Spending Review and OBR Updates ...
Spending Review this week, the Chancellor laid out the plans for government expenditure in the years ahead. The Office For Budget Responsibility released the latest forecast for the economy and government finances.
Government borrowing will hit £400 billion in the current financial year. Add in the funding for Gilt redemptions, the Debt Management Office will issue over £500 billion of new gilts this year. That's almost 25% of GDP. Thank the Bank, for the £1 trillion pound bank note. No need to task the markets too heavily to fund the deficits, "with inky blots and rotten bonds sustained".
The emergency spending on Covid measures now totals £280 billion. In the next financial year, it is hoped that spending on similar measures, will fall to around £55 billion. Total borrowing will fall to around £165 billion, then to £100 billion in 2022/23 as the damage from the pandemic abates.
No need for tax rises as yet. The Bank of England supports the spending plans, to sustain the economy during the crisis. Fears for tiers now extend to spring next year. Economic output is expected to have fallen by 11% in 2020. The good news, a strong recovery is expected next. The OBR is forecasting growth of 5.5% in 2021 and 6.6% in 2022.
The extension of the furlough scheme to the end of March, suggests the anticipated peak in unemployment will occur in the second quarter of 2021 at around 2.6 million, a rate of 7.5%. The spending review offers a commitment to create jobs, grow the economy and protect people's lives and livelihoods. The unemployment rate is expected to fall back to pre covid levels over the next two years.
More money for the NHS, education and defence. More schools, hospitals, safer streets and a big commitment to infrastructure. The creation of a national infrastructure bank, a positive step. The government is committed to the leveling up agenda, across the U.K.
More money for the low paid. The government is accepting in full the recommendations of the Low Pay Commission to increase the National Living Wage by 2.2% to £8.91 an hour and to extend the rate to those aged 23 and over. An increase in the National Minimum Wage rates follows. How long before the development of Universal Credit morphs into a Universal Basic Income?
It was all going so well for the Chancellor. Why then the suggestion of a public sector pay freeze and the threat to overseas aid. The move is political and piecemeal, with a modest yield in savings compared to the borrowing levels this year. NHS workers will avoid the pay freeze, those on lower incomes will receive a pay rise.
What then also of the the cut in overseas aid? The UK will spend the equivalent of 0.5% of GDP or £10 billion in 2021. "At a time of emergency, sticking to the 0.7% rule is not an appropriate prioritization of resources." according to the detailed spending review. It's also a good way of mitigating external capital flows ... always a good idea as the threat of gilt strike hovers ...
Deficits with inky blots and rotten bonds sustained : The Saturday Economist 22 June 2014
Rishi Sunak and the Trillion Pound Bank Note : The Saturday Economist 7th November 2020
Moving Out ... Moving On ...
The President was asked this week if he would move out of the White House, if the electoral college confirms Joe Biden as the 46th President of the United States next month.
"Certainly" he replied, "You know that". Well it hasn't always been so clear. Trump is down 35 - 1 in his legal challenges to the election result. A rambling, incoherent series of claims of voter fraud and the support of the un-dead for Democrats, has not helped.
This week, a Trump appointed judge in Pennsylvania, wrote a 21 page opinion, rejecting the appeal from the campaign team. "Voters not Lawyers, choose the President, Ballots not Briefs, Decide Elections " wrote State Judge Stephanos Bibas. The Federal appeal court, forcefully rejected the Trump campaign effort, to throw out millions of Pennsylvania votes. Allegations of misconduct were "meritless and undercut by a lack of evidence" the verdict.
According to Politico, in one final indignity, the judges, designated the 21 page ruling as "non precedential". "The campaign claims had so little weight, the case is not worthy of being cited in future cases". In Wisconsin, the Trump campaign team paid $3 million for a recount, only to see Joe Biden's numbers increase in the second tally.
Trump now is forced to accept the reality of leaving the White House in the New Year. The transition process is underway. A scorched earth policy is in play. The shredders are working overtime, no doubt and the furnaces burning bright, to obliterate all trace of foul play.
This week Trump pardoned Michael Flynn, former national security adviser found guilty of lying to the FBI. This follows the pardon of Roger Stone. Flynn and Stone were both convicted of impeding an investigation that threatened Trump.
According to the San Francisco Chronicle, "We should be prepared for more such protective pardons in the weeks ahead, possibly including an unprecedented self-pardon, to which Trump has dubiously asserted an “absolute right.” It would be a fitting finale for a president who has served himself at every turn and any cost."
