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Published by Anonymous (not verified) on Sun, 07/01/2018 - 12:00am in

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When a loss is not a loss (4 of 5)

Published by Anonymous (not verified) on Fri, 05/01/2018 - 2:35am in



The government would like to have the recent securitisation of student loans and the transfer of their ownership to Income Contingent Student Loans 1 (2002-2006) Plc classified as a sale that achieved market price without any implicit subsidy or support for the sale process, have ICSL1 classified as a private sector body independent of government, and thereby have the relevant transactions recorded in the national accounts as a ‘revaluation’. This would avoid any of the transactions recorded as income and expenditure and thereby avoid recording losses against the deficit, the headline measure capturing the difference between the two and the focus of the government’s fiscal mandate.

By losses here we mean two aspects – whether the asset was sold for less than it’s worth and what the decision to issue loans (that were later sold) cost, i.e. the cost of the policy overall. While a ‘revaluation’ might give you some truth about the first of those (the market told you the loans were worth less than you thought), it ignores the historic aspect: you would not be able to use income and expenditure to capture what’s going on with loans as a policy. If the sale precipitates future anticipated write-offs, then losses associated with the original policy never show up in the deficit.

This is pretty attractive to government and could be seen as a driving factor behind the sale. As we will see a loss-making loan that is sold at further loss would not be recognised. But there is a broader problem with income contingent loans. They don’t fit the conventions governing “financial transactions” – as such, the Office for National Statistics should now be reviewing more broadly what is transpiring with pre- and post-2012 loans.

Although government officials insist that they have not chosen the accounting conventions in use, the current treatment of financial transactions was not designed for loans with such long lifetimes, such large balances or with such large subsidies or losses built in. ICR loans have been crowbarred into place and a fundamental review is now overdue.

As with company accounts, you can look at the cashflow, the balance sheet and the income/expenditure statement to get an overall sense of the UK’s fiscal position. When writing about student loans I have tended to focus on the cashflows and the impact on the balance sheet as it is relatively straightforward.

The problems arise when it comes to determining what counts as income or expenditure for loans, and thereby what impact policy has upon the deficit.

The government loans money to students (cash outlay) and collects repayments from borrowers (cash receipts). Currently, annual loan issuance is about £15billion and annual repayments from all previous borrowers about £2.5bn. The Treasury elects to fund the shortfall between the two by issuing gilts. This form of borrowing adds to the nation’s stock of debt. Although the balance sheet has had added assets (new loans issued) and a liabilities (new gilts issued), only the latter is captured in the headline measure of Public Sector Net Debt. One presentational reason for preferring to sell student loans, it that the cash generated can be used to offset liabilities (or reduce the need for new borrowing) and so lower PSND.

The manner in which a sale impacts on the balance sheet and cashflow is clear. Cash is received in return for transferring ownership of the assets (moving them off the public balance sheet). There’s no problem there, but that’s not where the focus is. The government asks the public to judge its economic competence on reducing the deficit. There is a huge presentational gain from keeping as much out of income and expenditure as possible. This leads us to the problem: we should want the accounts to capture the proper impact of decisions.

As things currently stand, outlay on student loans – the lending – does not count as expenditure; nor do repayments count as income. (National accounts are run on a cash in, cash out basis. The cash value of transactions is recorded when they occur. None of this discussion applies to departmental accounts, which are accruals).

Ignoring outlay and repayments, income and expenditure deals with only write-offs and interest. Write-offs, when they occur, count as capital expenditure using the face value of the balances expunged, while interest accruing annually counts as income.

The latter in particular seems odd. Income accruing is income receivable, not income received, which would be repayments and so is excluded. That is, interest is only what is accumulating against outstanding balances.

This works for most financial assets, because there is a basic accounting identity at work.

In cash terms,

Loan Outlay + Interest Accrued = Repayments + Outstanding Balance

Through a bit of jiggery-pokery that means that

Loan Outlay – Repayments = Outstanding Balance – Interest Accrued

Either side of the second equation can be used as a definition of profit/loss. If Interest Accruing scores as income and Balances written off as expenditure, then the loss or gain on issuing loans is effectively captured in the deficit by the time the accounts are closed. (Note that the right-hand side of the equation is what you get with “financial transactions”, the left-hand side of the equation is what you get with graduate or general taxation.)

