Borrowing is falling but Sunak faces the most challenging situation for a chancellor in decades
During the last 17 months we have become almost inured to the terrifying increases in government borrowing incurred in grappling with the pandemic.
The government borrowed £303bn during the 2020-21 financial year, a peacetime record, equivalent to 14.5% of UK GDP.
Yet something interesting has been happening during the current financial year.
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Tax burden to reach highest level since 1960s
In each of the first four months government borrowing, while still high, has come in significantly below the levels forecast by the independent Office for Budget Responsibility (OBR).
The latest figures for the public sector finances, published today, revealed that the government borrowed £10.4bn in July.
Make no mistake, this is still a terrifyingly high number, equivalent to borrowing of nearly £233,000 every minute.
It was, however, £10.1bn less than in July last year – and also significantly lower than the £11.8bn that City economists had been expecting.
The figure means that, during the first four months of the current financial year, the government borrowed £78bn – some £26bn less than the OBR had been forecasting at this stage.
There are a couple of key points to make about the numbers.
July’s figures are normally boosted by self-assessed tax returns
First of all, July is usually a strong month for tax receipts and therefore the public finances, because it is one of two months in the year – the other is January – in which the deadline falls due for payments by those completing self-assessed tax returns.
It was not unusual, pre-pandemic, for the government to record a surplus during July.
That appears to have been a key factor this month.
The government enjoyed tax receipts of £70bn during July – up £9.5bn on the same month last year.
Behind that was a £3.7bn improvement in self-assessed tax receipts on the same month last year, when HMRC allowed tax payments to be deferred, chiefly to support the self-employed.
But it probably also reflects that the economy is starting to recover.
VAT receipts were up by £1.2bn on July last year, fuel duty was up by £400m – partly reflecting higher petrol and diesel prices – and regular income tax payments were up by £800m.
There was also a big jump in stamp duty receipts, which at £1.4bn were double the level they were in July last year, reflecting a rush to beat the deadline for the end of the temporary £500,000 nil-rate band.
Fuel duty was up by £400m
Receipts from corporation tax, which is levied on company profits, also came in higher than the OBR had been expecting.
Secondly, government spending was lower, with the government shelling out £79.8bn during the month.
That was down £2.9bn on July last year and probably reflects that, not only did the government begin to taper away its furlough scheme, but also that there were fewer workers participating in the scheme.
Government spending on the furlough scheme during July was down £4.2bn on the same month last year while spending on the equivalent scheme for the self-employed was down £200m.
Worryingly, though, interest payments on the national debt came in at £3.4bn during the month – up £1.1bn on July last year.
As for the national debt, that stood at £2.216trn at the end of July, equivalent to 98.8% of GDP, which the Office for National Statistics (ONS) said was the highest it has been since March 1962.
The figures were welcomed by Rishi Sunak, the chancellor, who has been spelling out the need to restore order to the public finances.
He said: “Our recovery from the pandemic is well under way, boosted by the huge amount of support government has provided.
A rise in stamp duty receipts reflected a rush to complete deals before the winding down of a stamp duty holiday
“But the last 18 months have had a huge impact on our economy and public finances, and many risks remain.
“We’re committed to keeping the public finances on a sustainable footing, which is why at the budget in March I set out the steps we are taking to keep debt under control in the years to come.”
That is not to say the chancellor faces anything other than a major challenge on that front.
Isabel Stockton, research economist at the Institute for Fiscal Studies said: “Even if, as recent revisions to economic forecasts suggest, some of this improvement persists the coming Spending Review will still require some very difficult decisions and, most likely, more generous spending totals than currently pencilled in by the chancellor given the myriad pressures on public services and the benefit system following the pandemic.”
That is why the government sought to cut its overseas aid budget by £4bn – but that is a comparatively small sum in the context of overall government finances.
Elsewhere the government has committed to raise public spending by £55bn this year to help clear backlogs in the NHS and in the courts system.
