Chancellor may need to raise taxes by £25bn, IFS warns

Published

7 months ago

October 10, 2024

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The chancellor will need to raise taxes by £25bn if she wants to keep spending rising with national income, according to the Institute for Fiscal Studies (IFS).

In its annual ‘Green Budget’ analysis, the IFS warned that the government would have to dramatically increase the £9bn of tax rises outlined in its manifesto to meet the pressures on public services.

The chancellor is likely to stick to her fiscal rule, which requires day-to-day spending to be met by tax revenues. This means she cannot increase borrowing to fill the gap.

Rachel Reeves will present her first budget in the Commons on 30 October. Paul Johnson, director of the IFS, said this budget could be “the most consequential since at least 2010”.

The new Labour government has already pledged in its manifesto to increase government budgets by £5bn and is spending £9bn to settle public sector pay disputes.

If Labour makes no further changes to the spending envelope, which was outlined by the previous government in 2021, it would register a surplus of £17bn.

However, those spending plans are considered wildly unrealistic and would involve real term cuts to unprotected budgets.

There is very little appetite for further cuts to public spending, so the chancellor could protect those budgets from inflation. That would leave her with a surplus of £1bn.

However, if she opted to protect spending as a share of national income – which better reflects population increase – she would record a deficit of £16bn.

That combined with the £9bn of tax rises already promised would see taxes increase by £25bn, further adding to a tax burden which is at a generational high.

Over-zealous borrowing plans could risk a UK buyer’s strike

The UK risks a buyer’s strike in the bond markets if the chancellor is over-zealous with her borrowing plans.

Rachel Reeves is expected to outline plans to increase borrowing for investment purposes in her Budget on 30 October.

Although she has a debt rule that requires debt to be falling as a share of GDP in five years time, she could change her definition of debt to give herself extra headroom.

In doing so, she could find up to £50bn in additional headroom. However, the IFS warned the government against borrowing this much money.

Economists said the chancellor should be slow and steady with any increases in borrowing, with full oversight of institutions such as the National Audit Office.

They note that the UK has greater liquidity risk than its neighbours, including the EU so it was more exposed to changes in investor sentiment.

It would be bigger than the net tax rises recorded in July 1997 and October 2010, which were both around £13-£14bn.

The government has also penned itself in by promising not to raise income tax and corporation tax or to increase National Insurance or VAT.

The IFS said that, even if Labour’s planned £9bn tax rise is implemented, trying to balance the current budget while avoiding cuts to public service spending would put the budget “on a knife edge” and highly sensitive to OBR judgments.

It said the chancellor has inherited an “unenviable” public finance situation as taxes are already at a historic high and debt is rising, while public services such as prisons, police and local councils are under strain.

Mr Johnson, said: “The first budget of this new administration could be the most consequential since at least 2010… Taxes are at an all-time high, and she is tightly constrained by her pledges not to raise the main rates of income tax or corporation tax, or to increase National Insurance or VAT at all.

“The temptation then is to borrow more, perhaps changing the definition of debt targeted by the fiscal rules. But, given her pledge to balance the current budget, that would not free up additional resource for day-to-day spending.”

Business

Monzo lines up bankers to spearhead blockbuster £6bn float

Published

2 days ago

May 10, 2025

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Monzo, the digital bank which counts one in five British adults among its customers, is closing in on the appointment of investment bankers to spearhead a stock market listing valuing it at more than £6bn.

Sky News has learnt that Monzo is working with Morgan Stanley, the Wall Street giant, on a series of meetings with potential investors ahead of an initial public offering which could take place as early as the first half next year.

People close to the company said this weekend that bankers would be formally hired to work on the listing within months, with Morgan Stanley now expected to be handed a key role on the deal.

The timing, size and location of an IPO are still to be determined and will depend on market conditions in London and New York, both of which have been buffeted by Donald Trump’s introduction of swingeing trade tariffs.

However, London is currently seen as the most likely listing venue for Monzo by board members and investors, according to people close to the situation.

The company, which saw its valuation soar to £4.5bn last year after primary and secondary share sales, is considering a further sale of existing shares to allow early investors and employees to cash in, although a decision to proceed has not yet been taken.

