The Conservatives can change PM, but not the economic hole they have dug

Published

2 years ago

October 20, 2022

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The final straw for Liz Truss’s premiership was a collapse of confidence among Conservative MPs, but the underlying cause is an economic crisis she first ignored, then deepened, and will now define her successor’s time in office.

The Conservatives are about to discover that they can change leaders but not the economic hole they have dug, or the ideological splits that did much of the work.

Ms Truss got into Number 10 on the promise of “growth growth growth”, to the delight of small-state free marketeer colleagues who coalesced around her candidacy only at the last moment.

Her decision to deliver that ambition by offering extravagant unfunded tax cuts without the ballast of an Office for Budget Responsibility (OBR) forecast proved fatal, spooking markets and shattering her prospectus for government.

While she’s gone her emergency rip-cord Chancellor Jeremy Hunt remains, his priority to recover economic credibility and financial stability.

That process began on Monday with the reversal of most of the mini-budget tax plans, and a clear signal of tax rises and spending cuts to come.

Investors are for now reassured – as Ms Truss fell so did the cost of government borrowing on long-term gilt markets and the pound strengthened – but this is just the start.

Next week, as the Conservative parliamentary party runs a five-day leadership election, Mr Hunt and the Treasury will be finalising the fiscal statement that could have a far greater impact.

That statement is currently scheduled to be made on Monday 31 October, after the new prime minister has been selected and a delay cannot be ruled out despite the risk of market disapproval.

If that timetable holds, however, the calculations and decisions that will shape public spending for the next five years will have to be made as the candidates topple.

The black hole in the public finances has been calculated as at least £60bn, deepening to closer to £70bn after the mini-budget drove up borrowing costs and the price of servicing existing debt.

Typically the OBR produces five forecasts in the run-up to a fiscal statement, containing its five-year view of the prospects for economic growth and the cost of public spending.

Next Tuesday it is due deliver the fourth draft, which will reflect the tax-reversals announced on Monday and presumably the cost of maintaining the triple-lock on pensions confirmed by Ms Truss on Wednesday, plus any new measures that are not yet public.

The fifth and final version, containing any additional measures, is due to be delivered on Thursday.

Reversing tax cuts has closed the gap by around £30bn but there is much more to find, and the search for policy measures that can boost growth has helped drive the chaos of the last week.

The rancorous resignation of Suella Braverman as home secretary on Wednesday offered an insight. While she cited an innocent breach of communication protocol, her allies pointed to a fundamental difference in opinion over immigration policy.

They claim she opposed plans by Ms Truss and Mr Hunt to liberalise immigration restrictions allowing more high-skilled workers.

There is also pressure to expand the shortage-occupation list, which grants an exception to post-Brexit visa restrictions, across a range of professions, including engineers to help deliver on the government’s broadband targets.

Both would boost the growth side of the OBR’s ledger, easing the demand for spending cuts, but this economic reality grinds directly against Brexit ideology.

There are several other pro-growth strategies that run into trouble among Conservative MPs. Planning reform to allow more development and housebuilding is problematic in leafy southern constituencies, onshore wind is barely more popular, and fracking delivered the final seismic blow to Ms Truss on Wednesday night.

While the Conservative’s squabble and markets wait for the OBR and the chancellor, business looks on aghast, uncertain whether what they hear today will still apply tomorrow.

The CBI, shop stewards for British big business and traditionally close to the Conservatives, delivered an unusually blunt response to the PM’s departure, without a single word for Ms Truss herself

“The politics of recent weeks have undermined the confidence of people, businesses, markets and global investors in Britain. That must now come to an end if we are to avoid yet more harm to households and firms,” said director general Tony Danker.

“Stability is key. The next prime minister will need to act to restore confidence from day one. They will need to deliver a credible fiscal plan for the medium term as soon as possible, and a plan for the long-term growth of our economy.”

They are not alone in that view.

Business

Chancellor’s Mansion House speech vows to rip up red tape – saying post-financial crash rules went ‘too far’

Published

4 hours ago

November 14, 2024

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Chancellor's Mansion House speech vows to rip up red tape - saying post-financial crash rules went 'too far'

Chancellor Rachel Reeves has criticised post-financial crash regulation, saying it has “gone too far” – setting a course for cutting red tape in her first speech to Britain’s most important gathering of financiers and business leaders.

Increased rules on lenders that followed the 2008 crisis have had “unintended consequences”, Ms Reeves will say in her Mansion House address to industry and the City of London’s lord mayor.

“The UK has been regulating for risk, but not regulating for growth,” she will say.

It cannot be taken for granted that the UK will remain a global financial centre, she is expected to add.

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It’s anticipated Ms Reeves will on Thursday announce “growth-focused remits” for financial regulators and next year publish the first strategy for financial services growth and competitiveness.

Bank governor to point out ‘consequences’ of Brexit

Also at the Mansion House dinner the governor of the Bank of England Andrew Bailey will say the UK economy is bigger than we think because we’re not measuring it properly.

A new measure to be used by the Office for National Statistics (ONS) – which will include the value of data – will probably be “worth a per cent or two on GDP”. GDP is a key way of tracking economic growth and counts the value of everything produced.

