I had previously looked at public sector net borrowing in some earlier posts. The most recent data for October was released on 21 November 2012. It again led to quite a bit of press, for example,
“This meant government borrowing excluding the effects of banking bailouts came in at £8.6bn in October, compared with £5.9bn a year ago. City economists had expected a shortfall of £6bn.”
The Guardian also has a focus with some analysis, but only presents the annual data in a nice looking graph linking it all back to political parties. See this link.
We can do better than this and use the monthly data and also combine this with some seasonal adjustment techniques to tell us really what is going on. Annual data won’t tell us the true story. The monthly data is available from this link (series id: J5II). The data goes from January 1993 up to October 2012.
So lets first look at what a reasonable expectation should have been for October 2012 estimates. Ideally, we should use the data that was available at September 2012 estimates. This is because there may have been some historical revisions. But unfortunately the ONS website does not make it easy to extract data vintages of previously published data. To make this as realistic as possible I have updated the data based on the published estimates in their previous statistical release. So taking the actual data published up to September 2012 and applying some simple forecasting methods would have given a forecast for net borrowing for October 2012 of around £6 billion. So in-line with the expert economists who probably also just applied a simple forecast model. But this forecast came with a range between £-9.5 billion and £-2.5 billion. A wide range. So we shouldn’t be too surprised that the actual number was £-8.6 billion, as it is well within the expect range of our forecast.
Using the actual published data for October 2012 we can look at the seasonality for October over recent years. This can give us an indication of whether the October 2012 estimate is different to previous Octobers in different years. As everyone knows it is not a good thing to just compare the non-seasonally adjusted data across years as it does not take into account aspects such as changing seasonality over time and calendar composition of the month. The use of seasonal adjustment will account for this. The plot for the seasonal component in both Septembers and Octobers since 1993 is:
This shows a few things. While we didn’t look at the September 2012 estimate in detail, it highlights that this came in as we would have expected based on historical Septembers. For October 2012, this shows that the net borrowing came in actually lower than we would expect by about £2.5 billion, and broadly in line with what occurred in October 2009. So not a good October 2012 result.
This is better illustrated with the seasonally adjusted and trend data. It looks like this:
The black line is the original data (e.g. the £-8.6 billion for October 2012) along with the seasonally adjusted in red, and the trend in blue. Now it becomes clear on the benefits of seasonal adjustment, which strips out the regular seasonal pattern that is observed over the history of the series. Based on historical data we would’ve expected the black line for October 2012 to be slightly higher (e.g. less negative by coming in around £-6 billion rather than £-8.6 billion). This is illustrated more clearly by the dip in the seasonally adjusted movement between September and October 2012. More interestingly, the underlying trend of net borrowing has leveled out since October 2011 with a change in underlying trend of “only” 70 million over 12 months, e.g. essentially unchanged underlying net borrowing for over a year.
And even more finally. For November 2012 estimate, we will throw out a forecast for net borrowing (non-seasonally adjusted) of £+2 billion. Anything less than this and the underlying trend will be going the wrong direction. Lets wait and watch the hype.