 So What has Rachel Reeves Said ...
"The Budget next week will deliver on the promise of change. That change will be driven by this government's number one mission to deliver sustainable growth after a decade and a half of stagnation. But growth can only be built on stable foundations. So my first and most important job next week at the despatch box is to turn the page on years of instability and uncertainty which have, for far too long, deterred investment and undermined business confidence. That is why my fiscal rules are so important: they will be the rock of stability at the core of my Budget. They will set the basis for stable fiscal policy, prudent management of day-to-day spending and responsible investment for growth. My fiscal rules will do two things. The first and most important: my stability rule will mean that day-to-day spending will be matched by revenues. My second fiscal rule, the investment rule, will get debt falling as a proportion of our economy. That will make space for increased investment in the fabric of our economy, and ensure we don't see the falls in public sector investment that were planned under the last government." Why change the rules? What Are The Current Fiscal Rules? In simple terms, debt should be on course to fall as a share of national income in five years time and Public Sector Borrowing should not exceed 3% of GDP in five years time. The good news for government, the hard task is always at the end of the forecast period. It's always five years away. Rachel Reeves, has a problem. The Chancellor has committed to a rule that public debt should be falling, relative to the size of the UK economy, between the fourth and fifth year of the forecast period. UK fiscal rules are designed to limit public sector net debt as a percentage of Gross Domestic Product. Gordon Brown's target in his ten years of tenure as Chancellor was that debt should not exceed 40% of GDP. How things change! Rachel Reeves is battling at the present time to hold the critical ratio below 100%. At the end of March 2024, debt as a percentage of GDP was 98% of GDP, forecast to fall to 94% of GDP by the end of the 2028/29. This before the discovery of the Black Hole and the reality of a projected over run this financial year alone of almost £40 billion. The Chancellor has announced, from now on, the government will target Public Sector Net Financial Liabilities (PSNFL) rather than Public Sector Net Debt (PSND). Affectionately known as PERSNUFFLE with one bound the government is free from the GDP constraint. At the end of March 20024, PSNFL as a percentage of GDP was a far more manageable 83% of GDP forecast to fall to 79% by the end of the forecast period. Public Sector Net Debt was estimated to be £2,699.6 billion at the end of March 2024 compared to an estimated PSNFL value of £2,285.2 billion, a difference of £414 billion. By 2028/29 Public Sector Net Debt is estimated to be £3,078.1 billion at the end of March 2029 compared to an estimated PSNFL value of £2,569.4 billion, a difference of £509 billion. As of March 2024, switching to a PSNFL target would have added £53 billion of spending 'headroom' compared to the PSND ex BoE target. In next week's budget statement, Rachel Reeves could spend £60 billion to £80 billion more than under the old rules. The Shuffle to Persnuffle pays off ... So What do we mean by PSNFL ... Public sector net financial liabilities (PSNFL) is a wider measure of the government balance sheet than public sector net debt (PSND). It includes all financial assets and liabilities recognised in the National Accounts. Sources of differences between the two measures include financial assets, such as student loans and equity stakes in financial institutions acquired during the financial crisis. They net off against PSNFL but not PSND. Additionally, some liabilities add to PSNFL without affecting PSND, including net pension liabilities for funded pension schemes. In simple terms, PSNFL is lower than PSND, because the net liability reflects the asset and the liability or debt, rather than just the debt. The main asset or liability is funded pension schemes, such as local government schemes. The assets held by these schemes are counted on both sides of the balance sheet, the asset and the liability. Total LGPS assets have grown from £290 billion in 2019 to £366 billion in 2022. The most important other assets included in PSNFL but not fully reflected in PSND are outstanding student loans worth some $236 billion at the end of March 2024, The Government forecasts the value of outstanding loans to reach around £500 billion by the late-2040s. The difference between PSND and PSNFL is largely driven by the differential treatment of student loans. PSNFL includes the portion of student loans expected to be repaid as an asset, while PSND does not. Loans issued by the Bank of England under the Term Funding Scheme (TFS) are also included. The OBR assumes that all £127 billion of these loans (5.0 per cent of GDP in 2023-24) redeem over the forecast period. So What Does The Market Make of It All ? So far so good, the