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| | Hi Friend, Note To Self ... There Is No Money ...
Good news for the Chancellor last week. The government borrowed £35 billion less than expected in the first nine months of the financial year. The chancellor, it was said, is estimated to have, between £15 billion and £20 billion to spend on his budget in March. What a stroke of luck!
Or was it? This week, in a note to self Jeremy Hunt has admitted there is no more money after all. The chancellor, has said there will be less room for tax cuts in the spring budget next month.
This, just days after the International Monetary Fund warned that the UK needed to focus on repairing public finances and a week after the OBR dismissed the Treasury spending forecasts as a work of fiction. (The week in which we also warned of the Bond Market Vigilantes).
Hunt, who in November announced he was cutting the main rate of national insurance contributions, was widely believed to be gearing up for another tax giveaway after dropping a series of hints about what could be the Conservatives' last budget before a general election.
However, the chancellor said he needed to manage expectations. "It doesn't look to me like we will have the same scope for cutting taxes in the spring budget that we had in the autumn statement," Hunt told the BBC's Political Thinking with Nick Robinson podcast.
"I need to set people's expectations about the scale of what I'm doing, because people need to know that when a Conservative government cuts taxes, we will do so in a responsible and sensible way."
His comments come days after the IMF issued a strong warning to the chancellor against cutting taxes in his March budget, noting that any tax giveaways would probably require extra borrowing or post-election spending cuts.
The International Monetary Fund warned against pre-election tax cuts as it downgraded Britain's growth prospects. It said the country should instead curb borrowing and prioritize public spending in areas such as health and education
"Preserving high quality public services will imply higher spending needs over the medium term than are currently reflected in the government's budget plans. Accommodating these needs while assuredly stabilizing the Debt to GDP ratio will already require generating additional high quality fiscal savings, including on the tax side". It is this context, that IMF staff advises against additional tax cuts.
This follows the statements last week from Richard Hughes, Chairman of the OBR in front of the Treasury Select Committee. The Chairman of the Office for Budget Responsibility (OBR) essentially called the government's post 2025 plans, or the conspicuous lack thereof, a flight of fiscal fantasy.
In a striking attack on the government Hughes, said ministers were not being honest with voters about the probable scale of public sector cuts because they had failed to publish detailed spending plans for the period after April 2025.
"Beyond 2025 we know virtually nothing," Hughes told the Lords economic affairs committee. "It is just two numbers one for total current spending and one for total capital spending. I think some people have referred to that as a work of fiction. I think that's probably generous, given that someone has bothered to write a work of fiction whereas the government hasn't even bothered to write down what its spending plans are."
So we say again, it is all a bit rum. In the space of a few weeks in the autumn, the Treasury, moved from a position in which the Chancellor had no money to play with, to one where he could announce some crowd pleasers because of the effect of higher inflation on tax revenues.
Last week, it seems the Treasury moved from a position in which the Chancellor had spent all the goodies in the Autumn statement, to one where he could provide more vote winners in the Spring budget. Now it seems in a note to self, there is no more money for vote winners after all, pressure from the IMF and the OBR not withstanding.
It's another episode of "Soap, Life In Downing Street". The intro to Soap, the U.S. Sitcom in the seventies,always began with an intro to the stories of the week and the summary "Confused you won't be after this week's episode. Or will you?
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| | Moving In the Right Direction ... Markets Assume A June Rate Cut ...
At the MPC meeting this week, the committee voted by 6 votes to three, to hold base rate at 5.25%. So much for group think, of which the Bank is oft criticized, two members voted for a rate hike and one voted for a rate cut.
Swati Dhingra, voted in favour of a 0.25-percentage-point reduction to the base rate, marking the first vote for monetary easing in almost three years. Dhingra thinks the Bank is at risk of over-tightening if it waits for data showing sharp declines in wage growth.
Jonathan Haskel and Catherine Mann, on the other hand, voted for another rate rise to 5.5 per cent. They think that wages (rising by 6.5%) are still dangerously high. A majority of six MPC members, including Andrew Bailey, the governor, and Huw Pill, the chief economist, voted for another month of no change.
Andrew Bailey delivered a mixed message to the markets, pointing out that the MPC was "not at the point where we can lower rates'. Nevertheless, he said, the main question facing rate setters at future meetings was 'how long we need to maintain this position". This is a significant change in stance.
The MPC has removed its previous guidance relating to the need for more rate rises, suggesting that the Bank's next move would be a reduction in borrowing costs.
In the US, this week, the Fed also shifted its guidance to financial markets to remove its previous language on the need for more monetary tightening. Chairman Jerome Powell opened the door to rate cuts, without specifying when they were likely to happen. A cut as early as May remains a possibility. Markets were previously exciting about a possible March cut.
Governor Bailey hinted at a potential rate cut, markets assume in June. This would mark the first easing of monetary policy since 2020. Andrew Bailey said, "The economy is "moving in the right direction", possibly towards a position that could cause the Bank of England to consider cutting interest rates.
The obsession with the "Suite of Models" continues. The "models" suggest inflation may hit the 2% target in the second quarter of the year. Thereafter, the headline CPI rate is expected to rise in the latter half of 2024 closing at just under 3%. (The "models" are also pretty optimistic about earnings and wage settlements).
The Governor called for caution, suggesting that while rate cuts are on the horizon, they may not be as substantial as financial markets anticipate.
In a later statement, Chief Economist How Pill decided to cloud the market view further. The day after the statements from the Governor, Hugh Pill indicated the Bank may have to raise interest rates, as a next step, instead of cutting them.
Pill highlighted potential risks, such as developments in the Middle East, that could necessitate a response from the Bank. He also pointed to sustained inflationary pressures from wages, the job market, and service industry prices as reasons to be cautious about rate cuts.
Despite market expectations for a rate cut to 5% by May or June, Pill emphasized that the Bank does not have sufficient evidence yet to support a reduction in rates.
"There are dangers from developments in the Middle East for example, that if they were to become manifest we would need to respond to, and that would certainly alter my assessment of the speed or even the direction of future movements in rates".
So what can we make of it all? Our overall forward guidance outlook remains unchanged. We expect a series of three base rate cuts in the current year possibly beginning, in May or June. We model base rates at 4.5% in the final quarter.
Don't be too surprised if inflation fails to perform as the Bank's ""suite of models" suggest. Models are like that ...
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| | That's all for now. Have a great week ahead ...
John
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| To understand the markets, you have to understand the economics ...
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© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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