Monzo has more than 11m UK retail customers, making it the seventh-largest British bank by customer numbers, and 600,000 business customers.

Founded a decade ago, it has become one of Britain’s most successful, and valuable, fintech companies.

It employs close to 4,000 people.

Last year, it raised more than £500m by selling newly issued shares to a group of investors led by Capital G, a division of Alphabet-owned Google.

That primary share sale valued the business at £4.1bn.

An IPO, including any new capital raised, would be likely to value Monzo at more than £6bn, and potentially in the region of £7bn, according to banking sources.

Last year’s secondary share sale saw existing Monzo investors StepStone Group and GIC, the Singaporean sovereign wealth fund, buying stock from employees.

The company is now profitable and has diversified into investments and instant access savings accounts.

It has also launched pensions products and accounts aimed at under-16s.

Monzo is among a new generation of banks which have emerged since the last financial crisis and begun to accumulate a significant share of the UK retail banking market.

Rivals include Starling Bank and Revolut, which was valued at $45bn in its last fundraising and was awarded a banking licence by British regulators last year after a protracted process.

Monzo has recovered spectacularly from a difficult period in 2020 when it emerged that the City watchdog was investigating it for potential breaches of anti-money laundering and financial crime rules.

It has revamped its corporate structure as it pursues an international expansion aimed at enticing new investors to its strategy for long-term growth.

The company has been exploring acquisition opportunities in the US and Europe, although a major deal is not thought to be imminent.

Monzo Bank Holding Group was established to avoid the company facing punitive capital treatment by British regulators as it launches in new overseas markets.

Other Monzo investors include the Chinese group Tencent, Passion Capital, Accel, General Catalyst and Hedosophia.

Monzo is run by TS Anil, its chief executive, and chaired by Gary Hoffman, the banker who salvaged Northern Rock after its nationalisation in 2008.

This weekend, a Monzo spokesperson declined to comment.

Business

Trade war: Trump floats China tariff cut to 80% ahead of talks

Published

2 days ago

May 9, 2025

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Trade war: Trump floats China tariff cut to 80% ahead of talks

Donald Trump has floated the idea of cutting US trade tariffs against China to 80% – as key peace talks between the sides prepare to get under way.

The weekend meeting, involving top officials from both nations in Switzerland, is seen as an opportunity to ease the most damaging and punitive element of the trade war.

At stake for both sides is not only a deteriorating domestic outlook but a weakening global economy.

Writing on his Truth Social platform, hours after agreeing an interim deal with the UK, the president said: “80% Tariff on China seems right! Up to Scott B [Bessent].”

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It means the decision will lie with Scott Bessent – the US treasury secretary who will lead the US delegation at the talks in Geneva.

The outcome is eagerly awaited after several rounds of tariff hikes that currently total duties of 125% on US imports to China and 145% on Chinese goods arriving in America.

Both levels amount to an effective trade embargo, given the severity of the numbers. A 80% figure against China would remain hugely restrictive.

But the announcement of talks in Switzerland this week has been welcomed broadly – across financial markets too, with the dollar and global stocks rising on Friday in hopeful anticipation of a cooling in the trade hostilities between the world’s two largest economies.

Investors are not only concerned by higher, if not extortionate, prices but also the impact on supply.

The effects are being felt in both economies already.

Fears of a trade war effectively meant that the US economy contracted during the first three months of the year, while the US central bank has held off on interest rate cuts on the grounds that tariffs applied to imports by the Trump administration globally will lift inflation markedly.

Official data out of China is yet to show any obvious pain, but surveys suggest factory orders are tumbling.

The fact that China is suffering was borne out on Wednesday when the country’s central bank cut interest rates and reduced bank reserve requirements to help free up more funding for lending.

The authorities also agreed wider borrowing facilities to help manufacturers.

It will be hoped that bolstering activity in the economy will help lift prices generally, as China continues to battle deflation.

Officially, China has signalled that it wants the US to make the first concession.

Its delegation in Geneva is led by vice premier He Lifeng – a figure within China who has gained an international reputation as an effective negotiator.