market has responded well to the news. Sterling at just under $1.30 has changed little in the week. We always thought the fall from $1.34 was a trend correction anyway. Ten year gilts yields have moved up by twelve basis points to 4.22. We still expect a normality of 4.00 to 4.50 to be the norm. Thirty year gilts now trade at 4.75. The Bond Vigilantes are taking a close look. No Liz Truss trauma due next week. Markets like the idea of spending to invest. The IMF has been clear that weak investment and low productivity are holding back growth in the UK. The IMF has given a blessing to the shuffle to persnuffle. It is the preferred international measure in any case. The "dual" mandate of fiscal prudence and a growth agenda no longer a "duel" mandate? We shall see next week, if a real conflict in objectives can be avoided ... References This week's post relies on extracts from our daily "What the Papers Say Review." Certain research and photo content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from Adobe Stock and The Saturday Economist Slide Deck. 1 Student Loan Statistics House of Commons Library. 2 Review of LGPS fund valuations : Government Actuary 3 Fiscal Rules and Investment in the upcoming budget : IFS 4 Public Sector Net Financial Liabilities : OBR 5 My fiscal rules will provide the stability on which growth depends, Rachel Reeves Financial Times 24th October 2025
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 Bank of England Set To Cut Rates in November …
The pound dropped sharply to its lowest level in two months after inflation fell by more than expected last month. Sterling dropped 0.6pc against the dollar to below $1.30 for the first time since August after the consumer prices index fell to 1.7pc in September, according to the Office for National Statistics. The FTSE 100 jumped higher as money market traders priced in an interest rate cut by the Bank of England next month, from 5pc to 4.75pc, as closely watched services inflation fell below 5pc for the first time since May 2022. Money markets imply there is a 76pc chance of a further reduction in borrowing costs in December, up from a 48pc chance on Tuesday. Don’t get too excited by the drop in headline CPI Inflation .. CPI the consumer prices index fell to 1.7pc in September from 2.2% in August. Headlines heralded the fall in inflation to below the MPC target but don’t get too excited by the drop in headline CPI Inflation. It may not last. Headline prices were flattered by the drop in goods inflation to -1.4% in the month. Lower oil prices and higher Sterling levels made the assist. Brent Crude averaged $74.00 dollars this year compared to $94.00 dollars in 2023. Sterling averaged £1.32 compared to $1.24 last year. That’s a 26% drop in oil costs Sterling adjusted. Core inflation excluding food and energy eased to 3.2% from 3.6%. Concerns remain about the high level of service sector inflation at 4.9% even as job market cools and earnings fall significantly. The drop below the 2% level will not be sustained. Goods inflation is set to rise, even as service sector inflation falls below 4%. The headline rate is set to return to the 2.5% - 3.0% level in the first quarter next year. The MPC may see some leeway for a 25 basis point cut at the next meeting in November but caution will prevail, despite some good news on wages costs in the Labour Market Update this week Wages Ease even as unemployment rate falls. Some goods news for the Government and the Bank of England in the Labour Market Update released this week by the Office For National Statistics, (ONS). Unemployment fell from 1.437 million to 1.386 in the period to August. The unemployment rate eased to 4.0% from 4.1%. More people in work, the employment rate increased to 75% as employment increased to 33.4 million. Vacancies eased back to 841,000 in September from over 900,000 at the start of the year. We expend a trend return to 750,000 into 2025. The really good news for monetary policy was the slowdown in wage inflation. In the three month average to August, whole economy total earnings increased by 3.8%, down from almost 6% in April. One note of caution the month single rate in August is estimated at 4.4%. Confused? You will be. The trend in wage inflation will increase the probability of a rate cut in November and possibly one further cut in the first quarter of 2025. It is difficult to see a second cut for Christmas. Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5% and vacancies averaged 650,000. That means no return to Planet ZIRP ... References : European Central Bank cuts interest rates for third time this year … Jack Barnett 18th October 2024. The Times https://www.thetimes.com/business-money/economics/article/european-central-bank-cuts-interest-rates-for-third-time-this-year-bvrpkv5tt ECB Monetary Policy Statement At A Glance https://www.ecb.europa.eu/home/html/index.en.html  This week, the European Central Bank made its first back-to-back interest rate reduction in more than a decade, reducing its key rate by 25 basis points in an effort to support the eurozone’s weakening economy.