Most economists believe the ultimate bill will be higher.
That is why the chancellor is dropping heavy hints that a rise in state pensions this year under the “triple lock” – whereby the benefit increases by the highest of 2.5%, inflation or average earnings – is not going to happen.
The government has committed to spending increases to clear NHS backlogs
Were the triple lock to apply, the state pension will have to match the rise in average earnings for May to July which, if as expected comes in at about 8% could cost the Treasury an extra £7bn a year.
Accordingly, Mr Sunak is arguing the lock should not apply.
He can reasonably point out that average earnings growth has been flattered by the fact that, a year ago, it was depressed by pay cuts, mass redundancies and the furlough scheme.
Yet the decision will be politically fraught.
The triple lock was a Conservative manifesto pledge and opinion polls suggest the public opposes scrapping it, even younger voters, despite the intergenerational unfairness implicit in the policy.
Mr Sunak is due already to announce the government’s three year Spending Review this autumn but there is also currently speculation in Westminster about the timing of the next budget.
Some Treasury officials would rather, it is said, have an early budget to nail down the government’s spending and taxation plans for the coming year in order to prevent the prime minister from making outlandish spending commitments ahead of the COP26 summit in November.
Others would prefer to postpone the budget until spring next year so the chancellor can better assess the strength of the recovery and the lasting damage done to the economy by the pandemic.
It is arguably the most challenging situation any chancellor has faced since, Labour’s Denis Healey in 1976
That happened last time when the budget was pushed back from autumn last year to March this year.
Making the chancellor’s job much harder would be an earlier than expected rise in interest rates.
This is due to the way the Bank of England’s asset purchase programme – quantitative easing in the jargon – works.
When the Bank buys a government bond, it credits the account of the seller, who effectively receives a deposit at the Bank.
These are known as “reserves” and the Bank pays interest on those reserves at Bank rate – currently 0.1%.
It means that the cost of QE rises if interest rates do.
All of this adds up to the most challenging situation any chancellor has faced since, arguably, Labour’s Denis Healey was forced in 1976 to seek a bail-out from the International Monetary Fund and possibly since the war.
Business
FCA considering compensation scheme over car finance scandal – raising hopes of payouts for motorists
Thousands of motorists who bought cars on finance before 2021 could be set for payouts as the Financial Conduct Authority (FCA) has said it will consult on a compensation scheme.
In a statement released on Sunday, the FCA said its review of the past use of motor finance “has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers”.
“Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way,” the statement continued.
Read more: How to tell if you’ve been mis-sold car finance
The FCA said it estimates the cost of any scheme, including compensation and administrative costs, to be no lower than £9bn – adding that a total cost of £13.5bn is “more plausible”.
It is unclear how many people could be eligible for a pay-out. The authority estimates most individuals will probably receive less than £950 in compensation.
The consultation will be published by early October and any scheme will be finalised in time for people to start receiving compensation next year.
The announcement comes after the Supreme Court ruled on a separate, but similar, case on Friday.
The court overturned a ruling that would have meant millions of motorists could have been due compensation over “secret” commission payments made to car dealers as part of finance arrangements.
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Car finance scandal explained
The FCA’s case concerns discretionary commission arrangements (DCAs) – a practice banned in 2021.
Under these arrangements, brokers and dealers increased the amount of interest they earned without telling buyers and received more commission for it. This is said to have then incentivised sellers to maximise interest rates.
In light of the Supreme Court’s judgment, any compensation scheme could also cover non-discretionary commission arrangements, the FCA has said. These arrangements are ones where the buyer’s interest rate did not impact the dealer’s commission.
This is because part of the court’s ruling “makes clear that non-disclosure of other facts relating to the commission can make the relationship [between a salesperson and buyer] unfair,” it said.
It was previously estimated that about 40% of car finance deals included DCAs while 99% involved a commission payment to a broker.
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Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.
“We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.”