So will come to an end our "White House WTF" feature. Trump is moving out. The adults are returning to the White House in the New Year ... and not before time ...
That's all for this week! Have a great, safe, week-end ... Hands, Face and Space ...
Boris Johnson announced this week, a huge £24 billion war chest to transform the armed forces and become "Europe's naval superpower once again".
"We will build the largest navy in Europe" said the Prime Minister, "paid for by a public sector pay freeze and a raid on pensions", said the Chancellor of the Exchequer.
Rishi Sunak has been considering an array of options for raising taxes to ease the growing deficit. The latest figures, confirm borrowing in the financial year to October was £276 billion. Figures published by the OBR suggest borrowing could increase to £372 billion in the current financial year. Some analysts now expect total borrowing to be over £400 billion.
The level of total debt increased to £2.1 trillion at the end of the month. Add in debt from the Public Sector Bank Holdings and the debt increases to £2.4 trillion. Toss in a few additional public sector liabilities and total public sector exposure, increases to £2.5 trillion. So how to pay for it all?
The Chancellor has pledged to bring soaring government borrowing under control. The Treasury is considering a range of options to plot a route out of the economic devastation caused by Covid, according to Sophy Ridge, writing for Sky News today. Rishi Sunak is due to make an appearance on Sophy Ridge Live this Sunday, ahead of next week's spending review.
The route out of the "devastation" is growth not tax rises. Growth will follow as the economy recovers from set back. Retail sales, excluding fuel were up by almost 8% in volume terms in October. Household goods increased by 16%, DIY and Garden Centre sales increased by 30%. Carpet sales were up by over 50%. Online sales increased by 60%, accounting for 29% of all retail transactions.
The Treasury always has a "bucket list" of possible tax increases. The secret is to keep them in the bucket under a pile of sand. Remember the pasty tax and the caravan tax? Is this really the time to impose a pay freeze on public sector workers or consider a raid on pension tax relief for higher earners?
If radical measures are required, VAT on mortgage payments could raise an additional £12 billion each year. A window tax, always an old favorite, could yield and additional £10 billion that's for sure. Young people under 25 could pay for the vaccines of the over 60's. That would be another great cash generator.
Sunak's messaging has drifted off course since Allegra Stratton left the camp. The UK's favorite cabinet member is no longer favorite to be the next Prime Minister. Worse still, Andy Burnham is the new nation's heart throb according to the "Loose Women" panel.
"Loose women swoon over sex symbol Andy Burnham" the headlines in the Manchester Evening News this month. "He makes my heart go funny" said Panelist Nadia Sawalha.
We are looking for a great performance by the Chancellor in the spending review next week. Too much talk of tax rises and many more hearts will go funny ...
In the first of our short notes on "The Economics of Mr Trump" we look at trade and developments in South East Asia. A "Coup for China and a setback for Uncle Sam", that's how analysts react to the world's largest trade deal that excludes the USA.
One of the first steps of the Trump administration, was to walk away from the Trans Pacific Partnership. The executive order signed in January 2017 effectively reversed the Obama decision to form a trade alliance with eleven pacific rim partners.
The partnership included the US, Canada, Japan, Australia, New Zealand, Chile and Peru. Without the USA, the partnership foundered, creating a vacuum, into which China was keen to make the move
Now, China and 14 other East Asian countries have signed one of the largest ever free trade deals, encompassing almost a third of the world’s population and a third of economic output.
Nations including Japan, South Korea, Australia and New Zealand agreed the Regional Comprehensive Economic Partnership, [RCEP] with the ASEAN group. The deal cuts tariffs and increases market access across some of the world’s most dynamic economies. The signing, cemented the RCEP, as the largest trading bloc in the world covering a market of 2.2 billion people and $27 trillion of global output.
The trade deal is larger than the North American USMCA ($23.4 trillion) and the European EU ($17.6 trillion). The global centre of economic gravity keeps pushing relentlessly to the East. Forecasts are for the area to account for almost 50% of world economic activity in the future. India may well join within the next five years.
The RCEP will boost Asian economies by reducing tariffs, implementing new online trading rules and bolstering supply chains with common “rules of origin”. The deal means a RCEP compliant product will now be able to access 15 countries on beneficial terms. It also marks the first free trade deal between China, Japan and South Korea — key rival powers in the region.
The 10-member Association of Southeast Asian Nations signed the mega deal with the region’s top trading partners China, Japan, South Korea, Australia and New Zealand. ASEAN is made up of Indonesia, Thailand, Singapore, Malaysia, the Philippines, Vietnam, Brunei, Cambodia, Myanmar, and Laos.