The bank lowered the main deposit rate to 3.25 per cent from 3.5 per cent in the third cut this year reducing the cost of borrowing from a record high of 4 per cent. The move came after a range of data reinforced concerns that the EU's major economies are struggling. Germany, is projected to expand by just 0.1 per cent this year, according to the OECD. The Eurozone economy as a whole is expected to grow by 0.7 per cent. “Manufacturing and exports are weak. Firms are not investing much. Services have been doing a bit better, thanks to a good summer tourism season. Even though many people have more money to spend, they are preferring to put it aside, even more so than before the pandemic.” The ECB said. “”The saving rate stood at 15.7 per cent in the second quarter, well above the pre-pandemic average of 12.9 per cent.” Inflation across the twenty nations fell to 1.7 per cent in September from 2.2 per cent the previous month, below the ECB’s target. Wage pressures, often singled out as a source of inflationary concern, have also cooled more quickly than expected. In a statement announcing the latest rate reduction, the governing council stated: “The incoming information on inflation shows that the disinflationary process is well on track.” “We're breaking the neck of inflation,” Christine Lagarde said in the Slovenian capital of Ljubljana as she announced that the European Central Bank was cutting interest rates. “It’s not broken completely yet, but we’re getting there.” Markets now see a high chance of rates being lowered by a further 25 basis points in December. The ECB is leading the way in comparison with the Fed and the Bank of England. The Euro is paying the price.  Last Sunday, it will have been 100 days since Keir Starmer became prime minister to form the first Labour government in over 14 years. While still only a fraction of the way through this parliament, it has been an eventful few months and a period that has taken its toll on Labour's popularity.
After just three months in power, six in ten Britons (59%) disapprove of the government's record so far, with only one in six approving (18%). Keir Starmer's popularity has sunk, with 63% of Britons seeing him unfavourably, just over a quarter (27%) still holding a positive view. Three in ten Britons (30%) say they had expected Labour to do well in government, but have been left disappointed by what they have seen so far. For a further 37% of Britons Labour's poor performance is what they were expecting in the first place. Only one in eight (12%) say their positive expectations have been met. Labour Had A Plan ... Labour had a plan for their early days of government, carefully worked on for months by Sue Gray, Starmer's then chief of staff. But despite that, it has been far from easy. Starmer insists he expected that. "It has proved the thesis that government is tougher, but also that government is better, because you get to take decisions." Preparations for government had been put in the hands of Gray and a small team of party officials, working at a secretive office around the corner from Labour's HQ in Southwark. Visitors were discouraged. "We were told Sue had a plan, and to keep our noses out of it," says one campaign adviser. "But she clearly didn't." One view is that some of Downing Street's early problems could have been avoided if they had spun a clearer narrative around all the activity. "There was no big set of announcements to capture that spirit of change," says an insider. There was no confirmation of a "Master Grid" and too much "gloom and doom" at onset. Others might argue like Mike Tyson, "Everybody has a plan until you get punched in the face." Big decisions, new legislation, foreign trips and attempts to set the political narrative, were established but the blows to the face kept on coming. Not just over donations, of clothing, sunglasses and sofas but stories of internal rows at No 10, the backlash to the cuts to the winter fuel payment and the lack of a clear strategy to reduce child poverty. Labour's first king's speech initially went off without a hitch, bringing in bills to nationalise the railways, establish Great British Energy, the National Wealth Fund, improve workers' rights and change planning rules to build more houses. Ministers scrapped the Tories' Rwanda scheme, got rid of the Bibby Stockholm Barge and set up a border security command to tackle small-boat crossings. They invited Ukrainian president Volodymyr Zelenskyy to Downing Street, and took first steps to reset relations with the EU. They reached pay deals with junior doctors and train drivers, and funded above-inflation public sector wage rises, helping to reverse years of service disruption adn decline. Just two weeks into office, Starmer faced his first major test, a Commons rebellion calling for the two-child benefit cap to be scrapped. Inside No 10, it was seen as an early and not entirely unhelpful opportunity to flex muscles, with Labour backbenchers, particularly on the left. Outside, though, it filled many MPs, including some in the cabinet, with dismay. "If we're not tackling child poverty, what are we doing?" one said at the time. Seven rebels, including veteran left winger John McDonnell, were stripped of the whip for six months. The government announced a child poverty task force but it did little to stem despair across the party, and the wider public, over such a