Markets

UK faces new £20bn budget black hole –as it happened

Weak productivity and Brexit uncertainty make it hard for chancellor Philip Hammond to see tax cuts or spending increases in next month’s Budget

In an uncertain day ahead of a busy week, the Spanish stock market bucked the trend and jumped sharply on hopes that the Catalan independence crisis could be resolved. A positive set of GDP numbers for the country also helped sentiment.

Elswhere the FTSE 100 slipped lower, as its overseas earners reacted badly to a stronger pound, which moved higher ahead of this week’s Bank of England meeting where the first interest rise in a decade is widely expected.

On Wall Street, the Dow Jones Industrial Average and S&P 500 continue to suffer, not helped by talk that the much anticipated Trump tax reforms could now only be gradual.

So the Dow and the S&P 500 are both down around 0.3%. But the Nasdaq Composite has slipped just 0.1% as investors still like the look of technology stocks in the wake of last week’s bumper results. Apple and Facebook, which both give updates this week, are both in demand.

The pound has moved higher ahead of the Bank of England’s latest meeting this week, with the first interest rate rise for a decade widely expected.

Sterling is currently up 0.49% against the dollar at $1.3190 and 0.32% higher against the euro at €1.1341. The strength of the pound has however knocked 0.25% off the FTSE 100, dominated as it is by overseas earners who benefit from a weaker UK currency. Connor Campbell, financial analyst at Spreadex, said:

Sterling continued to strengthen on Monday, as investors spent a relatively quiet afternoon eyeing Thursday’s Bank of England rate vote…Though an interest rate rise on Thursday is far from certain, today’s trading seems to suggest investors think we might be in for the first hike in a decade.

Rock-bottom interest rates have been terrible for UK banks’ profitability, but any interest rate rise …could actually be a double-edged sword. Higher interest rates will boost UK banks’ net interest income but the equity market is increasingly concerned about the slowdown in the UK economy and the negative effects it could have on loan growth and bad debt charges which a rate rise might worsen.

Back with the UK public finances, and Labour MP Stella Creasy has found a tax loophole she believes could bring in some £8bn to the public purse. She writes:

There is a country that taxes British residents, and British companies, when they make money on selling commercial real estate, but doesn’t tax foreigners. That country is the UK. Closing the tax loophole around non-UK companies and commercial property sales would level the playing field for British businesses and at the same time help tackle the overheated housing market. It would also generate substantial revenue – enough to cover the entire public health budget for a year, for example.

According to the British Property Federation there is about £871bn worth of commercial real estate in the UK – 10% of our nation’s net wealth. Not only is this hugely important in its own right, its value impacts on the price of land, and hence of new homes. About 20% of commercial real estate is sold each year – worth an eye-watering £115bn in 2015, according to Her Majesty’s Revenue and Customs.

Related: This egregious tax loophole costs the UK £8bn every year. Let’s close it | Stella Creasy

Here are some of the comments from the Dallas manufacturing survey:

Chemical Manufacturing

More positive economic data from the US, more fuel to the flames as far as a December rate hike is concerned.

The Dallas Federal Reserve manufacturing index of general business activity came in at 27.6 in October, much higher than the expected 21 and September’s figure of 21.3.

US markets have eased back from their record breaking run last week, which was partly fuelled by a surge in technology shares after forecast-beating results from the likes of Amazon and Microsoft.

As well as some profit taking, investors are playing it cautiously ahead of the latest US Federal Reserve meeting this week – which is not expected to alter interest rates but could point to a rise in December – and crucially, Donald Trump’s decision as to who he will pick for the next Fed chair.

The Spanish government has dissolved the parliament in Catalonia, and has announced a snap election in December. According to the opinion poll that was published in El Mundo, the Catalan separatists might lose their majority in the region.

The IFS’s warning that Britain’s fiscal position is worse than forecast has cast some autumnal gloom over the economy.

And with Halloween looming, Anthony Doyle, fixed interest investment director at M&G, has send over some more spooky charts to give us the shivers.

Governments, corporates, and households have never lived beyond their means by so much.

For the first time, central bankers like Mario Draghi and Haruhiko Kuroda have been calling on unions to increase wage demands, with Draghi stating wages are the “primary driver of inflation”…..

Unless workers can start demanding higher rates of pay, it is likely they will continue to suffer real-wage declines. This has been the case in the UK, with unit labour costs and inflation growing by 16% and 25% respectively since 2008.”

“In March 2019, unless some form of deal is agreed, the UK will have to negotiate trade deals with the majority of its current trading partners. This would be a major challenge as complex trade agreements are not easy to negotiate and often take years to agree to.

If the UK finds itself outside the European Union Single market and the EU Customs Union, tariff and non-tariff trade barriers (like quotas, embargoes, and levies) are likely to be implemented between the UK and its main European trading partners. Some sectors and companies may face much more restricted access to the European market, and that will prove to be a significant headwind to UK economic growth in the short-term.”

