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Introduction: Hunt warned against excessive austerity
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Nearly two months after the turmoil triggered by the mini-budget, chancellor Jeremy Hunt will announce a swathe of tax rises and spending cuts to reassure the markets that the UK is in responsible hands.
Today’s autumn statement is expected to outline plans to cut public spending by around £30bn, along with £24bn of extra taxes.
But many of the tough decisions may be deferred until after the election – creating a political headache for Labour.
Hunt’s also expected to increase benefits, pensions and tax credits by inflation – meaning a 10% rise next April.
But support for energy bills will be trimmed; the average annual bill could rise to £3,000 in the spring, from the current £2,500 cap, alongside a windfall tax on energy generators.
So, having reversed many of the measures in the mini-budget, Hunt is set to take the UK on a completely different path to Kwasi Kwarteng.
Autumn Statement:
£30bn of spending cuts, £24bn tax rises
Stealth taxes a big theme as thresholds frozen
Energy bills will go up from April. Support will continue but be scaled back.
Spending squeezes
Pensions and benefits up with inflation https://t.co/knk4RNDz1o
— Nick Eardley (@nickeardleybbc) November 17, 2022
But will the markets prefer Austerity 2.0, rather than the unfunded fiscal easing of Trussonomics that sank the pound and drove up borrowing costs?
Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, says that Hunt faces a very tricky balancing act.
He told Radio 4’s Today Programme that the markets will be looking for confirmation that the UK is restoring its economic reputation, and putting its finances on a sound footing. But, investors also care about growth.
El-Erian said:
They will also be looking for measures to promote economic growth.
It is going to be very tricky, striking the right balance, as there are so many economic and political judgements here.
And he agreed that Hunt risks going too far the other way, if he simply announces huge tax rises and spending cuts.
El-Erian warned:
It could be seen as excessive austerity.
At the end of the day, the answer to all the issues that the UK faces today, from inflation to low growth to a damaged economic reputation is high, sustained, inclusive growth.
It is “absolutely critical” that the government delivers a set of measures to enhance productivity and promote high economic growth, he added.
Yesterday, the Bank of England warned that Britain is suffering a worse economic performance than its rivals because of Brexit and a stark drop in the size of the workforce since the Covid pandemic.
Andrew Bailey also told MPs that the UK’s international reputation has been damaged by September’s mini-budget.
El-Erian agrees that the UK certainly has a credibility issue.
But the bigger question is how large the fiscal black hole actually is – and about the size of Hunt’s fiscal measure, the timing, and the balance between spending and tax cuts.
He says:
There is a concern that there may be a political agenda being played as well as an economic agenda.
The agenda
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9.30am GMT: ONS weekly economic activity and business insights
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9.30am GMT: ONS report into UK GDP, by regions and countries: January to March 2022
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10am GMT: Eurozone inflation reading for October
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11.30am GMT: Jeremy Hunt to give autumn statement
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1.30pm GMT: US weekly jobless claims
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1.30pm GMT: US building permits data
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2pm GMT: Office for Budget Responsibility press briefing on its economic and fiscal outook report
Key events
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UK ‘to spend billions on energy efficiency’
The UK government is set to spend billions of pounds to insulate homes and upgrade boilers in a drive to cut Britain’s overall energy demand by at least 13% this decade.
The energy efficiency push is set to be unveiled on Thursday by Chancellor of the Exchequer Jeremy Hunt as a major spending commitment in his Autumn Statement, according to Bloomberg.
They say:
Ministers are proposing to create a task force to oversee the program, which will include new funding from 2025 through 2028, according to the people. The government is also preparing a public information campaign to encourage individuals and firms to reduce their energy consumption.
Brian Berry CEO of the Federation of Master Builders, says it would be a ‘great start’ to tackling the energy crisis:
The Chancellor faces a tough call later today delivering his Autumn Statement. Help to make our 29 million homes better insulated would be a great start to tackle the energy crisis, create jobs, and spread economic wealth @fmbuilders @beisgovuk @hmtreasury @SME4LABOUR
Read Related Also: Russia-Ukraine war at a glance: what we know on day 275 of the invasion | World news
— Brian Berry (@BrianBerryFMB) November 17, 2022
London made the fastest recovery from the pandemic last year, according to new data from the Office for National Statistics.
GDP in the capital grew by an annual rate of 14.4% in the first three months of this year, followed by Scotland (+12.8%), the North East (+12.4%) and the South West (+11.3%).
The ONS also reports that all of the nine English regions showed positive growth in Q1 2022, led by the North East and the East Midlands which both grew by 1.2%, followed by London with an increase of 1.1%.
Wales saw no quarterly growth, though.
Eight weeks really is a long time in politics….
Still staggering that we’ve gone from “it’s time for biggest tax cuts in 50 years” to “inevitably time for the biggest fiscal tightening since 2010”in just a few weeks
— Torsten Bell (@TorstenBell) November 17, 2022
Analyst: If Autumn Statement moves markets much then it’s a cock-up
The City is in a subdued mood ahead of the autumn statement at 11.30am.