For normal loans, interest is repaid as it arises and it is recorded as income; there are no planned write-offs; if all goes well that financial transaction treatment accurately captures the gains made from issuing a loan.

The same cannot be said of income contingent loans with loss exemplified through large, planned subsidies when accounts are closed and where interest accruing against the balance may never be paid.

You can see the effects. Interest accruing is recorded as income every year. This flatters the income/expenditure statement until the policy write-offs occur decades in the future.

That is, as things currently stand (and in the absence of a concerted sale policy), we will start to see large write-offs score as expenditure after the mid-2030’s. These hits will relate to policy decisions made decades before. This does seem ridiculous: the current deficit simply doesn’t capture the impact of issuing tens of billions of student loans today.

You might expect a sale to clarify things. We know that student loans are offered on soft terms and make a loss for government. This is accurately captured in departmental accounts. A sale precipitates that loss – crystallises it today – and possibly adds additional losses if the loans are sold for less than the accounts say they are worth. An accounting treatment consistent with what was outlined above would set the price received against the balances written off and determine an appropriate expenditure mark. That is, if you raise £1.7bn from balances of £3.7bn then you would expect capital expenditure to take a £2bn hit.

Something akin to that would result were the ONS to classify the sale as a “capital transfer”. The government doesn’t want this and instead wants the transaction to be classified as a “revaluation” – the sale shows that the loans were really worth £1.7bn. That might or might not be the case, but such an interpretation loses the connection to the fundamental accounting identity that allows the overall cost of HE policy to be recognised, albeit imperfectly in very attenuated fashion.

What worries people about the ‘revaluation’ classification is that any losses on loans as a policy would no longer show up anywhere in expenditure. A fundamental aspect of double-entry bookkeeping would have been lost.

You could issue £10bn of loans in the expectation that you would get £8bn in return, but avoid recognising that £2bn loss by selling on the loans. As long as the sale is classified as ‘revaluation’, outlay, repayments and price received would never appear in income and expenditure and nor would any equivalents. You would have no record in income and expenditure of the difference between loan value and price received and no record of the cost of HE policy. A generalised loan policy would evaporate the cost of HE leaving nothing in the deficit, but interest accruing as income.

Only the “capital transfer” treatment, would keep this relation to losses.

Whatever the Manual of Government Deficit and Debt allows you to conclude about the sale, trying to shoehorn ICR loans into these existing treatments needs its own revaluation. What we have is a mess.

Whatever you think about accounting, it should capture the full fiscal impact of policy decisions. The ONS needs to review the accounting treatment for ICR loans, not simply decide how to classify the sale.

Tagged: deficit, income contingent repayment loans, national accounting, ONS, public sector net debt, securitisation

Was it a sale? ONS decisions (3 of 5)

Published by Anonymous (not verified) on Wed, 03/01/2018 - 9:11pm in


Deficit, eu

In order for the securitisation to be classified as a sale, the government needs to have shed all risk associated with student loan repayments.

Transferring those risks to the private sector required all of the junior tranches to be sold. Did the government shift the risk off its books by selling unrated bonds very cheaply? That’s a good question and one that’s hard to answer given that there was no market price in these assets – either the loans or the securities – beforehand.

The Manual of Government Deficit and Debt, is the EU guide to the relevant national accounting. Its section on securitisation contains the following paragraphs, which the government endorses:

V. “The sale of a financial asset to the securitisation entity will not affect the government net lending/borrowing.”

V. “In national accounts, the disposal of assets should be recorded at the market price that prevails at the time the transaction takes place. It is generally the observed sale price, the price agreed in the contract. However, if there is evidence that the observed sale price is lower than the market value it may indicate that the operation is not carried out on a pure commercial basis and that there is an implicit support of the securitisation entity. In such a case, it is necessary to record a capital transfer from government to make up the difference between the observed price and the market value as the sale is recorded at market price in national accounts”

The “securitisation entity” here is the special purpose vehicle that will take ownership of the loans. In this case, Income Contingent Student Loans 1 (2002-2006) Plc. Was there “implicit support” for the securitisation entity and indeed the process of securitisation? Whether there was or not determines whether the sale is categorised as a ‘revaluation’ or a ‘capital transfer’. The government would far prefer the former as it would mean that any losses associated with student loans and the sale would have no impact on the deficit.

