Category Archives: Financial Markets

Britain, Economic, Financial Markets, Government, Politics

Spring statement 2025: A stage built on myths

BRITAIN

BRITAIN is tightening its belt. The chancellor’s spring statement arrives with the gloomy tone of inevitability. Welfare payments for the sick and disabled will be shrunk, and public services from transport to criminal justice face much leaner times. The language is that of necessity. There is no money. The choices are hard, but unavoidable. So runs the rhetorical script.

The notion that painful cuts are inevitable is political theatre and grandstanding. Either Rachel Reeves knows the constraints are self-imposed – or, more troubling, believes they are real. Last October, she announced £190bn in extra spending, £140bn in additional borrowing, and £35bn more in taxes than previously forecast. The Treasury has expounded upon this by insisting “you can’t pour that amount of money into the state and call it austerity”.

Yes you can. Particularly where tens of billions are siphoned off in debt interest to uphold economic orthodoxy rather than meet social needs. The UK now spends more than £100bn a year on debt interest not because it is financially insolvent, but to a substantial degree because the Bank of England is offloading vast amounts of gilts, bought during quantitative easing, at a loss. The Treasury must cover these losses, while the flood of gilts into financial markets drives up interest rates on new borrowing. This is quantitative tightening (QT), with the state left to foot the bill for soaring interest costs and Bank payouts. Nonetheless, the Office for Budget Responsibility assumes that it will continue, locking in high costs.

This is ideology posing as policy. And it’s far from prudent. No money for free school meals or youth clubs, some parliamentarians warn, yet billions pour into the pockets of bondholders, for the sake of “stability”. Ending QT could redirect that money to public services – a better priority than reassuring markets with symbolic gestures.

If the Bank won’t stop on its own, it must be pushed. Under Gordon Brown, the Central Bank gained its independence in 1998 but included a safeguarding caveat: in “extreme economic circumstances” ministers can override the Bank in the public interest. If £100bn in spending isn’t extreme, what is? QT should be paused. The Bank stands alone among G7 peers in actively selling bonds and demanding Treasury cash to cover paper losses. This is self-defeating in a dangerously volatile world. Gilts could be strategically managed. Before New Labour, Kenneth Clarke often ignored the Bank’s advice – and was often right. But such thinking is now deemed heretical in a political culture that treats Central Bank independence as sacred, even when it deepens and exasperates public hardship.

The deeper irony cannot be lost on anyone. The chancellor refuses to raise taxes on the wealthy, will not relax her fiscal rules, and has ruled out borrowing more. So she claims that there is no alternative to cuts. Yet, these are self-imposed constraints – combined with deference to an unelected monetary authority – that sustain the illusion of necessity. Labour has been here before: Snowden did the same in the 1930s, and very nearly destroyed his party.

The spring statement is a performance. She asks the public to accept a diminished state as the result of external forces, when actually it’s the result of internal dogma. Worse, she may believe the script – failing to recall the economic tools once used to steer interest rates, debt, and public investment. Austerity isn’t the price of prudence, but the cost of forgetting. We have a chancellor of the exchequer who wears the mask of making tough decisions, but on a stage built on myths. The better choice would be to trim the Bank’s power, even if the spotlight has been carefully trained away from its damaging role.

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Banking, Britain, Economic, Financial Markets, Government

Brexit: Economic shocks can be positive

BRITAIN: ECONOMIC

A NO DEAL BREXIT would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism (ERM) in September 1992.

But such shocks, if they trigger the right policy response, don’t necessarily have to be negative.

That is why it is fascinating that the Cabinet Office is now contemplating about what “Project After” Brexit actions should be.

It should come as no surprise, then, that both the Bank of England and the Treasury have similar thoughts.

In the immediate aftermath of the 2016 referendum to leave the EU, Mark Carney played a central role in shaping fiscal policy. Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing (QE) was launched and an emergency £100bn line of credit for the banking system was created.