The move will consolidate Chinese power, as the world’s second largest economy. China is expected to overtake the USA as the largest economy in the world within ten years. The Renminbi is being readied to step up as a reserve currency in the years ahead. The demise of the dollar accelerates as China reduces Dollar holdings and transitions to the Yen.
So much for the The Economics of Mr Trump and America First. Next week we look at the impacts of Trump's tariffs and trade policy on the US economy ... Don't Miss That!
That's all for this week! Have a great, safe, week-end ... Hands, Face and Space ...
The latest data from the ONS confirm, the economy grew by 15.5% in the third quarter, compared to Q2. Year on year, GDP was down by 10%, compared to prior year.
The pattern of recovery is more or less as expected. We have talked in our recent broadcasts of a recovery by halves. An economy down by 20% in the second quarter, down by 10% in the third quarter, then down by 5% in the final quarter of he year.
For the year as a whole, output will be down by 10% in 2020, with a significant recovery in prospect for next year. Manufacturing and construction performed marginally better than we expected. Manufacturing output was down by 9% compared to prior year. Construction was down by 12.5%.
Sectors most badly hit, were accommodation and food, down almost 30%. The arts and entertainment sector was down by 25%. In travel, data from the Civil Aviation Authority, reports passenger numbers in UK terminals were down by 80% in the third quarter. Of itself, this is a considerable improvement on the 98% drop in Q2. No wonder then, Manchester airport is consolidating all activity into just one terminal, for the foreseeable future.
The latest jobs data reported an increase in unemployment to 1.5 million in the period to September. The unemployment rate increased to 4.8%. The level of redundancies, increased to over 300,000 in the quarter. The claimant count held steady at around 2.6 million.
So what happens next? Fear for tiers were swept away, by the decision to move into national lock down this month. The misery for many will continue. Hotels, bars, restaurants, pubs, non essential retail will suffer. Cinemas, theaters, sports and events will continue to feel the pain. Brakes on again, in the motor industry, registrations will be down by almost 40% this year.
Beneficiaries will continue to be, on line retail and logistics. Food delivery and last mile challenges will continue. Health and welfare will feature in continued uplift in activity.
The Bank of England has reduced GDP forecasts for the year, to a drop of 11.5%. It may not be so bad. The Chancellor has back tracked on the furlough scheme, extending support to the end of March next year. The peak in unemployment at between 2.5 to 3.0 million will be pushed back to Easter next year as a result.
Government borrowing may increase towards £400 billion in the process. The Chancellor has the trillion pound bank note in his back pocket to ease the pain ... as we discussed in full last week ...
No evidence of voter fraud in the election of 2020, the verdict from 16 federal prosecutors this week. Evidence enough, of voter fraud, in the election of 2016 perhaps ...
Trump clings to power, denying the president elect access to messages of good will from around the world, now residing in the State Department Post box.
No access to top security briefings for Biden, no concession from Trump. No gracious acceptance speech. the President clings to office, as Biden's count in the electoral college increases to 306. Adding Georgia to the Democrat base this week, Trump for the first time on Friday came close to accepting, there would be a new administration in the White House on January 20th.
In his first official appearance in ten days since polls closed on November 3, Trump said “This administration will not be going to a lock down. Whatever happens in the future, who knows which administration it will be. I guess time will tell”.
"The election was rigged", Trump tweeted on Friday. Sixteen federal prosecutors charged with investigating election crimes have said in a letter to Attorney General William Barr, "There is no evidence of voter fraud or other irregularities that could substantially impact the election."
In court, Republicans on Friday faced losses in Michigan, Arizona and Pennsylvania. Over the past two days, two prominent law firms have sought to withdraw from representing the Trump legal effort in Arizona and Pennsylvania.
Trump’s claims of voting fraud have been contradicted by his own election security agency, which called last week’s vote “the most secure in American history”.
“There is no evidence that any voting system, deleted votes, lost votes, changed votes or was in any way compromised,” the Election Infrastructure Government Coordinating Council (GCC) has now said.
Barack Obama has launched a scathing attack on Republicans “humoring” Donald Trump over his refusal to concede he lost the election, saying they were undermining both the incoming administration and the nation’s democracy.
John Kelly, former White House chief of staff, criticized Trump over the delay to the Biden Transition. "It's about the nation", the delay is damaging to national security. President elect Joe Biden should start receiving intelligence briefings to get them up to speed as soon as possible".