A full sale and transfer of the asset to the private sector also requires that the special purpose entity holding the loan accounts be independent of government. (Although the securities can be traded, the underlying loans are not being sold, but transferred to the SPE.)

This means there are two related issues that are in the purview of the Office for National Statistics.

  • Were the loans sold at market price?
  • Is Income Contingent Student Loans 1 (2002-2006) Plc sufficiently independent of government?

The next paragraph in the MGDD explains:

V. “If there is no obvious market price for specific assets, then, in order for an arrangement to be recorded as a sale, there should be a process by independent bodies to determine an equivalent market price, on the basis of the usual valuation methods used in business areas. The absence of such a process could be interpreted as a lack of autonomy of the securitisation entity, such that it should be classified to government.
(my emphasis in bold)

No independent body, as far as I am aware, has been involved in the sale process. The government would argue that the prices achieved through the securitisation were equivalent to market prices: there is only a market as a result of the securitisation. But the final sentence points to the general issue for the ONS to address.

Even if it is agreed that a market price was achieved, there is a general question about the status of the Special Purpose Entity that now owns the loans. It has to be independent to be taken off the public books. If its operations are circumscribed by government, then it should probably be classified to government.

Here is how the Manual characterises the requisite autonomy:

V. “… the SPE should have autonomy of decision in respect of the management of the debt securities that it issues: indicators of this are issuance rhythm, debt management, repayment strategy, etc. It should be clear that the SPE does not act on behalf of government. It should also have complete autonomy concerning the management and disposal of its assets. Otherwise the SPE should not be recorded as separate institutional unit.”
(my emphasis in italics)

Most of the evidence available suggests that Income Contingent Student Loans 1 (2002-2006) Plc could be seen to lack the requisite autonomy.

  • The SPE has not conducted the securitisation, it was set up subsequent to it – indeed its title indicates that a separate company will be set up for each sale process;
  • Under the terms of the 2008 Sale of Student Loans Act, the SPE cannot sell on the loans without government permission: it cannot dispose of its assets;
  • HMRC and the SLC will continue to administer loan collections on behalf of the SPE and purchasers;
  • DfE remains the ‘Master Servicer’ – with responsibility for transferring repayments to the SPE – and the government has undertaken various warranties and contingent liabilities as part of the sale process (see Part 5).

ONS hasn’t reached a decision yet on these classification issues. I will update this post when it does.

The next post will look at the resulting accounting issues. If the sale is classified as a capital transfer or the SPE is deemed not to be independent, then the government will probably have to book a £2bn hit to expenditure and the deficit: the difference between the £1.7bn raised and the £3.7bn face value of the loans transferred.

Tagged: classification, deficit, EU, national accounting, ONS, securitisation, SPV

Cartoon of the day

Published by Anonymous (not verified) on Fri, 22/12/2017 - 5:00am in

How Progressives Can Win Big: Casting out the Spirit of Defeatism, One Keystroke at a Time

Published by Anonymous (not verified) on Mon, 11/12/2017 - 12:44pm in

By Steve Grumbine.

Progressives Trigger warning: Compassion required. When is the last time you heard Greens, Berniecrats or Indie voters not acknowledge the distinct and pressing need for election reform, campaign finance reform, voting reform? More to the point, when haven’t they mentioned unleashing 3rd parties from the fringe of irrelevancy and up onto the debate stage?

That is mostly what is talked about, simply because it is low hanging fruit.