A commerce ministry spokesperson said of the prospects for a breakthrough when confirming the talks: “The Chinese side carefully evaluated the information from the US side and decided to agree to have contact with the US side after fully considering global expectations, Chinese interests and calls from US businesses and consumers.”

White House economic adviser Kevin Hassett told Sky’s US partner CNBC on Friday: “Everything that’s been going on with the meeting in Switzerland is very promising to us.

“We’re seeing extreme respect, treating both sides with respect. We’re seeing collegiality and also sketches of positive developments.”

Business

UK-US pact neither a free-trade agreement nor broad trade deal of Brexiteer dreams

Published

3 days ago

May 9, 2025

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UK-US pact neither a free-trade agreement nor broad trade deal of Brexiteer dreams

Sir Keir Starmer was at home in Downing Street, watching Arsenal lose in the Champions League, when he got a call from Donald Trump that he thought presented the chance to snatch victory from the jaws of trading defeat.

The president’s call was a characteristic last-minute flex intended to squeeze a little more out of the prime minister.

It was enough to persuade Sir Keir and his business secretary Jonathan Reynolds, dining with industry bosses across London at Mansion House, that they had to seize the opportunity.

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The result, hurriedly announced via presidential conference call, is not the broad trade deal of Brexiteer dreams, and is certainly not a free-trade agreement.

It’s a narrow agreement that secures immediate relief for a handful of sectors most threatened by Mr Trump’s swingeing tariffs, with a promise of a broader renegotiation of “reciprocal” 10% tariffs to come.

Most pressing was the car industry, which Mr Reynolds said was facing imminent announcements of “very difficult news” at Britain’s biggest brands, including Jaguar Land Rover, which sounds like code for redundancies.

In place of the 25% tariffs imposed last month, a 10% tariff will apply to a quota of 100,000 vehicles a year, less than the 111,000 exported to the US in 2024, but close enough for a deal.

It still leaves the car sector far worse off than it was before “liberation day”, but, with one in four exports crossing the Atlantic, ministers reason it’s better than no deal, and crucially offers more favourable terms than any major US trading partner can claim.

For steel and aluminium zero tariffs were secured, along with what sounds like a commitment to work with the US to prevent Chinese dumping. That is a clear win and fundamental for the ailing industries in Britain, though modest in broad terms, with US exports worth only around £400m a year.

In exchange, the UK has had to open up access to food and agricultural products, starting with beef and ethanol, used for fuel and food production.

In place of tariff quotas on beef that applied on either side (12% in the UK and 20% in America) 13,000 tonnes of beef can flow tariff-free in either direction, around 1.5% of the UK market.

The biggest wins

Crucially, sanitary and phytosanitary (SPS) production standards that apply to food and animal products, and prevent the sale of hormone-treated meat, will remain. Mr Trump even suggested the US was moving towards “no chemical” European standards.

This may be among the biggest wins, as it leaves open the prospect of an easing of SPS checks on trade with the European Union, a valuable reduction in red tape that is the UK’s priority in reset negotiations with Brussels.

Farmers also believe the US offers an opportunity for their high-quality, grass-fed beef, though there is concern that the near-doubling of ethanol quotas is a threat to domestic production.

Technology deals to come?

There were broad commitments to do deals on technology, AI and an “economic security blanket”, and much hope rests on the US’s promise of “preferential terms” when it comes to pharmaceuticals and other sectors.

There was no mention of proposed film tariffs, still unclear even in the Oval Office.

Taken together, officials describe these moves as “banking sectoral wins” while they continue to try and negotiate down the remaining tariffs.

The challenge from here is that Mr Trump’s “reciprocal” tariff is not reciprocal at all. As commerce secretary Howard Lutnick proudly pointed out in the Oval Office, tariffs on US trade have fallen to less than 2%, while the UK’s have risen to 10%.

As a consequence, UK exporters remain in a materially worse position than they were at the start of April, though better than it was before the president’s call, and for now, several British industries have secured concessions that no other country can claim.

From a protectionist, capricious president, this might well be the best deal on offer.

Quite what incentive Mr Trump will have to renegotiate the blanket tariff, and what the UK has left to give up by way of compromise, remains to be seen. Sir Keir will hope that, unlike the vanquished Arsenal, he can turn it round in the second leg.