This week, The President Elect made a phone call to Boris Johnson in which the Prime Minister congratulated Joe Biden on his victory. A Downing Street spokesperson said the prime minister had "warmly
congratulated" Mr Biden and "conveyed his congratulations" to Vice-President-elect Kamala Harris.
This week China also offered congratulations to Joe Biden and Kamala Harris. Foreign ministry spokesman Wang Benbin said "We express our congratulations to Mr Biden and Ms Harris. We respect the choice of the American people."
Yes China respects the choice of the American people. It is time for Donald Trump to do so too ...
That's all for this week! Have a great, safe, week-end ... Hands, Face and Space ...
Bad news for the economy this week, "Fears for Tiers" increased. The country was pushed into a second lock down. Covid infections are rising, warnings of an NHS overload emerged.
The Chancellor stepped up to ease the pain. The furlough scheme will be extended to the end of March. Universal credit may be extended, by a further £1,000 next year, for over six million people.
Government borrowing was expected to hit £350 billion in the current financial year, before the new spending plans were announced. The additional support schemes could add a further £30 billion to the spend. Debt levels could hit 20% of GDP this financial year. Not since the World Wars, of the twentieth century, has such excess been experienced in the UK.
The imposition of the second lock down will hit output, in the final quarter. Hotels, leisure, events, tourism, hospitality and the creative sector will suffer. Aviation and travel will be hit again. The motor trade will be damaged further, as showrooms are closed to visitors once more.
Non essential retail will be punished, especially in clothing and footwear. The critical run up to Christmas will be disastrous, if the lock down continues well into December. Winners, will be food supermarkets and online traders. The volume of home delivery will boost the parcel and logistics business. Shop early for Christmas, albeit for a smaller turkey this year.
Despite the wave of pessimism, the November lock down will not be as devastating as the first, especially if confined to a four week period. The Bank of England expects GDP output to fall by 11% in the current year. Earlier estimates had suggested a down turn of 9.5%. Unemployment is expected to peak in the second quarter of 2021 with 2.5 million people out of work, a U rate of 7.5%.
Central Government Liabilities will increase to £2.5 trillion before the year is out. How to pay for it all? Step up the Old Lady of Threadneedle Street. The Bank of England increased the level of government debt purchase by an additional £150 billion this month. The total stock of government bond purchases will increase to £875 billion as a result.
The pretense of QE now abandoned, the Bank is the "Buyer of Last Resort". The appetite from domestic pension funds and insurance companies, too low to absorb the flow. The Bank is creating the £1 trillion pound bank note to hand over to the Chancellor. No need to pay interest on the debt ... No need to worry about repayment either ... The Money For Nothing Gilts for Free process continues ...
Confused? Check out our post On Modern Monetary Policy nine points to explain it all. It's also available as a podcast ...
"We are going to win", the confident claim of Vice President Biden. "We have already won" the confused claim of President Trump. The premature victory later to be "stolen" by late vote counts in contested states. "Stop the count" supporters chant in Pennsylvania, all too late as Biden creeps ahead.
As we write the count is 253 for Biden and 213 for Trump. Add in Arizona and at 264 the challenger is just six votes short of victory. Biden is ahead in Pennsylvania. Victory nears. A win in Pa. and Biden is in the White House. Fox news anchors have been instructed not to use the term "President Elect" under any circumstances.
The President is angry and despondent as defeat looms. A rigged election and voter fraud the Trump claim. Major news networks cut away from Trump's baseless complaints during the White House news conference. Fox News and CNN stayed with it, but later reported the President offered no evidence of his accusations.
According to the Washington Post, advisers are urging Trump to prepare for defeat "They know he has lost but no one seems willing to tell King Lear or mad King George, they have lost the Empire".
"It is time to end the warfare" Biden tells Trump. Joe Biden has called for an end to the unrelenting and unending political warfare in the USA. An invitation to concede, pack up and leave? Perhaps.
The President is in no mood to abandon the Oval Office. Trump has told people he has no plans to concede even if his path to victory is blocked. Alternative facts suggest reports of defeat are just a lie. But in true White House speak, a lie is just a truth you don't not believe or fail as yet to accept.
In any case, the Democrats have made it clear ... "The United States Government is perfectly capable of escorting trespassers out of the White House ..." "The Blue Wave" will be waving from the balcony on the 20th January ...
That's all for this week! Have a great, safe, week-end ... Hands, Face and Space ...
Don't forget you can now listen the The Saturday Economist Live as a weekly Podcast ...