It has long been known that our electoral system and methods of voting are corrupt, untrustworthy, and easily manipulated by less than savvy politicians, state actors, and hackers alike. The answers to many of these issues is the same answer that we would need to push for any progressive reforms to take place in America: namely, we need enlightened, fiery, peaceful, and committed activists to propel a movement and ensure that the people rise, face their oppressors, and unify to demand that their needs be met.

What is not as well-known, however, is how a movement, the government, and taxes work together to bring about massive changes in programs, new spending, and the always scary “National Debt” (should be “National Assets”, but I will speak to that later). In fact, this subject is so poorly understood by many well-meaning people on all sides of the aisle that these issues are the most important we face as a nation. Until we understand them and have the confidence and precision necessary to destroy the myths and legends we have substituted in the absence of truth and knowledge, it must remain front and center to the movement.

Progressives, like most Americans, are almost religiously attached to the terms “the taxpayer dollar,” and the idea that their “hard earned tax dollars” are being misappropriated. Often, the most difficult pill for people to swallow is the concept that our Federal Government is self-funding and creates the very money it “spends”. It isn’t spending your tax dollars at all. To demonstrate this, consider this simplified flow chart:

These truths bring on even more hand wringing, because to the average voter they raise the issue of where taxes, tax revenue, government borrowing, and the misleading idea of the “National Debt” (which is nothing more than the sum of every single not yet taxed federal high-powered dollar in existence) fit into the federal spending picture. The answer is that they really don’t.

A terrible deception has been perpetrated on the American people. We have been led to believe that the US borrows its own currency from foreign nations, that the money gathered from borrowing and collected from taxing funds federal spending. We have also been led to believe that gold is somehow the only real currency, that somehow our nation is broke because we don’t own much gold compared to the money we create, and that we are on the precipice of some massive collapse, etc. because of that shortage of gold.

The American people have been taught single entry accounting instead of Generally Accepted Accounting Practices, or GAAP-approved double entry accounting, where every single asset has a corresponding liability; which means that every single dollar has a corresponding legal commitment. Every single dollar by accounting identity is nothing more than a tax credit waiting to be extinguished.  Sadly, many only see the government, the actual dollar creator, as having debt; that it has liabilities, not that we the people have assets; assets that we need more and more of as time goes on, to achieve any semblance of personal freedom and relative security from harm.

In other words, at the Federal level it is neither your tax dollars nor the dollars collected from sales of Treasury debt instruments that are spent. Every single dollar the Federal Government spends is new money.

Every dollar is keystroked into existence. Every single one of them. Which brings up the next question: “Where do our hard-earned tax dollars and borrowed dollars go if, in fact, they do not pay for spending on roads, schools, bombs and propaganda?” We already know the answer. They are destroyed by the Federal Reserve when they mark down the Treasury’s accounts.

In Professor Stephanie Kelton’s article in the LA Times “Congress can give every American a pony (if it breeds enough ponies)” (which you can find here ) She states quite plainly:

“Whoa, cowboy! Are you telling me that the government can just make money appear out of nowhere, like magic? Absolutely. Congress has special powers: It’s the patent-holder on the U.S. dollar. No one else is legally allowed to create it. This means that Congress can always afford the pony because it can always create the money to pay for it.”

That alone should raise eyebrows and cause you to reconsider a great many things you may have once thought. It will possibly cause you to fall back to old, neoclassical text book understandings as well, which she deftly anticipates and answers with:

“Now, that doesn’t mean the government can buy absolutely anything it wants in absolutely any quantity at absolutely any speed. (Say, a pony for each of the 320 million men, women and children in the United States, by tomorrow.) That’s because our economy has internal limits. If the government tries to buy too much of something, it will drive up prices as the economy struggles to keep up with the demand. Inflation can spiral out of control. There are plenty of ways for the government to get a handle on inflation, though. For example, it can take money out of the economy through taxation.”

And there it is. The limitation everyone is wondering about. Where is the spending limit?

When we run out of real resources. Not pieces of paper or keystrokes. Real resources.

To compound your bewilderment, would it stretch your credulity too much to say that the birth of a dollar is congressional spending and the death of a dollar is when it is received as a tax payment, or in return for a Treasury debt instrument, and deleted? Would that make your head explode? Let the explosions begin, because that is exactly what happens.