Brexit has reduced the level of goods coming into the UK, Mr Bailey will also say, and the government must be alert to and welcome opportunities to rebuild relations.

Mr Bailey will caveat he takes no position on “Brexit per se” but does have to point out its consequences.

In what appears to be a reference to the debate around UK immigration policy, Mr Bailey will also say the UK’s ageing population means there are fewer workers, which should be included in the discussion.

The greying labour force “makes the productivity and investment issue all the more important”.

“I will also say this: when we think about broad policy on labour supply, the economic arguments must feature in the debate,” he’s due to add.

The exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.

Mr Bailey described this as “a substantial problem”.

He will say: “I do struggle to explain when my fellow [central bank] governors ask me why the British are particularly bad at this. The Bank, alongside other users, including the Treasury, continue to engage with the ONS on efforts to tackle these problems and improve the quality of UK labour market data.”

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Reeves has welcome support from Bank’s governor as she goes for growth and seeks to woo City

Published

7 hours ago

November 14, 2024

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Reeves has welcome support from Bank's governor as she goes for growth and seeks to woo City

When Gordon Brown delivered his first Mansion House speech as chancellor he caused a stir by doing so in a lounge suit, rather than the white tie and tails demanded by convention.

Some 27 years later Rachel Reeves is the first chancellor who would have not drawn a second glance had they addressed the City establishment in a dress.

As the first woman in the 800-year history of her office, Ms Reeves’s tenure will be littered with reminders of her significance, but few will be as symbolic as a dinner that is a fixture of the financial calendar.

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Her host at Mansion House, asset manager Alastair King, is the 694th man out of 696 Lord Mayors of London. The other guest speaker, Bank of England governor Andrew Bailey, leads an institution that is yet to be entrusted to a woman.

Ms Reeves’s speech indicates she wants to lean away from convention in policy as well as in person.

By committing to tilting financial regulation in favour of growth rather than risk aversion, she is going against the grain of the post-financial crash environment.

“This sector is the crown jewel in our economy,” she will tell her audience – many of whom will have been central players in the 2007-08 collapse.

Sending a message that they will be less tightly bound in future is not natural territory for a Labour chancellor.

Her motivation may be more practical than political. A tax-and-spend budget that hit business harder than forewarned has put her economic program on notice and she badly needs the growth elements to deliver.

Her plans to consolidate local authority pension schemes so they might match the investing power of their Canadian and Australian counterparts is part of the same theme.

Infrastructure investment is central to Reeves’s plan and these steps, universally welcomed, could unlock the private sector funding required to make it happen.

Bank governor frank on Brexit and growth

If the jury is out in a business financial community absorbing £25bn in tax rises, she has welcome support from Mr Bailey.

He is expected to deliver some home truths about the economic inheritance in plainer language than central bankers sometimes manage.

Britain’s growth potential, he says, “is not a good story”. He describes the labour market as “running against us” in the face of an ageing population.

With investment levels “particularly weak by G7 standards”, he will thank the chancellor for the pension reforms intended to unlock capital investment.

He is frank about Brexit too, more so than the chancellor has dared.

While studiously offering no view on the central issue, Mr Bailey says leaving the EU had slowed the UK’s potential for growth, and that the government should “welcome opportunities to rebuild relations”.

There is a more coded warning too about the risks of protectionism, which is perhaps more likely with Donald Trump in the White House.

“Amid threats to economic security, let’s please remember the importance of openness,” the Bank governor will say.

All that is welcome for Ms Reeves.

Already a groundbreaking chancellor, she is aiming for a political and economic legacy that extends beyond her gender and the dress code.

Business

United Utilities increases profit by more than £100m as it seeks more bill rises

Published

13 hours ago

November 14, 2024

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United Utilities increases profit by more than £100m as it seeks more bill rises

Water company United Utilities has reported hundreds of millions in profit as it seeks to further increase customer bills.

The utility serving seven million customers in the northwest of England recorded £335.7m in underlying operating profits for the first half of this year, up nearly 23% from £271.1m a year ago.

It comes as the firm has requested bills rise 32% to make them among the most expensive in England and Wales.

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The proposed average annual bill would increase to £584 by 2030 from the £443 typical yearly charge in the 2023/2024 financial year. Since April 2023 bills have been upped 6.4% and then 7.9%.

Bills hikes were behind the rise in revenue to more than £1.08bn from £975.4m in 2023.

Other ways of assessing profit were lower than the underlying operating sum. Profit before tax reached £140.6m while after tax profit topped £103.1m for the six months to the end of September 2024, both lower than a year earlier.

Boss’s pay

Bonus and benefits payments worth £1.416m were paid to two executives on top of £1.128m in base pay, according to analysis of company filings done by the Liberal Democrats.

It’s down compared with 2022/2023 when three executives were given £1.6m in base pay and £2.456m in bonuses and benefits.

The environment

In a year of record sewage outflows into waterways the company was one of just three firms that met the Environment Agency’s top four-star performance ranking.

United Utilities in July came under investigation by water regulator Ofwat for not meeting its obligation to minimise pollution.

In response the company said at the time: “We understand and share people’s concerns about the health of the environment and the operation of wastewater systems, including combined sewer overflows.”