In the event of a No Deal Brexit the Bank should be able to do more. Threadneedle Street is known to believe, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Government – and the Chancellor Philip Hammond – is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

What should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better and improved commuter routes into Manchester, Leeds and other northerly centres.

The most direct and easiest way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced quite sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc. Gaining a competitive edge is going to become increasingly prescient.

The best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

 

DREDGING Ramsgate harbour might help. But within international commerce, money speaks the loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would rapidly deploy their best logistical skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. One of the biggest concerns is that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that.

But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.

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Britain, Economic, Financial Markets, Government, Society

Brexit, oil prices and global trade: factors hindering economic recovery

ECONOMIC

DESPITE the uncertainties surrounding Brexit the range of expectations for UK growth for 2019 is relatively narrow – between 1 per cent and 2 per cent. A recent poll found that no economist expected an outright contraction next year; nor did any expect a boom. Rather, the most likely scenario is for growth of 1.5 per cent, which, the Bank of England believes, is around the UK’s new lower trend rate. The International Monetary Fund (IMF), which has also refreshed its global forecasts, expects roughly this same rate of growth in Britain to persist over the next five years.

The Brexit saga is probably the most obvious risk facing the economy. Whatever one’s view of the longer-term Brexit effect, a “no-deal” outcome could lead to the economy plunging into recession, while a “good deal” could boost confidence, investment and consumer spending and thereby economic growth. But Brexit is far from the only risk in town.

Indeed, there are plenty more global concerns that may yet scupper the recovery. After all, the British economy – unlike the United States and other relatively “closed” economies – is highly dependent on the outlook for global growth. And across much of the world forecasters see growth slowing over the coming years, even without some of the more disastrous risk scenarios crystallising.

What are the key global risks that might come back to bite the UK? First, there’s China. Many think of China as being a source of cheap imports but it is also Britain’s sixth largest goods export market. On one measure, published by the IMF, China overtook the US as the world’s largest economy in 2014, so attempts to reduce its debt pile after many years of spending could present a significant threat to global growth.

Fiscal largesse in the US is boosting growth there, but as President Trump’s splurge comes to an end the economic hangover could spread far beyond its shores. On this side of the Atlantic, the European Commission is likely to complain about the high budget deficits planned by Italy’s populist government, providing another source of market stress. Then there’s the issue of protectionism. Global tariffs have fallen significantly since the interwar period and remain low even after recent increases between the US and the EU/China. Even if these moves do not directly affect Britain, an escalation in trade disputes could yet be the precursor to weaker global confidence and exports, both to the UK’s detriment.

Oil prices could become a destabilising global force. Prices have fallen a little over the past few weeks but remain high at above $80 per barrel. Had strong global demand been the cause, that might have provided a counterbalance. But when prices rise because of supply constraints net oil importers such as the UK suffer increased costs with no improvement in demand conditions.

Higher energy prices also tend to leak into general price inflation. For now the inflation genie remains in the bottle, with rates of inflation across the G7 in a tight 1 per cent to 3 per cent range. But past above-trend rates of economic growth alongside unemployment rates at their lowest in a generation suggest upside risks to inflation. If not met with rising wages, that would reduce household spending power and could also prompt central banks to raise interest rates more quickly. Not only does that directly curtail domestic spending but for those countries that have taken out foreign currency loans (such as Turkey or Argentina) rising global interest rates push up their repayments and the risk of more widespread emerging market panic.

Recent moves in equity prices reflect all of these concerns; the FTSE 100 index fell to below 7,000 to a six-month low earlier this month. Investor concerns relate to the fact that neither central banks nor government exchequers can be sure their armoury is sufficient to deal with another crisis, should one arise. Banks may be more resilient now but they may not be the source of the next economic downturn.

Brexit is one of many global concerns that have increased the risks of another downturn in Britain and beyond. These risks will require careful navigation by policymakers if another downturn is to be avoided.

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