Money is a temporary thing. Even in the old days we heard so many wax poetically about how they took wheelbarrows of government — and bank – printed IOUs to the burn pile, and set the dollar funeral pyre ablaze.  

In the same LA Times piece, Professor Kelton goes on to say:

“Since none of us learned any differently, most of us accept the idea that taxes and borrowing precede spending – TABS. And because the government has to “find the money” before it can spend in this sequence, everyone wants to know who’s picking up the tab.

There’s just one catch. The big secret in Washington is that the federal government abandoned TABS back when it dropped the gold standard. Here’s how things really work:

  1. Congress approves the spending and the money gets spent (S)
  2. Government collects some of that money in the form of taxes (T)
  3. If 1 > 2, Treasury allows the difference to be swapped for government bonds (B)

In other words, the government spends money and then collects some money back as people pay their taxes and buy bonds. Spending precedes taxing and borrowing – STAB. It takes votes and vocal interest groups, not tax revenue, to start the ball rolling.”

Let’s be clear, we are not talking about the Hobbit or Lord of the Rings. We are not talking about Gandalf the Grey or Bilbo Baggins. We are not referencing “my precious!”. It’s not gold, or some other commodity people like to hold, taste and smell. It is simply a tally. Yet somehow, we have convinced ourselves that there is a scarcity of dollars, when it is the resources that are scarce. We have created what Attorney Steven Larchuk calls a “Dollar Famine”.

To quote Warren Mosler in his must-read book “The 7 Deadly Innocent Frauds of Economic Policy” (you can download a free copy right here) he states:

“Next question: “So how does government spend when they never actually have anything to spend?”

Good question! Let’s now take a look at the process of how government spends.

Imagine you are expecting your $1,000 social security payment to hit your bank account which already has $500 in it, and you are watching your account on your computer screen. You are about to see how government spends without having anything to spend.

Presto! Suddenly your account statement that read $500 now reads $1,500. What did the government do to give you that money? It simply changed the number in your bank account from 500 to 1,500. It added a ‘1’ and a comma. That’s all.”

Keystrokes. Is it becoming clearer? Let’s go further for good measure. Mosler continues:

“It didn’t take a gold coin and hammer it into its computer. All it did was change a number in your bank account. It does this by making entries into its own spread sheet which is connected to the banking systems spreadsheets.

Government spending is all done by data entry on its own spread sheet we can call ‘The US dollar monetary system’.

There is no such thing as having to ‘get’ taxes or borrow to make a spreadsheet entry that we call ‘spending’. Computer data doesn’t come from anywhere. Everyone knows that!”

So why do we allow people to tell us otherwise? Maybe it is too abstract. And on cue, Mosler explains this phenomenon via a sports analogy for those who are not comfortable with the straight economic narrative:

“Where else do we see this happen? Your team kicks a field goal and on the scoreboard the score changes from, say, 7 point to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a ‘reserve of points’ in a ‘lock box’ to make sure you can get the points you have scored? Of course not! And if the bowling alley discovers you ‘foot faulted’ and takes your score back down by 5 points does the bowling alley now have more score to give out? Of course not!

We all know how ‘data entry’ works, but somehow this has gotten all turned around backwards by our politicians, media, and most all of the prominent mainstream economists.”

Ouch! Mosler pointed out the obvious, the propaganda machine has polluted our understanding. So how is this done in economic language? Let’s let Warren finish the thought:

“When the federal government spends the funds don’t ‘come from’ anywhere any more than the points ‘come from’ somewhere at the football stadium or the bowling alley.

Nor does collecting taxes (or borrowing) somehow increase the government’s ‘hoard of funds’ available for spending.

In fact, the people at the US Treasury who actually spend the money (by changing numbers on bank accounts up) don’t even have the phone numbers of the people at the IRS who collect taxes (they change the numbers on bank accounts down), or the other people at the US Treasury who do the ‘borrowing’ (issue the Treasury securities). If it mattered at all how much was taxed or borrowed to be able to spend, you’d think they’d at least know each other’s phone numbers! Clearly, it doesn’t matter for their purposes.”

