Spring Statement: Reassuringly Sensible Spending Or Woeful Lack Of Ambition? Discuss

26th Mar by Megan Boxall

53 comments 1623 reads

Chancellor Rachel Reeves’ promise to have just one major fiscal event a year has been somewhat scuppered by an unfortunate hole in the public purse. A hole that has opened up, according to Reeves, because of global economic instability.

To give the chancellor a soupçon of leeway, her budget and spending plans were set out just one week before the election of Donald Trump, whose first few months of his second term have been dominated by economically destabilising trade tariffs.

But it was perhaps a bit ambitious to give just 1% of headroom in the budget, given it isn’t just the re-election of a rather radical president which has thrown global economies into disarray. Geopolitical tension has been raging in the Middle East and eastern Europe for several years. While political instability in Europe has been threatening trade ties there well before Trump started using his “favourite word”.

The headline from today’s announcement is that rising borrowing costs (the yield on government bonds) means that without further taxes or cuts, the government will fall short of its target to balance the deficit. That puts Reeves and her team in Labour HQ in something of a pickle - further cuts (or austerity measures) are a solution for the Tories, but further taxes go against what she promised in the Autumn.

The solution - tiny tweaks to spending plans, cuts to welfare spending (dressed up as an altruistic plan to ‘get people back to work’) and the promise to kick the can down the road until June. Speaking to the Financial Times, a senior portfolio manager from Axa’s investment management warned that rebuilding just £10bn of headroom was unlikely to be enough. The spending review in June (another one of the non-major fiscal events the chancellor has planned to keep everyone focused) will likely come with more spending cuts to meet the fiscal rules.

Market impact

The statement received a mixed reaction from the financial markets, with the domestic-focused FTSE 250 dropping sharply as the chancellor started speaking before rallying again.

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That rally might have been supported by the share price movement of the defence companies and housebuilders, which were the only sectors to get a direct callout in this review.

Defence (which has had a pretty strong start to…

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andrewdb

27th Mar

Those who make their lives here do so for many reasons, the marginal tax rate is probably not that important. If money is the main reason for leaving, I am pleased they are going and hope they do not come back. I do not want this country shaped for the convenience of a tiny minority of v.v. rich people. That is a race (to the bottom) that we should not compete in.

Funny how we think giving v.v. rich people more money is a good thing, and at the same time taking money away from poor people is also a good thing. By all means apply the rules (something that seems to have been deprioritised in the Pandemic) but reducing benefits in the expectation that the claimant will get a job is truss-level policy. If that is really the outcome, it wont end well.

not sensible or woeful, just completely missing the point imo.

Improve productivity (1):
Most of the flexible capital we have is human. for better or worse, factories and offices are big, expensive and hard to move. Bringing work to the home is great, but is for a lucky minority. Improve public transport so that the bus / train / tram system within 20m of bristol / manchester / birmingham / any UK city is as good as it is inside the M25. I see many talented young people in this town (13m outside bristol) who end up in min wage jobs because the transport links are too slow and (crucially) unreliable. There are studies out there that show the main difference between Lyon and Birmingham (similar in many ways but Lyon's per capita income > 25% bigger) is that Lyon has a good public transport system and Birmingham does not so the right person simply cannot get to the right - better- job in Birmingham.

Improve productivity (2):
Adult education. Most of the capital we have is human. Improve it. Investing in - and implicitly believing in and valuing - a person would probably also improve general well-being.

Reduce immigration:
(yes, clickbait) People dont have many children because they cannot afford a stable home. Because we dont have enough children we need a lot of immigrants (actually we always will need immigrants to do the jobs we dont want to (nhs support staff) and jobs we dont seem to be able to do (nhs doctors and other high skill professions) but if we had 500k more children pa, you need 500k fewer immigrants). Until the mid 90s a couple could just about afford a 3 bed semi a commutable distance from london, and have kids etc. Now you need to be the FD of a mittlestand. Houses need to be a *lot* cheaper (especially in a commutable distance from a city). Yes, this means re-drawing the greenbelt, it is a choice.

Inflict the biggest cuts on the treasury:
These are the people who thought HS2 was a job well managed. It is structurally unable to invest in a sustained manner. There is the BoE and the OBR and the Audit commission and House of commons committees. The spending departments should know how to spend money more efficiently and effectively. Cabinet can set overall spending levels. Not sure why the treasury does anything more than obtaining the funds the spending departments require (tax or borrowing) in the most efficient manner.

Viz

I'm not a Reeves apologist. I just don't like the way that the economies woes have been placed at her doorstep and providing some balance. BTW a lot of the spending you have listed was already in place and as a side point, what the UK are doing to the Chagos Islands is the very minimum that the UK should be doing. This was already in the pipeline.

Burnt Onions

I like this snapshot for the simplicity of the current problem the UK is facing.

Now you could raise income taxes by 40% across the board to balance the books or.....

You could cut spending by 10%.

Hi Phoenix, yep, I agree with all of that (unfortunately!)

gheng1s10

BOE still paying interest on QE deposits. Could have done something there, but she’d rather pick the pockets of pensioners instead.

DVB99

I agree, its not all her fault, but she seems to be making things worse...

The Phoenix

I personally think the UK is in checkmate sadly, the US can most likely stumble on for a while yet as the worlds reserve currency despite Donalds best efforts to blow up the entire Western system.

But on the flipside the BOE is estimated to have lost north of £45 bil over the past year due to Quantative Tightening.

Alphaflight

"The rich, however, must be made to contribute far more than they do so . And if they feel the single most important factor in their lives is how much money they have, then it would be best if they went elsewhere anyway. They are not needed or welcome."

More socialism isn't the answer Lochinver. Anyway how do you define "the rich"?