symbolic issue. The Black Hole Within days of becoming chancellor, Reeves announced the Treasury would be carrying out an audit of the fiscal inheritance, one of the worst since the second world war. The Chancellor claimed to have found a £22 billion black hole in government spending plans for essential public services in 2024-25. The Government immediately leapt on the deficit as evidence of irresponsible management of the economy, requiring tax increases and spending cuts in the budget to meet the shortfall. To help fill the black hole, the biggest mistake was made, cutting the winter fuel payment for pensioners. It was an expensive move politically, to generate a modest contribution financially. More to fill a a pothole than a cosmic hole, the abolition of the winter fuel allowance will contribute just £1.5 billion. It could well be less. Reeves has been bullish, in private and in public, about the decision, arguing that she had no choice. Otherwise the axe would have fallen on support for disabled people or families with children. "There's no way I'm doing that"" she is said to have told angry MPs. The Morton's fork, it's a tricky bit of sophistry in which a conclusion is drawn in several different ways that contradict each other. MPs were not forked. Internal frustrations within Starmer's top team, which had been kept at bay by the election, began to bubble over, with. Gray increasingly became the "overpaid" lightning rod. Some political colleagues accused her of "control freakery", creating a "bottleneck" in No 10 that had delayed policy decisions and appointments. Finally, after warnings from senior aides and cabinet ministers to "get a grip", Starmer came to the conclusion that some of the side winds blowing could develop into a hurricane. Gray was getting the blame for many of the missteps. It had become unsustainable. At the end of the week, Starmer summoned her to a meeting, at which he told her that she would have to go. Calmer Waters ... Morgan McSweeney, the political mastermind behind the party's win, was appointed chief-of-staff in her place, supported by two deputies and a new director of strategic communications. There are now hopes of calmer waters. 'I want to make Downing Street boring again," McSweeney is said to have told officials. Clearly Starmer needs a cool head of strategy, a master grid, an attack dog (Thatcher's Tebbit) and a great budget at the end of the month. The Treasury has been market testing options, like a mad man in a Woolworths pick and mix shop. Employment tax, higher capital gains tax, a raid on pensions, what else? Business are wary, holding back on plans for investment and recruitment. The last millionaire to leave the country has been asked to leave a suitable donation at customs. Bring on the budget, let's have a clear plan. But don't hinder the growth objective in the process ...  "Has Animal Farm Moved Into Downing Street ?" ...
We are into the final decile of the Labour Government's first one hundred days. It feels as if we are into the final chapter of Animal Farm. By chapter ten in George Orwell's brilliant political satire, the pigs are walking on two legs, talking with the humans, drinking and playing cards with the former enemy, as the other unfortunate animals are urged to work harder and eat less. The mantra "four legs good, two legs bad, four legs bad", has morphed into "four legs good, two legs better". The windmill investment providing cheap energy for all, has been annexed by the pigs to power the grinding mill, processing grain for the coffers of the elite. The milk and barley has been hogged by the pigs. The pig swill has been distributed to all in the fields, with demonstrative largesse. "Has Animal Farm Moved into Downing Street? In opposition, Sir Keir Starmer repeatedly accused the last Conservative government of cronyism, from its handling of contracts for personal protective equipment during the pandemic to renovations of the flat in Downing Street. But just two months into government, the Labour prime minister and some of his most senior colleagues have been accused of failing to declare freebies including clothing and a trip abroad in the most transparent way. For Rosie Duffield, it is all a bit too much. The Labour MP for Canterbury has quit the party over the freebies scandal, accusing Sir Keir Starmer of presiding over "sleaze, nepotism and apparent avarice that is off the scale." Resigning her position, the MP for Canterbury, told Sir Keir that she was "ashamed of what he and his inner circle had done to tarnish and humiliate our once proud party". She declared that he was unfit for office after "inexplicably" choosing to accept designer suits and sun glasses while at the same time pursuing "cruel and unnecessary" policies. In her resignation letter to the Prime Minister, Ms Duffield said: "Someone with far above average wealth choosing to keep the Conservatives' two-child limit to benefit payments which entrenches children in poverty, while inexplicably accepting expensive personal gifts of designer suits and glasses costing more than most of these people can grasp, is entirely undeserving of holding the title of Labour prime minister." "Forcing a vote on the winter fuel payment to make many older people iller and colder while you and your favourite colleagues enjoy free family trips to events most people would have to save hard for and you not showing