Borrowing is falling but Sunak faces the most challenging situation for a chancellor in decades

Published

3 years ago

August 20, 2021

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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.

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.

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.

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.

“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.

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.

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

Chelsea co-owner Boehly goes into bat with Lords cricket bid

Published

33 mins ago

November 2, 2024

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Chelsea co-owner Boehly goes into bat with Lords cricket bid

The joint owner of Chelsea Football Club has joined forces with one of his fellow board members to bid for the most valuable team in English cricket’s Hundred competition.

Sky News has learnt that Todd Boehly is backing a bid spearheaded by Jonathan Goldstein, a British property entrepreneur, in an offer for a large stake in London Spirit, the Lords-based franchise.

The bid represents the latest move by Mr Boehly, a billionaire financier, to gatecrash the British sporting elite, following his takeover of Chelsea in 2022 alongside Behdad Eghabli, the founder of Clearlake Capital.

Recent reports suggest the pair have fallen out and are looking at ways to buy each other out of the club.

Mr Boehly’s interest in the London Spirit franchise puts him and Mr Goldstein on a shortlist of a handful of bidders for – at least – a 49% stake in it.

Sources said this weekend that the other contenders to buy the interest as part of a process run by the England and Wales Cricket Board were Sanjiv Goenka, an Indian billionaire who owns the Indian Premier League’s (IPL) Lucknow Super Giants; the owners of the IPL’s Chennai Super Kings; India’s ultra-wealthy Ambani family; and possibly members of the Glazer family, which retains the largest stake in Manchester United Football Club.

The London Spirit franchise is expected to command the highest price of the eight teams being auctioned, with one of Chelsea’s lenders, Ares Management, plotting the purchase of a stake in the Oval Invincibles, Sky News revealed on Friday.

CVC Capital Partners, one of the most prolific backers of global sport with stakes in the men’s professional tennis tour and rugby union’s Six Nations Championship, is also bidding for the Oval Invincibles.

Insiders said CVC had also submitted offers for two other Hundred franchises.

In total, roughly 35 bids are said to have been shortlisted for the eight teams, with the respective host counties able to decide whether they offload part of their 51% stake in order to give new investors control of the franchise.

Those 35 proposals are, in turn, said to have come from 15 separate investor groups.

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The teams are in aggregate understood to have been valued at more than £600m in the first round of the auction, with the proceeds distributed across the recreational game, the 18 first-class counties and the MCC, which owns Lords.

The eight host venues play home to teams including the Northern Superchargers, Manchester Originals and Southern Brave.

A bigger-than-expected windfall from the process could offer a financial lifeline to a number of cash-strapped counties, with part of the proceeds likely to be used to pay down debt.

Concerns have been raised, however, that windfalls from the Hundred auction will not deliver a meaningful improvement in counties’ long-term financial sustainability.

The outcome of the auction, which will become clear in the coming months, is also likely to intensify other searching questions about the future of cricket, as the Test format of the game struggles for international commercial relevance against shorter-length competition.

The Hundred auction is being handled by Raine Group, which also oversaw the sale of Chelsea to Mr Boehly and Mr Eghbali two years ago after Roman Abramovich was sanctioned by the government.

Mr Goldstein, CVC and the ECB declined to comment on the process.

Business

Investment giant KKR wades into Thames Water survival battle

Published

4 hours ago

November 2, 2024

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One of the world’s largest investment firms has waded into the fight over the future of Thames Water, the water utility which is racing to stay afloat.

Sky News has learnt that KKR is in talks with Thames Water and its advisers about participating in a £3bn share sale which forms part of a wider recapitalisation plan.

City sources said this weekend that KKR, which has more than $550bn of assets under management, was among a handful of parties which had accessed a data room for potential investors.

Rothschild, the investment bank, is running a process to raise around £3bn from the sale of an equity stake in Thames Water, which is grappling with a debt mountain of as much as £19bn.

Other investors which have expressed interest in acquiring newly issued shares in the water company include Carlyle and Castle Water, the latter of which is controlled by Graham Edwards, the Conservative Party treasurer.

Global Infrastructure Partners, which is owned by BlackRock, Brookfield and Isquared are also reported to have lodged an interest, although sources said that the latter two were unlikely to play any further role in the process.

The crisis at Thames Water is presenting Sir Keir Starmer’s administration with a challenge as the debt-laden company attempts to avert temporary nationalisation.

Insiders said that KKR was “a serious player” in the equity process being run by Thames Water, although its outcome hinges on a final determination by Ofwat, the industry regulator, which is due by January at the latest.

Thames Water – and other suppliers across Britain – wants to hike bills and is demanding leniency from Ofwat on fines for past transgressions.

One obstacle to KKR buying a big stake in Thames Water, which has more than 15m customers, may be its 25% holding in Northumbrian Water.

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Under Ofwat’s mergers regime, the Competition and Markets Authority would need to review the deal, although there would not be an automatic prohibition.

The share sale process is being run in parallel to an attempt to raise up to £3bn in debt financing from hedge funds and other investors.

A battle has broken out between the holders of Thames Water’s class A bonds, which account for the bulk of its borrowings, and its riskier class B debt.

Both sets of bondholders have submitted proposals to the company, with the class A’s arguing that theirs is more certain and the class B’s arguing that theirs will save the company £380m or more in fees and interest over a 12-month period.

Thames Water has already endorsed the class A group’s offer, with an initial £1.5bn of funding to be delivered immediately.

The class A bondholders are now trying to secure backing for their proposal within the next fortnight.

Their group, which includes the American hedge funds Elliott Advisers and Silverpoint, would earn in the region of £650m during the first year of the financing.

One area of controversy is likely to be any incentive plan for Thames Water bosses, led by chief executive Chris Weston, as part of a deal to give the company a stay of execution.

Last month, the environment secretary, Steve Reed, established an independent review of the industry that will look at far-reaching reforms.

It was unclear this weekend which of KKR’s funds was participating in the Thames Water equity-raise.

The firm owns John Laing, an infrastructure investor, which it took private in 2021.

It has also owned South Staffordshire, another water company, selling its 75% interest in 2018.

KKR declined to comment.

Business

Reynolds to hold talks with bosses amid business budget backlash

Published

1 day ago

November 1, 2024

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Reynolds to hold talks with bosses amid business budget backlash

The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.

Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.

Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.

An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.

Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.

On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.

“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.

His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.

Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.