So why do progressives allow the narrative that the nation has run out of points deter us from demanding we leverage our resources to gain points, to win the game of life, and have a robust New Deal: Green Energy, Infrastructure, free college, student debt eradication, healthcare as a right, a federal job guarantee for those who want work and expanded social security for those who do not want to or cannot work?

How has a movement so full of “revolutionaries” proved to be so “full of it” believing that we must take points away from the 99% to achieve that which the federal government creates readily, when people do something worth compensating? Why does the narrative that the nation is “broke” resonate with progressives? Why do they allow this narrative to sideline the entire movement?

I believe it is because progressives are beaten down. Many have forgotten what prosperity for all looks like or sounds like. Many are so financially broke and spiritually broken that the idea of hope seems like gas lighting. It feels like abuse. It crosses the realm of incredulity and forces people into that safe space of defeatism.

If they firmly reject hope, then they can at least predict failure, be correct and feel victorious in self-defeating apathy. If the system is rigged; if the politicians are all bought off; if the voting machines are hacked; if the deep state controls everything; then we think we are too weak to unite and stand up and demand economic justice, equality, a clean environment, a guaranteed job, healthcare and security and then we have a bad guy to blame.

Then we can sit at our computers, toss negative comments around social media, express our uninformed and uninspired defeatism about the system, and proclaim it is truth by ensuring it is a self-fulfilling prophecy about which we can be self-congratulatory in our 20/20 foresight as we perform the “progressive give-up strategy”. Or, if we want to achieve a Green New Deal, then in a radical departure from the norm we can own our power; we can embrace macroeconomic reality through the lens of a monetarily sovereign nation with a free floating, non-convertible fiat currency and truly achieve the progressive prosperity we all deserve.

The choice is ours. It is in our hands.


**For more of Steve’s work check out Real Progessives on Facebook or Twitter

The post How Progressives Can Win Big: Casting out the Spirit of Defeatism, One Keystroke at a Time appeared first on The Minskys.

The UK's political crisis

Published by Anonymous (not verified) on Thu, 28/09/2017 - 7:20am in

On the evening of Friday, September 22nd, the credit ratings agency Moody's downgraded the UK's credit rating. Admittedly, it was only by one notch. But coming as it did hard on the heels of Theresa May's grand speechin Florence, it was a shattering blow. 

Credit ratings agencies lost much of their lustre in the financial crisis of 2008, when they were revealed to have been complicit in the mispricing of complex financial derivatives – the “toxic waste” that brought down some of the world’s largest financial institutions. So it is tempting to dismiss Moody’s action as pointless and its analysis as economically illiterate. I confess that I have done so myself, in the past. But this time, Moody’s is on the money. It tells a story of a tragically weakened government struggling with a legacy of policy errors from previous governments as well as the growing likelihood of a chaotic and potentially disastrous Brexit.

Moody’s gives two main reasons for the downgrade:

  1. The outlook for the UK's public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government's fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise;
  2. Fiscal pressures will be exacerbated by the erosion of the UK's medium-term economic strength that is likely to result from the manner of its departure from the European Union (EU), and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.

Unsurprisingly, most commentary has focused on the second of these, and tended to ignore or downplay the first. But in fact the two are inextricably linked.

According to the ONS, the UK’s fiscal deficit currently stands at 2.3% of GDP and its public debt (excluding publicly-owned banks) at 88% of GDP.  George Osborne had planned to eliminate the deficit completely by 2020 and run an absolute surplus thereafter to reduce public debt over time. Of course, ratios to GDP depend as much on the path of the denominator as the numerator: even if the absolute amount borrowed reduces, debt and deficits can still rise in relation to GDP if GDP falls. But until recently, GDP forecasts were buoyant: notwithstanding the Brexit vote, the UK economy was still expected to turn in GDP growth of 2% or more.

Those forecasts have now degenerated substantially. This is from the second section of Moody’s analysis:

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period. Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty. While future years may see some recovery, Moody's expects growth of just 1% in 2018 following 1.5% this year and 2.25% on average in recent years.