The blue-chip FTSE 100 index has dropped by 0.5%, while the UK-focused FTSE 250 index of smaller companies has lost 0.3%.
The pound is a little weaker against the dollar, at $1.188 (but still much higher than before the mini-budget, let alone afterwards…).
The bond market is calm, and one of Jeremy Hunt’s objectives will be to “make gilts boring again”, says Neil Wilson of Markets.com. He writes:
If the Autumn Statement moves the markets much then there has been a cock-up.
The messaging from the Treasury thus far has been very clear – heapings of fiscal discipline and lashings of austerity, no uncosted borrowing.
It’s about restoring credibility in the financial markets and very little else.
But could there be a surprise or two? Wilson thinks Hunt and Sunak might save then up until nearer the election.
Chancellors love to pull a rabbit or two out of the hat and fiscal credibility goes hand in hand with winning the next the election as far as the Tories go, so it might not be as horrendous as some of the various test balloons floated by the Treasury in recent weeks would suggest.
A credibility premium, though, is worth more right now and the surprises will be saved up for next year ahead of the election…when they can apply some soothing tax cuts and say they could only do that because of the difficult steps taken in 2022.
Sarah Butler
The German-owned discount grocer Lidl has quadrupled its UK profits as shoppers look for ways to save money.
Lidl reported a 1.5% rise in UK sales to £7.8bn in the year to the end of February but pretax profits surged 319% to £41.1m as the group trimmed costs as measures to control the Covid-19 virus eased.
Out in the real economy, pub chain Fuller, Smith & Turner has told shareholders that it faces continued pressure from high inflation, steep energy bills and interest rate hikes.
Fullers also expects a robust Christmas period and an added boost from the upcoming football World Cup. More here.
James Meadway, director of the Progressive Economy Forum, insists Jeremy Hunt should not be making huge spending and tax decisions on the basis of uncertain forecasts.
Writing in the Guardian today, Meadway says the government should focus on hard economic facts, not an arbitary target to get debt falling at a future date.
He says:
This screeching U-turn in government policy – contradicting promises to end austerity and its commitments in the 2019 manifesto – is being driven by nothing more than an insubstantial statistical artefact. The “fiscal black hole” is not a hard economic fact. It’s the result of uncertain forecasts and the government’s own target for the level of debt in five years’ time.
This isn’t the same as looking at (for instance) real wages – currently falling rapidly – or rising unemployment today. It would be a profound error to use this ghostly “fiscal hole” as an excuse to drag the country back into the economic doom-loop of austerity.
For the Guardian:
“Uncertain forecasts and an arbitrary target are not enough to declare a “black hole” in the public finances. They’re not enough to make huge decisions about taxes and spending of the kind that will affect millions of people’s lives.”https://t.co/DxJN01JXMy
— James Meadway (@meadwaj) November 17, 2022
Five charts that will shape the UK’s autumn statement
These charts show the UK’s poor economic situation, with inflation at a 41-year high and a recession possible underway – and government departments bearing the scars of the last austerity drive.
My colleague Richard Partington’s full analysis is here:
TUC warns against austerity
Frances O’Grady, general secretary of the Trades Union Congress (TUC), warned against the dangers of austerity.
Speaking on BBC Radio 4’s Today programme ahead of the Chancellor’s autumn statement, she said that tough spending cuts are “never easy for working people”.
O’Grady said that George Osborne’s austerity plan had “failed”, so it would be a mistake for Jeremy Hunt to make similarly painful cuts.
“We have been suffering weak growth as a country ever since, because it was killing the golden goose.
“If you are starving the NHS, our education and skills system, of funding that has an impact on the economy because we need a healthy workforce, we need educated, skilled and trained workers.
“Now we really need big investment in green infrastructure and our public services, if we’re going to grow.”
Bloomberg’s Phil Aldrick tweets that the cost of paying off the UK’s debts will be in focus today.
The cost of servicing the national debt now inflation is high and rates rising will be a big feature of the OBR forecasts today. Over £100bn this year alone, a tenth of govt revenues – the highest level in 4 decades and twice the average since 2000 (Javid set a 6% limit)
— Philip Aldrick (@PhilAldrick) November 17, 2022
Inflation has driven up Britain’s debt servicing costs, because the interest rate on ‘index-linked gilts’ goes up, or down, in line with the Retail Prices Index. RPI surged over 12% last month.
Investec: Politics and economics pulling in fundamentally different directions
It’s an understatement to say that Jeremy Hunt faces a difficult balancing act today, says Investec economist Phil Shaw.
Politics and economics are pulling in fundamentally different directions: the evident need to assist in light of the cost-of-living crisis, which underpins much of the current wave of industrial action, collides with the hard truth that markets need to see the public finances being kept on a sustainable footing.
As the Truss administration found out, the latter is neither negotiable nor easily kicked into the long grass: credibility must be shored up, to avoid a return of the volatility in markets and surges in yields that can worsen conditions for the whole economy in a short space of time.
Fresh austerity will be a “significant drag on economic activity”, Shaw points out, which will push the UK economy into recession through next year.
But, it would also mean the Bank of England wouldn’t need to raise interest rates as high as expected.
