Bye Bye Rachel Reeves

[GG.]

There is a danger of people reading too much into things but then again all of that speech would have been worded very carefully so perhaps not...

There was a former member of the MPC (up until last year) on the BBC straight after the speech this morning that was very illuminating. He pointed out that there were multiple references to measures in the budget needing to be non-inflationary, so that in effect rules our VAT hikes as they filter directly through into higher prices, don't pass go don't collect £200 (and which already are high at 20% having previously been hiked from their pre-crisis norm of 17.5%, never to go back down). So that leaves NI and Income Tax - but I suppose we knew that already. Looking like adding 2p to income tax and removing from NI to widen the base is the most likely option, the question is what other horrors around the edges will be added to make it "fair" (i.e. how much damage do they see fit to do to other wealth creators to justify it in the eyes of their socialist brethren).

The even more illuminating thing, which I wasn't even aware of, was that in quantum terms - the fiscal headroom Reeves decided to leave herself in re-writing the "rules" previously was a mere 10bn. This is approximately 1/3 what previous chancellors have left as leeway to absorb volatility previously so having to come back this time was a result of that decision, not Covid, Brexit, Productivity, etc. which were all known quantities at the time of the last budget. The fact that bond yields are high is again likely because of that and given her promise not to increase tax the bond market had to assume that would come in the form of more borrowing - i.e. also not just a Truss phenomenon. Bond yields already down since this speech (which shouldn't be taken as a vindication of Reeves except in the narrow sense that she's said she's not going to borrow more).

Also on productivity - she made a big deal of it not being a big "puzzle" and all relates to underinvestment. The MPC member debunked that pretty quickly noting that the causes of lower than expected productivity have fluctuated over time and currently the main driver is the public sector (i.e. waste and inefficiency) and the main bulk of that was the NHS. If you distill that down, what he's saying is that we have shovelled lots more money into a black hole and have nothing to show for it, i.e. NHS reform would be the biggest driver or productivity increase - they need to do more with what they have and certainly not a case of taxing more to throw even more into a cavernous maw.

[Alex88]

Basically confirmed then. A highly significant pledge broken, and obviously not her fault at all and they should be exonerated all of responsibility.

She has dug her own grave; the myriad speeches she and Kier gave saying they wouldn't come looking come looking for more in taxes, has completely undermined her economic credibility.

I can't imagine the markets will respond well. Yes, you'll patch over the cracks temporarily, but the back tracking in itself will only further add to the narrative that they aren't equipped to handle the economy. She is demonstrating this in real time.

Also cant see this doing much for revenue growth as consumers will surely become increasingly conscious of their reduction in spending power, thus contributing to the deficit further with lower tax receipts.

Will have to see what is actually announced.

[GG.]

Also cant see this doing much for revenue growth as consumers will surely become increasingly conscious of their reduction in spending power, thus contributing to the deficit further with lower tax receipts.

Traders looking at the BoE's next rate move agree as they're predicting a further reduction reasonably quickly to counteract the damage to spending that will result. Question is whether that is ends up being inflationary again as we're already running well above target.

[Alex88]

Also cant see this doing much for revenue growth as consumers will surely become increasingly conscious of their reduction in spending power, thus contributing to the deficit further with lower tax receipts.

Traders looking at the BoE's next rate move agree as they're predicting a further reduction reasonably quickly to counteract the damage to spending that will result. Question is whether that is ends up being inflationary again as we're already running well above target.

I am not surprised. Her short term-ism will see her squeeze a cohort of taxpayers, including those who are less able to absorb a reduction to their disposable income, all while the economy is already stagnant. She could push us towards recession now. And with a potential increase in the cost of borrowing, when we're already borrowing more, I think 2026 could be a disastrous year for them, and the public.

[Alex88]

Leaving the budget this late was a mistake, now they have weeks of rumours about tax rises to contend with. All the while the uncertainty can’t help the economy. Whole speech today was frankly pointless unless.

Agreed, and the fact she even had to call this speech was ridiculous and testament to their incompetence. I've only got a minute or so in, and listening to her talk about lowering the cost of living and reducing national debt while simultaneously pre-announcing a budget that will result in the exact opposite, really is one for the ages

[Alex88]

There is a danger of people reading too much into things but then again all of that speech would have been worded very carefully so perhaps not...

There was a former member of the MPC (up until last year) on the BBC straight after the speech this morning that was very illuminating. He pointed out that there were multiple references to measures in the budget needing to be non-inflationary, so that in effect rules our VAT hikes as they filter directly through into higher prices, don't pass go don't collect £200 (and which already are high at 20% having previously been hiked from their pre-crisis norm of 17.5%, never to go back down). So that leaves NI and Income Tax - but I suppose we knew that already. Looking like adding 2p to income tax and removing from NI to widen the base is the most likely option, the question is what other horrors around the edges will be added to make it "fair" (i.e. how much damage do they see fit to do to other wealth creators to justify it in the eyes of their socialist brethren).

The even more illuminating thing, which I wasn't even aware of, was that in quantum terms - the fiscal headroom Reeves decided to leave herself in re-writing the "rules" previously was a mere 10bn. This is approximately 1/3 what previous chancellors have left as leeway to absorb volatility previously so having to come back this time was a result of that decision, not Covid, Brexit, Productivity, etc. which were all known quantities at the time of the last budget. The fact that bond yields are high is again likely because of that and given her promise not to increase tax the bond market had to assume that would come in the form of more borrowing - i.e. also not just a Truss phenomenon. Bond yields already down since this speech (which shouldn't be taken as a vindication of Reeves except in the narrow sense that she's said she's not going to borrow more).

Also on productivity - she made a big deal of it not being a big "puzzle" and all relates to underinvestment. The MPC member debunked that pretty quickly noting that the causes of lower than expected productivity have fluctuated over time and currently the main driver is the public sector (i.e. waste and inefficiency) and the main bulk of that was the NHS. If you distill that down, what he's saying is that we have shovelled lots more money into a black hole and have nothing to show for it, i.e. NHS reform would be the biggest driver or productivity increase - they need to do more with what they have and certainly not a case of taxing more to throw even more into a cavernous maw.

I'll check that interview out. Interesting point regarding the headroom - I saw a post on Instagram the other day from Sunak talking about that, too. He was saying that £10b headroom is tiny considering that forecasting errors can be as much as £20b, and when laid out against the context of total government spending of £1200b, it just isn't enough, and has also fuelled speculation about tax rises and contributed to low confidence.

[GG.]

One comment I liked was "she's just rolled the pitch with a rotavator"

[Alex88]

Saw this earlier, made me chuckle