Could Rachel Reeves’s budget ‘jiggery-pokery’ scare investors?

Published

2 days ago

October 30, 2024

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Budgets are all about numbers.

In the coming 24 hours, we’ll be engulfed with all sorts of figures – about the state of the economy, about the size of the deficit, about the fiscal rules the new chancellor is planning to introduce in the coming months.

But in fact most budgets, this one included, can really be boiled down to the difference between two big numbers.

Politics live blog: Budget 2024 latest developments

Total government spending and total government receipts.

Right now the UK government is spending just over £1.2trn a year and bringing in just over £1.1trn in taxes and receipts.

In other words, this country is spending more than it generates in tax receipts.

So it has to borrow the difference.

That borrowing, also known as the deficit, is (as you’ve already probably worked out from the above numbers) around £100bn a year.

And politicians, including the chancellor, spend rather a lot of time fretting about the deficit.

Indeed, the main objective of the various different fiscal rules they’ve imposed on themselves in recent decades has been to narrow the gap between those two big numbers.

Broadly speaking, the easiest way to do this is to cut something few people notice in the short run – government investment.

When he came into office in 2010, George Osborne cut a lot of parts of public spending, but he absolutely slashed the amount the public sector spent on buildings, infrastructure and machinery – capital spending.

Having lifted the total briefly after the pandemic, Jeremy Hunt was planning a similar fall in investment in the coming years.

Rachel Reeves has said repeatedly ahead of the budget that she plans to invest far more in the coming years.

This is a noble goal, given investment tends to benefit future generations, however, it will not be cheap in the short run.

Indeed, keeping investment spending at current levels will cost roughly £30bn a year by the end of this decade.

So how does the chancellor square that with her fiscal rules?

Well, one part of the answer is that she’s planning to increase the revenues coming into the Exchequer, reportedly via higher national insurance charges for insurers.

But the other part of the answer is that she’s changing her fiscal rules as well.

Budget 2024: Rachel Reeves vs the fiscal rules

The long and the short of it is that Ms Reeves looks likely to choose a set of fiscal rules that ignore investment spending.

Both her updated debt rule and her current budget rule essentially omit capital spending – although they include debt interest costs, so she can’t just borrow willy-nilly.

That might sound like fiscal jiggery-pokery, and some in the market fret that investors will soon take fright as a result.

Indeed, some suggest they already are, and point to the fact the UK’s cost of government borrowing – as measured by the benchmark 10-year bond yield – has risen from under 4% to nearly 4.3% in the past month alone.

However, this is a slight misreading of this market, which is as affected by global economic factors and central bank action as much as by UK budgetary policy.

Indeed, compare the recent changes in the UK’s borrowing rates with those in Germany and the US and British government bond yields are close to where they usually trade in the run up to a budget.

And they are far, far below where they were in the run-up to Liz Truss’s mini-budget.

Even so, there are bound to be a few unexpected surprises and some relevant new data points in this fiscal event.

It is a budget after all.

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Budget: Hostile market response as chancellor suffers Halloween nightmare

Published

7 hours ago

October 31, 2024

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Budget: Hostile market response as chancellor suffers Halloween nightmare

First things first: don’t panic.

What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.

The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.

That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.

In hindsight, perhaps we shouldn’t be surprised.

After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.

But those financial markets are now reassessing how keen they are to lend to the UK.

The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.

This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.

But the falls in the pound and the rises in the bond yields accelerated today.

This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.

Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.

That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.

The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.

But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.

And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.

And this is where things get particularly sticky for Ms Reeves.

In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.

In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.

Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?

Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.

Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.

Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.

The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.

A Halloween nightmare for any chancellor.

Business

Football financier Harris spearheads £200m bid for Crystal Palace stake

Published

9 hours ago

October 31, 2024

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Football financier Harris spearheads £200m bid for Crystal Palace stake

The football financier Keith Harris is spearheading a bid to buy a 45% stake in the Premier League football club Crystal Palace in a deal that could be worth close to £200m.

Sky News has learnt that Mr Harris is advising a group of businessmen including Zechariah Janjua and Navshir Jaffer on an offer to acquire the shareholding from Eagle Football, a vehicle created by American businessman John Textor and owner of a number of major clubs around the world.

Sources said on Thursday that the consortium advised by Mr Harris was a leading contender to buy the stake in the Eagles, although they cautioned that at least one, and possibly two, other parties were also in discussions with Mr Textor.