Ouch. And no, this is not merely a minor setback which Britain will quickly transcend on its path to the "sunny uplands":

More importantly for the UK's credit profile, Moody's does not expect growth to recover to its historic trend rate over the coming years.

Brexit will make Britain poorer. Permanently.

Clearly, if GDP is not going to rise as much as previously expected, then debt and deficits will not fall as fast in relation to GDP as previously expected, even if government spending and revenues remain broadly the same. Ceteris paribus, therefore, Brexit thus threatens the UK’s fiscal position

The disastrous 2017 election further weakens the UK's fiscal position:

…..the government has yielded to pressure and raised spending in several areas, including for health and adult social care. It also agreed to above-budget pay increases for some public sector workers. While these additional expenditures will be funded out of current budgets, the pressure to continue to increase spending in the coming years is likely to remain high, in particular on health care and the public sector wage bill.

In addition, in order to secure a working parliamentary majority, the new government agreed a 'confidence and supply' arrangement that increases public spending by GBP1 billion for Northern Ireland. It also abandoned a pre-election promise to review the costly so-called "triple lock" on state pensions after 2020. Overall, Moody's expects spending to be significantly higher than under the government's current budgetary plans and higher than the rating agency expected when the negative outlook was assigned in June 2016.

The minority Conservative government is breaking spending limits all over the place in order to hold on to power. I criticised George Osborne's slash and burn approach to government finances, but this is no better. Giving in to spending demands to prevent a backbench revolt is hardly a responsible approach to managing public finances. It smacks rather of desperation. Theresa May, it seems, will do “whatever it takes” to prevent Jeremy Corbyn from becoming Prime Minister.

Government revenue, too, is compromised by the Tories’ desperation to keep Labour out:

At the same time, revenues are unlikely to compensate for higher spending. Earlier this year, the government abandoned a planned increase in national insurance contributions for the self-employed. Instead, the government has become reliant on highly uncertain revenue gains from tackling tax avoidance to fund tax cuts....

No government in history has ever managed to repair the fiscal finances by clamping down on tax avoidance. This is not a reason not to do it, of course. But it is a reason not to rely on it.

Adding in the effect of a weak government being forced to increase spending and failing to raise the anticipated revenues, Moody’s anticipates that the deficit will remain at or above 3% in the coming years. Debt/GDP will continue to rise, peaking at 93% in 2019.

All in all, this adds up to a poor economic outlook and worsening fiscal finances. This is the reason for the downgrade. To be sure, the current fiscal forecasts are at least realistic, unlike Osborne’s. But as Moody’s says, repeated revisions to government targets don’t exactly inspire confidence.

So far, so meh. Then Moody’s drops this bombshell:

Moody's is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.

Wait, haven’t we always known this?

Apparently not. Moody’s seems to have had its head in the sand. Belatedly, it recognises that the obstacles the UK government set up from the start – such as refusing to accept the jurisdiction of the ECJ – have rendered a new free trade agreement all but impossible. The window of opportunity is closing rapidly, there is as yet no substantive agreement on any of the EU’s showstoppers, and therefore little prospect of significant progress on trade before the UK leaves the EU in March 2019.

But even if trade were up for discussion, there is no way any new agreement could come close to matching what the UK currently has as a full EU member. According to Moody’s, Brexit “would likely impose additional costs, raise the regulatory and administrative burden on UK businesses and put at risk the close-knit supply chains that link the UK and the EU.” The UK’s vital services sector is particularly at risk: Moody’s warns that “differences of outlook between the UK and the EU suggest that the most likely outcome is now a rather more limited free trade agreement which may exclude services.”

Putting it all together, Moody’s concludes:

Aside from the direct impact on the UK's credit profile, weakening growth prospects are likely to exacerbate the government's evident fiscal challenges. And this is likely to be happening during a period in which policymakers will be increasingly distracted by the twin challenges of sustaining a domestic political consensus on how to operationalise Brexit and reaching agreement with EU counterparts.

