This is a phase where we are receiving quite a lot of economic news for the UK. It should be calm waters in the sense of a government with a large majority but it is not like that. Plus before I get to the challenger there was a serious issue that is likely to be ignored at the Labour party conference which I have just posted about on social media.
The UK was in Dunkelflaute last night with Solar Power at 0GW and Wind Power falling as low as 0.5GW.
As you can see that poses its own issue and compares to the claimed capacity for the two sources of 50 GW which we have never got anywhere near. We essentially need two electricity supply systems with the second for nights like last night which for the benefit of those abroad was also a colder night. This is why the UK has such expensive electricity and on current policies it looks set to become even more so.
Next up is a political challenge within the Labour party which would have economic consequences.
If this was the start of Andy Burnham’s challenge for the leadership of the Labour party, it could barely have gone worse.
A remark in an interview about “getting beyond this thing of being in hock to the bond markets” sparked a storm of criticism this week from Labour colleagues and investors in the City. ( Financial Times)
Whatever you think of the politics this was a rather stupid statement in terms of the economics. The present government decided to borrow more in its October Budget and has found that the public finances have weakened further since. Andy Burnham decided to make extra public spending on housing as part of his present campaign so he would need to borrow even more. Apparently his plan is to spend to save.
By his thinking, a broader public housing building programme would save “significant billions” from the welfare bill.
This rolls into the speech today by Chancellor Rachel Reeves as everyone waits to hear what she hints about the tax rises which are clearly coming. Here is former Bank of England policymaker Andrew Sentence.
Chancellor Rachel Reeves was being very economical with the truth on @BBCr4today
this morning, blaming the need to raise taxes again in her Nov Budget on the global situation. But the real reason is her massive £100bn a year rise in spending, relative to Tory pre-election plans!
We do know that there is a plan to abolish youth unemployment to be announced by the Chancellor in her speech except when interviewed on LBC radio earlier they summed it up like this.
“All of this money was set out in the Spending Review.” “How much is it?” Chancellor Rachel Reeves struggles when asked how much money will be allocated to help youth employment.
There is also the issue raised by the BBC Money Box presenter Paul Lewis that in the past UK governments have announced 11 schemes which were supposed to end youth unemployment and sadly it is still with us.
As a fan of the science fiction series The Outer Limits I do appreciate Bloomberg attempting an economics version.
Chancellor of the Exchequer Rachel Reeves can be sure the bond markets have her back. But on Monday she faces down her own party, and she may find them tougher to win over.
At the annual Labour Party conference in Liverpool she needs to assure her restive colleagues that she can put the economy in the service of beating the populist right without undermining her reputation for fiscal prudence.
At least that is what I hope they are doing. Because is we switch to an objective measure of comparing the UK ten-year yield to the US the usual situation is for the UK to be cheaper. Whereas we are presently paying around 0.6% extra as a sort of Reeves premium. It is pretty clear if you look at it and then we get to “fiscal prudence” which in some ways is even more extraordinary than claiming the bond markets have her back. In fact as the Andrew Sentence tweet shows she took a risk by borrowing more and the public finances have weakened because of that.
Or to put it another way that is why the UK has a ten-year yield that is above 4.7% making us rather stand out but not in a good way. The past claims that we would see economic growth have rather faded out.
The Office for Budget Responsibility
In the spring and summer of 2024 in the lead up to the General Election Chancellor Rachel Reeves stated time and time again that she wanted to enhance the role of the Office for Budget Responsibility or OBR as a fiscal watchdog. These days she has a clear problem and you may note yet another example of the first rule of OBR Club (that the OBR is always wrong) in the second sentence below.
The Financial Times reported two weeks ago that officials were braced for a fiscal gap of up to £30bn in the OBR’s first private forecast for the Treasury. The biggest driver was expected to be a reduction in the OBR’s relatively bullish trend productivity growth forecast, which has been criticised by economists including Andrew Bailey, the governor of the Bank of England.
Actually this is a critique of the whole OBR procedure and something I have warned about since its inception in 2010. The forecasts are presented as science when many of the major factors such as productivity are based on judgement and opinion and as it happens they appoint people to the OBR who have a proven track record of being poor at that. The strategic problem for the Chancellor is that she was either unaware of that or ignored it when she said her plan was to enhance and promote the role of the OBR.
If we now switch to the tactical element above any productivity downgrade reduces expected growth leading the Chancellor to look frankly desperate in her response.
The chancellor, who will address the Labour party conference on Monday, has said she wants the Office for Budget Responsibility (OBR) to give the government credit for policies such as a mooted youth mobility scheme with the EU so she could mitigate the need for fresh tax increases in the Budget on November 26. ( Financial Times)
How they are supposed to do that in the situation below is anybody’s guess.
But the terms of the UK’s “reset” with the EU are still under negotiation, making it harder for officials to quantify the effects. ( FT)
It must be really rather awkward for the Financial Times as someone who recommended voting for such policies. I think it is time for a reminder that I avoid politics as much as I can and that the previous government were poor. But this one is limboing under what is a low bar.
And while Labour wants the watchdog to recognise potential growth from trade agreements with major partners, the overall outlook has darkened since the OBR’s March forecast, given US President Donald Trump’s “liberation day” tariffs.
Migration
In case you were wondering why bodies like the OBR are such fans of migration they only look at one side of the balance sheet.
Changes in the run rate of net migration are an important element of the OBR’s forecasts because they affect the outlook for labour supply and the UK’s long-term growth prospects. A bigger workforce boosts the OBR’s forecasts for revenues, but does not change its forecasts for public spending, despite arrivals’ likely use of public services, because these are based on published government plans. ( FT)
The real world is rather different.
Comment
There is much here that is rather confused to say the least. So we make sure there is no youth unemployment which will be particularly good for those made unemployed by the rise in employer’s National Insurance. Then there is the youth mobility scheme with the European Union. If we bring them to the UK wont they take jobs from our own youth making some of them unemployed again?
Next up is the energy/electricity policy which is managing to both make things more expensive and make supply less reliable. It is hard to see manufacturing do anything other than weaken in such an environment. It also challenges the recent hopes for investment from some US AI companies as sooner or later they will be concerned about where the power will come from?
So we wait to see what is announced next….
Podcast
