives £3.9bn a month from  the Bank of England’s Asset Purchase scheme. The second is the Treasury has taken a credit of £3.2bn for tax receipts likely to be coming from Switzerland following the Swiss tax deal. The credit is for the whole amount they think they might receive over ensuing months.

Underlying tax revenue is mixed. National Insurance is up 3% and VAT up 2.1% in May, whilst Income Tax and CGT are down 2%.

 The longer term perspective can sometimes be useful. Total current public spending  was £3.6bn in 1946, £10 bn in 1966, £45 bn in 1976 and  £138 bn in 1986. In 1996 it reached £283 bn, and £480 bn by 2006.  In 2010 it stood at £605bn, to rise to £631bn in 2012.  Over many years there has been endless talk about cuts, yet current spending in cash terms and usually in real terms as well has gone on rising.

As the economy picks up it is likely receipts will rise a bit more, helped by the lower rates where these have been applied. Spending should start to come under better control, as the Coalition’s plans always assumed growth in public spending in cash and real terms for the first two years, to be followed by slower cash growth in the second half of the Parliament. This may start  to happen, assuming the big boost to Councils is a timing issue and not an overall increase.

 Next week the Chancellor will announce spending totals for 2015-16, with a view to putting more downward pressure on the growth in cash spending by the public sector.