Mr Harris’s group, which would probably execute its deal through a recently established corporate vehicle called Sportbank, may also require financing from other investors as part of its plans, the sources added.

Eagle Football is said to be hopeful that a deal to offload its Crystal Palace shareholding would value the club, which recorded its first win of the Premier League campaign against Tottenham Hotspur last weekend, at more than £400m.

Stanley Tang, one of the founders of the US-based food delivery company DoorDash, is also understood to have expressed an interest in acquiring Eagle Football’s stake in Crystal Palace.

A spokesman for Mr Tang denied that he was in discussions to buy Eagle Football’s Crystal Palace stake.

Mr Textor, who declined to comment, is keen to own a controlling interest in a club in English football’s top flight, and came close to securing a deal to buy Everton during the summer.

Instead, Everton’s long-standing owner agreed a transaction with Dan Friedkin, the owner of Italian Serie A side AS Roma.

Eagle Football’s other footballing interests include Olympique Lyonnais in France, Botafogo, which currently leads Brazil’s top division, and RWD Molenbeek in Belgium.

This week, the holding company issued a statement confirming that it is preparing to file confidentially with US regulators ahead of a public listing in the first quarter of next year.

Sky News revealed in August that Eagle Football had lined up Stifel and TD Cowen, the investment banks, to work on the initial public offering (IPO).

The stake in Crystal Palace is being sold by The Raine Group, which has been involved in recent deals involving Chelsea and Manchester United.

In its statement this week, Eagle Football said it would seek $100m from the sale of shares in the company ahead of an IPO, as well as a further $500m as part of the flotation itself.

It also wants to raise “up to $500m to retire existing senior debt, to be achieved through the sale of its interest in Crystal Palace Football Club and, possibly, the placement of long-term senior notes”.

Collectively, these moves are expected to help Mr Textor achieve an enterprise value for Eagle Football of around $2.3bn (£1.74bn), they said.

In the past, Mr Textor has spoken about his belief that public ownership of football teams provides fans with greater transparency about the running of their clubs.

He has described this as the democratisation of ownership – an issue set to face greater scrutiny now that a bill on football regulation has been reintroduced to parliament by the new Labour government.

Some clubs with listed shares, including Manchester United, have, however, endured a torrid relationship with supporters, partly as a result of their voting rights being controlled by a single dominant shareholder.

Mr Harris declined to comment on Thursday.

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Disposable income levels to worsen and wages to stagnate in wake of budget, says thinktank

Published

13 hours ago

October 31, 2024

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Disposable income levels to worsen and wages to stagnate in wake of budget, says thinktank

The next five years will hurt disposable income and wages will stagnate further following Chancellor Rachel Reeves’ budget, an influential thinktank has said.

Household disposable income, or living standards, will be the worst under any Labour government since 1955 when inflation is factored in, the Resolution Foundation said.

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The thinktank also said pay will stagnate in the middle of the parliament as higher inflation lessens pay rises and growth is slowed in an already challenging economic environment.

It will mean that in 2028, pay adjusted for inflation – real wages – is forecast to have grown on average by just £13 a week over the past 20 years, according to analysis from the foundation.

Previous analysis from the thinktank showed weekly wages had increased by just £16 in 14 years when inflation was factored in.

But the foundation added that households’ disposable income will grow more throughout the five-year parliamentary term than the last – by an expected 0.5% a year, compared to 0.3% under the Conservative government.

Rising prices

Prices will rise more because of the budget and growth will be weaker in part due to the rise in employer’s national insurance, it added.

Inflation will rise as a result of employers passing on the national insurance contributions to customers, the introduction of VAT on private school fees and the reform of vehicle tax, the Office for Budget Responsibility (OBR) said.

The OBR predicts UK economic growth to be 1.1% in 2024, peaking at 2% in 2025 before falling to 1.85% in 2026, 1.5% in 2027, and 1.5% in 2028 before rising again to 1.6% in the final year of the parliament.

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The OBR reached the same conclusion as the Resolution Foundation on disposable income. It also anticipates it will grow just over 0.5% a year.

Some positive response

The International Monetary Fund (IMF) has broadly welcomed the UK budget, praising the proposed debt reduction targets and tax-raising measures.

The focus on boosting growth and increasing public investment was singled out in their comment as was the move to having only one fiscal event, a budget, a year.