The Saturday Economist on Modern Monetary Policy November 2020
Earlier this month one of readers wrote in as follows ... what follows is our response
I'd like your opinion on something. I read a report this morning from one of our investment counselors that went into some detail on Modern Monetary Theory. What I understand is that it supports the printing of dollars to keep the economy going, no matter the amount of deficit spending.
Central Banks then become the buyer of the ensuing debt to prevent austerity measures from being put into place, and it continues until inflation becomes "an issue" which who knows what that number will be until the time comes.
Sounds like the closest thing to a free lunch since I became a wealth advisor 25 years ago. But I feel like there has to be an end game, doesn't there? What are your thoughts?
1 Theory …
A supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained …
2 Modern Monetary Theory …
Modern Monetary Theory suggests sovereign nations with their own fiat currency can print as much money as they need to because they cannot go broke or be insolvent … hence, for example, the US can sustain much larger deficits, than previous thought, without cause for concern.
3 Quantitative Easing …
Quantitative Easing (QE) is the monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity.
The central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets, lowering yield, increasing money supply and liquidity within the economy generally.
4 Modern Monetary Policy …
Quantitative Easing (QE) is the monetary policy whereby a central bank buys government bonds. The central bank implements quantitative easing by buying financial assets directly from the Government debt management office or issuing agent. The central bank acts as the “Buyer of Last Resort”. In the US the Fed is both the buyer and seller.
5 Dire Straits Economics : Money For Nothing Gilts for Free
In the UK, HM Treasury funds the government deficit by issuing gilts via the Debt Management Office. The Bank of England buys the gilts from the DMO. Any risk is underwritten by the Treasury. Any dividend or yield on the Gilts purchased by the Bank of England is remitted to the Treasury.
Of the £300 billion of gilts issues by the DMO in the current financial year, including roll overs, the Bank has purchased the majority (almost all) of the new issuance.
As the Governor of the Bank of England admitted this year, without central bank intervention, the Government would have had difficulty in getting the volume of gilts away. The government was confronted with a possible gilt strike.
6 One Man’s Asset is another man’s liability …
The liability owned by the Treasury, is an asset owned by the Bank of England. Both the Treasury and The Bank of England are owned by the British Government. At some stage in the future, a process of “intergroup consolidation” will ensure the long term debt, just like old soldiers, will just fade away.
7 A Critique ...
MMT is based on a rather quaint terminology about the “printing of money”. An increase in money supply should lead to an increase in inflation at some stage in the future if our economics 101 is correct. The velocity of circulation where MV = PT rules OK.
However, the inflation impact is mitigated. MMP funds government spending at a time of economic weakness. The output gap or rather the demand gap is generated as household spending and investment falls. Government spending is an endeavour to bridge that gap. The boost to output does not create an inflationary excess.
In any case, MMP has a slightly different impact. The impact of an increase in liquidity is exported into asset prices (and a deteriorating balance of payments deficit). As Andy Haldane Chief Economist at the Bank of England has stated, the process of QE has created “the greatest bond bubble in history.”
Asset prices rise, yields fall, the curve is distorted. The search for alpha pushes equities, property and alternative assets higher.
Logically the increase in liquidity should lead to currency weakness. However the Dollar, Sterling and the Euro are equally vulnerable to the process. Step up the renminbi as a “safe haven in a volatile world”. At some stage the money will move East. China is down-weighting Dollar exposure in its own international reserve portfolio.
8 It’s all About Credibility …
In July Fitch Ratings revised its outlook on the US credit score to negative from stable, citing a “deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan.” “High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the epidemic” it said.
In October, Moody’s lowered the UK’s sovereign debt rating by one notch to Aa3 from Aa2.
Domestic and International institutions will take note of the down grade but will understand any increase in risk is underwritten by the central banks in North America, UK and Europe. The prospect of debt cancellation in the future will provide further support in part to the underlying values.
If MMT was so easy anyone could do it. It is not clear the Governments of Argentina or the Weimar republic would be offered such largesse.
9 So what’s the end game?
Trapped on Planet ZIRP, interest rates on the floor, yields flat, asset prices pushed higher, the search for yield continues. The process of MMP, Modern Monetary Policy, continues. Inflation will not be the end game. This is not MMT or QE, it is important to understand the subtle difference.
Dollar weakness, the Euro not really a plausible substitute, Sterling swinging in the Atlantic vortex. Money will move East. The renminbi will find favour as Washington disapproves.
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
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