Remember that the top 10% of earners already disproportionately pay far more income tax than anybody else in the economy. That is to say, the top 10% of earners are already shouldering the majority of income tax revenue.

Note that the bottom 50% of earners pay just 9.2% of total income tax, while the top 50% pay 90.8%

If people don't think they are being taxed sufficiently enough then they can elect to overpay their taxes in the form of a donation, HRMC will be more than happy to receive the additional revenue from you.

jonestheinvestor

Whereas the Laffer curve isn't a load of ideological clap trap at all!

We're in this mess due to successive governments borrowing too much to fund their own ideological clap trap. At the end of the day we're all collectively to blame for believing the nonsense that is regurgitated, I hate to think what will happen next it appears to be a race to stupidity.

littledavesab

Is it all in the chart... the market is happier when she is either not speaking or says nothing (much) . Which is I guess why you chose that chart :)

Aislabie

The single greatest change this country should (and could !) do is to lower the cost of energy by pushing the cheapest possible options and not subsidising any of them. The answer is for now probably gas and oil, the real cost of wind power is very high once the necessary back up is costed in ( Lazards much quoted levelized cost is not relevant) . Amazingly, we actually still have the prospect of more North Sea resources and it is vital that we get out of the way of companies that want to exploit these. Meanwhile we order ( not prevaricate over) new nuclear power stations based on SMR designs from Rolls Royce. SMRs may not even be the most efficient way to get nuclear power but they promise to get it reliably and in an acceptable time. They also, by being locatable nearer to demand, reduce some of the cost of grid changes that accompany the current wind power plans.

If the government signs up for this now the assurance of a credible future energy strategy will take some of the pressure off sterling and the government’s spending plans. It also declares, more than any other single measurement, that government is grounded in reality.

Lochinver

The Equality Trust Charity :

“Using inflation-adjusted wealth data from archive copies of the Rich List, it said the combined wealth of Britain’s billionaires had risen from £53.9bn in 1990 to more than £653bn in 2022. “This represents an increase in billionaire wealth of over 1,000% over the past 32 years,” the report said.

“That we have allowed the very richest few to accrue such a staggering amount of the nation’s wealth since 1990 is a national disgrace,” Wittams said. “The UK’s record on wealth inequality is appalling, grossly unjust, and presents a real threat to our economy and to our society.

“Every year we are invited to celebrate the very richest individuals and families in the UK, while food bank usage continues to increase, 3.9 million children are living in poverty and 6.7m households struggle to heat their homes. That these are two sides of the same coin is very rarely mentioned.”

Its a complex situation Alpha, no doubt.

But this surely cannot be an acceptable state of affairs

Paul2148

28th Mar

I agree with all your points bar immigration.

We’ve created a bloated tertiary education sector that just doesn’t serve the UK economy and many of the kids that attend uni would have been better off being guided into apprenticeships at 18, especially in sectors we now find ourselves with labour shortages.

Let’s face it, most uni leavers aren’t going into 6 figure salaried jobs. Getting into £40-£50k of debt by 21yo just kills aspiration imo. Why would a young person chase that promotion with its increased accountability when they pay 9% of their student loan on earnings above c.£26k,

Right size uni placements, get young people into apprenticeships and close labour shortages.

As for NHS, we cap medical students so supply doesn't meet demand and burden them with loans.

Remove the cap and depreciate the loan as long as they Ramin working within the NHS.

I can’t help but think the above reduces the requirement for migrant labour in crucial industries, whilst providing better life outcomes for homegrown people, possibly even giving them the wherewithal to start families.

FREng

How quickly would a surge in house building lead to a significant reduction in house prices? If house prices fall , the value of existing houses will fall, perhaps leading to negative equity and a slowdown in house sales, with sn impact on the economy.

Will house builders price new houses below current house prices? If supply exceeds demand, will they keep building houses that they can’t sell?

I can’t see an achievable way to provide more or cheaper housing quickly

Paul Walton

The OBR have forecast a 15% increase in house prices upto 2030 despite a forecast rise in mortgage rates. Go figure

intuitive6191

"I can’t see an achievable way to provide more or cheaper housing quickly"

I would agree. There is the possibility however that the definition of "housing" might change. Redundant office space could be repurposed to provide housing of sorts with a change to planning and possibly building regulations. Currently many of these type of conversions divide opinion as to whether they would be acceptable for housing.

Also the trend might continue for smaller accommodation. And there is also the possibility of someone making a breakthrough on modular or prefab building which significantly lowers the cost and/or speeds up construction. Modular building has not achieved mass acceptance despite many years of trying - though there are some signs that this might change.

As for house prices, I would suggest that they follow affordability rather than price. If someone can afford the deposit and monthly payments then they will buy the house.

Housebuilders generally build the number of houses which will deliver the best financial return for the company. They either speed up or slow down depending on costs and if the development competes locally with another developer. It's a well honed skill which perhaps unsurprisingly does not produce the number of houses the Government requires in its various targets. I don't expect the situation will change.

The big unknown is the affordability. Killing off cash ISAs for those saving for a house will not help. A rise in interest rates will really hurt - a recent survey of Mortgage Brokers said that 69% of those brokers surveyed expected interest rates to be higher this time next year.

There are a lot of moving parts in the Housebuilding process and it is very difficult to say what might happen. From an investment perspective, I think that some housebuilders look interesting but I am not investing at the moment.

I forgot to include some info about 3D printing in last post. Interesting article how Australia are developing 3D printing in construction..

https://www.theguardian.com/au...

As far as I can figure Paul so long as money supply (government debt) continues to increase then we will keep having inflation so housing/stockmarkets will only long term go one way same as the last 50 years.

Spring Statement: Reassuringly sensible spending or woeful lack of ambition? Discuss

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Megan Boxall

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