even the slightest bit of embarrassment?" Rosie Duffield has become the fastest MP to jump ship after a general election in modern political history. It came after Sir Keir admitted on Friday that Lord Alli gave him £32,000 to pay for clothing, double what he previously declared. Sir Keir also received £2,400 from Lord Alli for glasses, and the use of an £18 million penthouse during the election campaign and on other occasions. Members of his front bench team have also declared large donations from the peer. Why are gifts to Starmer in the spotlight? According to the Financial Times, Starmer accepted £76,000 worth of entertainment, clothes and similar freebies from UK donors in the last parliament, more than any other MP. The most generous benefit disclosed was £16,200 of "work clothing" and £2,485 of spectacles from Lord Waheed Alli, a Labour peer and former chair of online clothing retailer Asos. The row intensified this month when it was reported that Starmer's wife, Victoria, had received £5,000 of clothing from Alli that had not been initially declared in the register of MPs interests. Starmer fully declared that he had taken £20,437 of "accommodation" from Alli during the election campaign, which he has since said was used by his son for the period of his GCSE exams. [The stay was from May 29 until July 13 but the GCSE season had ended by June 19, raising questions over how necessary the accommodation was.] Starmer has promised to take no more clothing but he will retain the use of a box provided by Arsenal football club, which he says he needs for security reasons to continue taking his son to matches. Liz Bates Political Correspondent for Sky writes,"The public were expecting to see one of their own in Number 10, but Labour ministers' "early life" struggles are now a distant memory for them. It appears that whatever they want is at their fingertips and they are making the most of it. During the election campaign, Sir Keir made a virtue of his ordinariness and this has continued into government. He sold the public the dream of a prime minister, not from Eton and Oxbridge, but a pebble-dashed semi, the son of a toolmaker, who was one of them. In his conference speech he did it again, referencing "people of a completely ordinary working-class background like mine". But now Starmer and his ministers are living a life of privilege, free clothes, free sunglasses, free tickets, parties paid for, the use of million-pound properties whenever they need them. They may have started off trying to make ends meet, but now whatever they want is at their fingertips and they are making the most of it. Voters, promised one of their own in Number 10, see someone whose life could not be further from theirs and it's jarring. The rules weren't broken here but the public's impressions aren't just based whether particular guidelines were followed or not. Some will think Animal Farm has moved into Downing Street. All animals are equal but some are more equal than others. Labour principles good, Tory lifestyles better. References This week's post relies on extracts from our daily "What the Papers Say Review." Certain research and photo content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from The Adobe Stock, The Saturday Economist Slide Deck and DALL-E Starmer freebies row is not about corruption - it's about class. Liz Bates Sky News. Labour MP quits over "freebies" scandal and Keir Starmer's "cruel policies". Camilla Turner, Telegraph. Why Is Kier Starmer Under Pressure Over freebies ... Jim Pickard and Anna Gross in London and Lucy Fisher in New York, Financial Times. Animal Farm Orwell's Brilliant Political Satire. George Orwell  Liz Truss goes for a full house in her buzzword bingo says Tom Peck writing in The Times this week .. Members queued round the block at the Tory conference for the former PM’s bulletproof epistemology: that she was definitely right and everybody else was wrong. The huge queues are the vindication she requires. She was prime minister for six weeks, her party lost 200 seats, but the number of people who still want to listen to her are proof that she was definitely right about everything. It was all the world’s fault, not hers. The event was a Q&A hosted by the Telegraph’s sketch writer, Tim Stanley. “I’m going to plough straight in,” he said. “Is Britain now on the road to socialism?” "Socialism is bad. We’re not just on the road to it. We are already in it,” said Truss. She smiled nervously. Her blow-dried hair fluttered under the stage lights and she launched straight in to her greatest hits. Nothing was her fault. It was all the establishment, all the deep state. Labour shows itself to be “unserious” when it dares to blame the failure of the mini-budget on her and not on the Bank of England and the Office for Budget Responsibility (who she banned from looking at it). She also claimed that the election would have gone better if she’d still been in charge. “The problem, she explained, was “the neo-Marxist orthodoxies of wokery”. That’s verbatim, almost a full house of Liz Truss bingo in just six words. The Q&A finished, she made her way out of the room, past a bank of reporters from every conceivable broadcaster and podcaster, waiting to doorstep her. None of them were gifted a word. Within seconds she was out the door and gone. https://lnkd.in/eXCPeKbm |
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