Some of the world’s leading tech companies are betting big on very small innovations.
Last week, Samsung released its Galaxy Z Fold 7 which – when open – has a thickness of just 4.2mm, one of the slimmest folding phones ever to hit the market.
And Honor, a spin-off from Chinese smartphone company Huawei, will soon ship its latest foldable – the slimmest in the world. Its new Honor Magic V5 model is only 8.8mm thick when folded, and a mere 4.1mm when open.
Apple is also expected to release a foldable in the second half of next year, according to a note by analysts at JPMorgan published this week.
The race to miniaturise technology is speeding up, the ultimate prize being the next evolution in consumer devices.
Whether it be wearable devices, such as smartglasses, watches, rings or foldables – there is enormous market potential for any manufacturer that can make its products small enough.
Despite being thinner than its predecessor, Honor claims its Magic V5 also offers significant improvements to battery life, processing power, and camera capabilities.
Hope Cao, a product expert at Honor told Sky News the progress was “due largely to our silicon carbon battery technology”. These batteries are a next-generation breakthrough that offers higher energy density compared to traditional lithium-ion batteries, and are becoming more common in consumer devices.
The Magic V5. Pic: Honor
Honor also told Sky News it had used its own AI model “to precisely test and find the optimum design, which was both the slimmest, as well as, the most durable.”
However, research and development into miniaturisation goes well beyond just folding phones.
A company that’s been at the forefront of developing augmented reality (AR) glasses, Xreal, was one of the first to release a viable pair to the consumer market.
Xreal’s Ralph Jodice told Sky News “one of our biggest engineering challenges is shrinking powerful augmented reality technology into a form factor that looks and feels like everyday sunglasses”.
Xreal’s specs can display images on the lenses like something out of a sci-fi movie – allowing the wearer to connect most USB-C compatible devices such as phones, laptops and handheld consoles to an IMAX-sized screen anywhere they go.
Pic: Xreal
Experts at The Metaverse Society suggest prices of these wearable devices could be lowered by shifting the burden of computing from the headset to a mobile phone or computer, whose battery and processor would power the glasses via a cable.
However, despite the daunting challenge, companies are doubling down on research and making leaps in the area.
Social media giant Meta is also vying for dominance in the miniature market.
Ray-Ban Meta AI glasses are shown off at the annual British Educational Training and Technology conference. Pic: PA
Meta’s Ray-Ban sunglasses (to which they recently added an Oakley range), cannot project images on the lenses like the pair from Xreal – instead they can capture photos, footage and sound. When connected to a smartphone they can even use your phone’s 5G connection to ask Meta’s AI what you’re looking at, and ask how to save a particular type of houseplant for example.
Gareth Sutcliffe, a tech and media analyst at Enders Analysis, tells Sky News wearables “are a green field opportunity for Meta and Google” to capture a market of “hundreds of millions of users if these devices sell at similar rates to mobile phones”.
Li-Chen Miller, Meta’s vice president of product and wearables, recently said: “You’d be hard-pressed to find a more interesting engineering problem in the company than the one that’s at the intersection of these two dynamics, building glasses [with onboard technology] that people are comfortable wearing on their faces for extended periods of time … and willing to wear them around friends, family, and others nearby.”
Mr Sutcliffe points out that “Meta’s R&D spend on wearables looks extraordinary in the context of limited sales now, but should the category explode in popularity, it will be seen as a great strategic bet.”
Facebook founder Mark Zuckerberg’s long-term aim is to combine the abilities of both Xreal and the Ray-Bans into a fully functioning pair of smartglasses, capable of capturing content, as well as display graphics onscreen.
However, despite recently showcasing a prototype model, the company was at pains to point out that it was still far from ready for the consumer market.
This race is a marathon not a sprint – or as Sutcliffe tells Sky News “a decade-long slog” – but 17 years after the release of the first iPhone, people are beginning to wonder what will replace it – and it could well be a pair of glasses.
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