Just in: The cost of living in Germany rose by less than expected this month.

German preliminary HICP inflation down to 1.5% YoY in October as feared. Downside risk to € flash HICP, not necessary to core inflation.

Newsflash from America: US consumer spending has surged at its fastest rate since the early days of the financial crisis.

Consumer spending jumped by 1% in August, a very sharp increase. It may be driven by people replacing furniture and automobiles damaged by the hurricane season.

WASHINGTON (AP) — US consumer spending surges 1 percent in September, strongest gain in 8 years.

Lloyd Blankfein, the CEO of Goldman Sachs, has a new hobby — baiting the UK government over its Brexit strategy.

Blankein has just tweeted a photo of Goldman’s new European headquarters, currently being built in the City of London.

In London. GS still investing in our big new Euro headquarters here. Expecting/hoping to fill it up, but so much outside our control.#Brexit pic.twitter.com/XwrIcqwM1t

Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I'll be spending a lot more time there. #Brexit

nice and sunny in London today

Over in the City, sterling has risen this morning despite the IFS’s gloomy prognosis.

When it comes to monetary policy, talk matters almost as much as action. Now that the market is ready and waiting for a hike this week, the BoE would risk a major hit to its credibility if it did not meet this expectation. In short, if the BoE didn’t intend to hike it probably would have told us by now.

If you’re just tuning in, here’s the key message from the IFS today :

A large productivity downgrade in the Budget would almost certainly mean a higher borrowing forecast https://t.co/QcsZzOhn0u #Budget2017 pic.twitter.com/6bONkiunSx

Back in London, the Institute of Fiscal Studies is briefing experts about its new assessment of the UK economy, ahead of next month’s budget.

Helen Miller, the head of tax research at the IFS, is tweeting some key charts.

NHS budget usually grows faster than GDP. Not true in recent years #budget2017 pic.twitter.com/CvbajB1FuT

Would cost £15bn to stop public service spending falling in per head terms #budget2017 pic.twitter.com/ym2ILyp3Cy

Departments needing to cut spending now are same ones that were previously squeezed #budget2017 pic.twitter.com/56OH6SLZkm

Prisons is area where we have data (from @instituteforgov) showing signs of strain. Not a pretty picture #budget2017 pic.twitter.com/qQOZsBBiP8

We have options for increasing taxes but none seem likely in political climate. Revenue from anti-avoidance measures v uncertain #budget2017 pic.twitter.com/eCeOicZodZ

Breaking: Economic confidence across the eurozone has hit its highest level in around 16 years.

Euro area economic confidence just hit its highest level since 2001. pic.twitter.com/cwl9lS0ihT

For the first time in over five years, Eurozone economic sentiment has been higher than UK economic sentiment for three consecutive months. pic.twitter.com/fM1HSNYU9s

Newsflash: British consumers are still racking up bills on their credit cards.

New figures from the Bank of England shows that borrowing via credit cards jumped by by 9.3% year-on-year last month. Britons now owe £69.4bn on their credit cards, up from £69.0bn in August.

Here’s another neat chart from the IFS, showing how chancellors like to hit the public with tax rises shortly after a general election (perhaps hoping that we’ll have forgotten by the time we vote again)

The BBC’s Kamal Ahmed points out that the new budget black hole might be bigger than £20bn (as explained at 7.57am, it all depends on productivity…)

If productivity growth remains at 0.4%, poorer econ growth wd result in £53bn more borrowing by 2021/22 if no other action taken @TheIFS

Here’s another stunning fact from the IFS: Britain’s economy would be 15% bigger, even adjusted for population increases, if it had continued to grow at its pre-crisis pace since 2008.

Instead, the economy didn’t really bounce back from its very sharp downturn after the financial crisis.

Weak productivity has been backdrop to all budgets since 08 #budget2017 @TheIFS pic.twitter.com/ZAENl0c92t

Apologies, we had a technical glitch with the comments this morning (OK, I might have forgotten to press the ‘On’ button). They’re turned on now…..

The Institute for Fiscal Studies’ report is online here.

It concludes with a grim assessment of the challenge facing ‘Spreadsheet Phil’ Hammond:

The first Budget of a new parliament is often the best chance a Chancellor has to set out her stall. She can raise taxes if need be, set an agenda for the next five years, and set in train economic and fiscal reforms. Mr Hammond, though, has been dealt a very tricky hand indeed. The political arithmetic makes any significant tax increase look very hard to deliver. It looks like he will face a substantial deterioration in the projected state of the public finances.

He will know that seven years of “austerity” have left many public services in a fragile state. And, in the known unknowns surrounding both the shape and impact of Brexit, he faces even greater than usual levels of economic uncertainty….

