As the dust began to settle after the emergency speech by UK Chancellor Rachel Reeves yesterday minds turned to the question posed by Carly Simon. Why? I continue to believe as I posted yesterday that it was aimed at her own back benchers which is quite extraordinary in itself. But I think there was another purpose linked to the reality that the Bank of England votes today on interest-rates. Once one starts to think like that then there were a range of claims aimed at the Bank of England. The main two points came early.
reducing our national debt,
and improving the cost of living.
Tax Rises
The reducing our national debt is plainly going to come from tax rises as there was very little mention of spending at all.
Stabilising our public finances –
Making the tax and spending decisions to get debt down and to fund our public services sustainably.
We got another nudge here.
The UK’s national debt now stands at £2.9trillion:
Equivalent to 95% of GDP.
[political redaction] our borrowing costs were in the middle of the pack compared to other advanced economies…
…but now, we have the highest borrowing costs of any G7 country.
Today, 1 in every £10 of taxpayer’s money is spent on debt interest.
As an aside the mention of debt reductions is a combination of being outright misleading and confused as a likely plan to reduce the national debt to GDP ratio is presented as an outright fall in debt. But the two messages here are that she plans to raise taxes to reduce the deficit which will have a contractionary impact on the economy and that she hopes for a type of virtuous circle where doing so reduces debt interest and thus further improves the borrowing figures. Thus opening the way for interest-rate cuts or so Chancellor Rachel Reeves hopes.
There was also scope here for the Chancellor to blame the Bank of England for higher UK bond yields.This is due to its policy of shrinking its balance sheet or QT which involves actual bond sales ( at large losses) as well as letting holdings mature without replacement. This matter will have been on the minds of her advisers after the US Federal Reserve announced it will not only stop QT but will buy US government bonds to offset maturing Mortgage Backed Securities. Whereas the Bank of England plans an extra £70 billion in the year to September 2026.
Inflation
This is an area with a fair bit of scope because the Chancellor raised the UK inflation rate last year mostly via the increase in employers National Insurance. Whilst she was never going to admit that she avoided blaming the Bank of England for CPI inflation being at 3.8% or more than our peers. Indeed “supply chains” became the bogeyman or woman.
Inflation has been too slow to come down as supply chains continue to be volatile –
Meaning that the cost of everyday essentials remains too high.
I guess that the Chancellor was hoping no-one would ask why these supply chains have not impacted other countries? Then we got a promise that she will not repeat the mistake she made last year.
and the choices I make in the Budget this month will be focused on getting inflation falling…
There was no detail but there has been a lot of kite flying around ending VAT on domestic energy bills so a cut from 5% to 0%. Then another hint combined with a policy suggestion for the Bank of England.
and creating the conditions for interest rate cuts to support economic growth and improve the cost of living.
If we step back for a moment then simply refraining from her mistakes last year will reduce UK inflation in the year ahead. For example whilst Tim Martin of Weatherspoons is also attacking the relative problems created by taxation he also has in today’s trading release given us some insight into the real world impact of the October 2024 Budget changes. The emphasis is mine.
“A final and related point concerns wages and taxation. The average price of a pint in pub is about £5.16 and labour is about 35% of the ex-VAT sales price (Mitchells & Butlers 36.2%, FY24), about £1.50 per pint.
“A supermarket pint costs about £1.50 and labour is about 12% of the ex-VAT sales price (Tesco 12.0%, FY24), about £0.15 per pint. “Therefore, it can be seen that a 10 per cent wage rise will increase the cost of a pint by about 15 pence in a pub versus about 1.5 pence in a supermarket. “Increased labour costs are, consequently, dramatically widening the pricing differential between pubs and supermarkets, to the anger and consternation of customers.
So should this year’s Budget actually reduce some prices it would have a big effect on the annual rate of UK inflation as it replaces rises. That is what the Chancellor wants the Bank of England to think.
Interest-rates
Another hint.
but at 4% they are still a constraint on business borrowing and a burden on family finances.
There is something rather revealing in the “burden of family finances” part as whilst debtors will gain savers will lose. The claimed benefits from an interest-rate reduction start with something usually forgotten which is initially it is a zero-sum game. The assumption is that borrowers spend more than savers cut back on spending which is where any economic boost comes from. So it is also benefiting one group at the expense of another rather than a floating all boats style move.
and creating the conditions for interest rate cuts to support economic growth and improve the cost of living.
And again.
I will do what is necessary to protect families from high inflation and interest rates…
This is in fact exactly the opposite of what she did last year.
Comment
There are all sorts of problems with this effort from the Chancellor. Firstly there is her own track record of policy U-Turns on benefit cuts and the Winter Fuel Allowance. If as we are told a week is a long time in politics then three weeks is an eternity for the same back benchers who forced those policy changes to affect the upcoming Budget. Thus her claims of strength may yet become a weakness.
Then there are her own struggles with the truth which are again likely to make the Bank of England wait and see. After all waiting for the Budget would then allow those keen on an interest-rate cut to deliver it just in time for Christmas.
Switching to the Bank of England itself whilst there are 9 voters the reality is that it is up to Governor Andrew Bailey. This is because there are 2 external policymakers keen on more cuts and most of the internal members will independently decide that they agree with the Governor. That means though that if he should do so another 5-4 vote is likely. There is an oddity today in that Sarah Breeden is apparently scheduled to speak at 4.15 pm as I cannot recall anyone previously ringing in to say “I agree with the Governor”. Perhaps she left a written note.
This is extraordinary. Members of the MPC should not be circulating in the City in the middle of a policy-setting meeting! An urgent call to #BoE needed to clarify what’s going on! ( Andrew Sentance)
Personally I think that with CPI inflation at 3.8% and the recent pick-up in money supply growth another interest-rate cut would be a mistake, although as I pointed out on the 9th of October.
Plus her is a suggestion to improve things. Why do they never discuss the money supply? Surely it is not the wrong sort of measure….
