UK borrowing falls in May - Where next for borrowing and interest rates

The ONS announced on Friday better than expected borrowing figures in May. In this article I analyse why and the implications for Jersey

The Chancellor had a surprise boost on Friday with good news from the ONS, showing a significant improvement in the government borrowing position compared to the same month in 2012.

 

The figure of £8.8bn in May contrasted with a figure of £15.6bn in May 2012. However, the figure was flattered by one off’s, such as the first substantive fruits of the Swiss Tax Evasion deal at £3.2bn and by a boost from transfers from the BOE QE inspired bond buying programme.

 

Labour’s Chris Leslie claimed the underlying trend is up with out the one off factors, whilst the Chancellor will bag the good news just ahead of his spending review announcements next week, with an assertion that his medicine is working.

 

Vicky Redwood, Chief Economist at Capital Economics framed it somewhere in the middle "May's UK public finance figures provide further evidence that government borrowing is back on an improving trend, although mainly due to temporary factors"

 

Does it matter, and what is the relevance to Jersey?

 

The UK PSBR will govern economic policy right through the next UK election and is driving the austerity programme and other measures such as tax cooperation with the Channel Islands. The main effect though for Jersey is the absolute level of interest rates, which will stay near zero whilst ever the UK government is borrowing in a major way.

The forecast deficit for 2013 is £120bn, although only £85bn, when you wash out special financial support, which will come to an end, at least partially, probably before the 2015 election, cue Lloyds and RBS disposals.

 

The absolute national debt figure is  £1,189.2 billion excluding the temporary effects of financial interventions. I think that is about £20,000 per head of population!

 

A government that has to service this level of debt (about 90% of GDP) has a powerful incentive to keep interest rates low, so expect base rate to stay on the floor right through the next election irrespective of moves across the pond on Wall Street by Ben Bernanke, who has signalled an intent move out of QE, with interest rates set to rise.

 

The main impact for Jersey as a deposit harvester is that margins and income stay depressed with low interest rates, but profits conversely should rise with interest rates.

 

Some kind of normalisation around a 2% plus base rate could add circa 25 - 30% to revenues, and we may see some positive effect from the US, if the recovery there is sustained, given we have quite a big dollar book.

 

In the Sterling area however, expect more of the same, with the Chancellor increasingly focused on trimming the deficit and debt figure, as his window between now and the next election narrows.

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