Liberal Democrat leader Sir Vince Cable tweets:

IFS warning on #Budget18. Stop treating public #investment as spending. #industrial strategy to boost #Productivity. #exitfrombrexit

And… here’s why the government’s deficit reduction strategy has spluttered.

Deficit reduction has been "almost entirely driven" by tax rises and spending cuts, not economic growth @TheIFS

Today’s report also shows that seven years of austerity have only brought Britain’s tax receipts and government spending back to its levels before the financial crisis:

The IFS says:

As national income fell between 2007–08 and 2009–10, public spending increased sharply as a share of national income while government revenues fell. Since then, most of the increase in spending has been unwound, such that it in 2017–18 it was 0.5% of national income greater than it was in 2007–08 (6.1% less 5.6%). This is an important fact. Seven years of cuts have served merely to return public spending to its pre-crisis level as a share of national income.

Total government receipts have risen by more as a share of national income since 2009–10 than they fell over the preceding two years, such that they are now 0.4% of national income greater than in 2007–08 (–1.1% plus 1.4%; numbers do not sum due to rounding). So overall borrowing is now only slightly greater than it was in 2007–08, with both receipts and spending slightly above their pre-crisis shares of national income.

7 years of austerity, 7 years of economic failure, 7 years of the degradation of public services, 7 #Tory years https://t.co/VXI0hAISH5

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Q: Could the government really raise taxes specifically to get more funding for social care and the NHS, as Oliver Letwin says?

IFS director Paul Johnson says it can be done in theory — a chancellor can put a penny on income tax and say they’ll spend it on the NHS.

It’s just a tax rise to increase spending.

Peter Dowd, Labour’s shadow chief secretary to the Treasury, is also on the Today programme.

Sir Oliver Letwin, a Conservative MP, says he believes the IFS is roughly right.

Paul Johnson, director of the Institute for Fiscal Studies, is discussing the IFS’s report on the Radio 4’s Today Programme right now.

Newsflash from Madrid: Spain’s GDP expanded by 0.8% in the third quarter of 2017.

That’s a solid result, and means Spanish economy grew twice as fast as Britain in the last quarter.

The bigger picture behind the #Catalonia crisis: Spain grew by 0.8% over Q3, confirming the strong growth momentum. https://t.co/uNtOHVvpmU pic.twitter.com/4mObYlR1zc

Solid growth in Spain
Real GDP expanded by 0.8% q-o-q in Q3, slightly slower than the previous quarter (0.9%)
Carry-over for 2017: 2.9-3.0% pic.twitter.com/5I6VDIhXPN

The IFS’s gloomy forecast suggest Britain may struggle to balance the books by the middle of the next decade, warns the Financial Times.

As the FT’s Gemma Tetlow puts it:

When he took the job last year, the chancellor set himself the target of reducing public borrowing to less than 2 per cent of national income by 2020-21 and eliminating borrowing altogether by the mid-2020s.

The commitment to strict fiscal discipline was seen as one of the important dividing lines between the Conservative party and Labour in this year’s general election.

The IFS says Mr Hammond is also under “increasingly intense” political pressure to spend more, while the Parliamentary arithmetic makes tax increases look difficult.

The chancellor has been dealt a “very tricky hand indeed”, it says.

The Budget on 22 November may also include new revenue-raising measures. One option floated by the Treasury is a clampdown on companies using self-employed contractors, rather than employees, to avoid paying national insurance.

Such a move could affect firms ranging from multinational behemoths like BP to tiny businesses with three employees, according to Jonathan Riley, head of tax at accountants Grant Thornton, as well as hitting professionals who are paid through personal service companies.

CITY AM: Deficit hangs over Hammond #tomorrowspaperstoday pic.twitter.com/JYnNrBCCcA

These charts how how Britain’s budget deficit could be billions of pounds bigger than was forecast, back in March:

If the OBR were to decide that the terrible productivity growth of the last seven years were now the new normal (the ‘very poor’ scenario, under which output per hour grows at just 0.4% a year), without further policy action structural borrowing would rise above 3% of national income (almost £70 billion) in 2021–22 and rise further thereafter.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The stark analysis adds to pressure on the chancellor as he appears increasingly trapped between the government’s fiscal targets and calls to raise spending as the economy deteriorates and uncertainty over Brexit persists. He is due to deliver his budget on 22 November.

“It is hard to see how the chancellor can both maintain the credibility of his fiscal targets and respond effectively to the growing demands for spending”, the IFS said.

Mr Hammond will not be able to satisfy everyone, perhaps anyone, as he makes budget trade offs. @theifs https://t.co/O7awOW8e3N pic.twitter.com/Bjl0ev1l1O

Related: UK deficit to heighten pressure on chancellor ahead of budget

#eurozone economy today: economic confidence; Spanish & Belgian GDP; German CPI; #ECB's Costa speaks in Lisbon, Hansson in Tallinn pic.twitter.com/jibRN2cHOw

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