UK policymakers will spend all their time working out how to implement a policy that will make Britain considerably poorer and substantially weaken its fiscal finances. Lovely.

Of course, the UK government hit back. A spokesman from the Treasury, quoted in the Financial Times, said this:

The assessments made about Brexit in this report are outdated. The prime minister has just set out an ambitious vision for the UK’s future relationship with the EU, making clear that both sides will benefit from a new and unique partnership.

So Theresa May's grand aria will make all the difference. Unfortunately the head of sovereign ratings at Moody's doesn't think so. "I've read the speech and it doesn't change our view at all", he said on the BBC's Today programme, downgrading Mrs. May's credibility to junk.

I criticise Mrs. May's government, but I am equally critical of a Labour party whose tax and spending plans are every bit as unrealistic as those of the desperate Tories. Brexit will make Britain poorer. High wages, generous pensions, universal healthcare and quality social care are the luxuries of rich nations. Even without Brexit, these create a substantial burden for younger generations, including the children and the unborn who have no voice in this debate. The impoverished outlook for Britain may render them unaffordable. But neither party as yet shows any willingness to admit that the prosperity they have promised the British people is completely incompatible with any sort of Brexit. The British people are being systematically deceived by blue and red politicians alike.

Ever since the referendum, the UK has been engulfed in a deep political crisis. Indeed, it started long before the referendum. It is a crisis of lies and dishonesty which is rapidly destroying all trust in the political establishment.

Moody's says (I paraphrase), "Thank goodness for the UK's institutions, because its politicians can't be trusted." The downgrade itself does not matter, and I would be the first to dismiss calls for further austerity measures to bring the deficit and debt down in relation to GDP. We know now, all too well, how disastrous fiscal consolidation can be in a weakening economy. But the picture that Moody's paints, of a weak and untrustworthy political establishment and an economy entirely dependent on the soundness of institutions that are increasingly under political pressure, is shocking. This, even more than Brexit, threatens the future of the UK.

Where have the honest and courageous politicians gone? Whatever happened to doing the right thing, not merely the most popular thing? Who will speak up to avert the coming disaster?

The Lord said, “If I find fifty righteous people in the city of Sodom, I will spare the whole place for their sake.”27Then Abraham spoke up again: “Now that I have been so bold as to speak to the Lord, though I am nothing but dust and ashes, 28what if the number of the righteous is five less than fifty? Will you destroy the whole city for lack of five people?”“If I find forty-five there,” he said, “I will not destroy it.”29Once again he spoke to him, “What if only forty are found there?”He said, “For the sake of forty, I will not do it.”30Then he said, “May the Lord not be angry, but let me speak. What if only thirty can be found there?”He answered, “I will not do it if I find thirty there.”31Abraham said, “Now that I have been so bold as to speak to the Lord, what if only twenty can be found there?”He said, “For the sake of twenty, I will not destroy it.”32Then he said, “May the Lord not be angry, but let me speak just once more. What if only ten can be found there?”He answered, “For the sake of ten, I will not destroy it.”

- Genesis 18: 26-32

GOP tax plan will take money from middle class and shovel it to the wealthy

Published by Anonymous (not verified) on Thu, 28/09/2017 - 5:33am in

This afternoon in Indianapolis, Pr*sident Donald Trump will deliver a speech outlining a long-awaited tax overhaul that, among other things, the White House and Republicans in general hope will reboot a regime that has failed to deliver on promises to its base and whose various shenanigans, gaffes, and missteps have generated a backlash that includes ever-lower approval ratings […]

The post GOP tax plan will take money from middle class and shovel it to the wealthy appeared first on Red, Green, and Blue.

Cartoon: Deficit memories

Published by Anonymous (not verified) on Tue, 25/04/2017 - 11:50pm in


Budget, Deficit, Taxes

This is a cartoon flashback that I thought bore repeating as we learn about the Trump tax plan. It doesn’t matter how how fiscally prudent Democrats manage to be, or how badly Republicans bust budgets; the narrative never changes. 

Follow Jen on Twitter at @JenSorensen