One of the first things on Rishi Sunak’s to-do list is the matter of whether next week’s fiscal plan should go ahead. This is one of the easier decisions the new prime minister has to take. The fiscal event should certainly be delayed.
To be sure, there are arguments in favour of going ahead with the package of tax and spending announcements as planned on 31 October. The problem is that none of them are especially good ones.
It is said the Treasury needs to clarify its intentions on Monday so that the Bank of England knows what is happening to fiscal policy before it sets interest rates on Thursday next week. Yet the thrust of tax and spending policy has already become crystal clear in the 11 days since Jeremy Hunt was appointed to succeed Kwasi Kwarteng as chancellor.
Most of Kwarteng’s mini-budget has been ditched and Hunt has indicated that there are big spending cuts to come. Reducing the budget deficit will be a priority for the new government. Threadneedle Street would need to be spectacularly tin-eared not to grasp that policy is going to be significantly tighter than it was assuming when it last set borrowing costs in September. The odds on the Bank’s monetary policy committee plumping for a 0.75 percentage point increase rather than a 1.0 point rise have already shortened.
The other argument in favour of sticking to a Halloween announcement is that not doing so would unsettle the markets, putting upward pressure on government bond yields and mortgage rates.
But the markets are a lot calmer than they were when next Monday’s fiscal plan was brought forward from the date originally planned in late November. That was a panic measure when Liz Truss’s government was under maximum pressure.
Obviously, Sunak cannot put off the fiscal statement indefinitely, but many of Truss’s problems stemmed from the fact that she acted hastily without thinking through the implications of her tax and spending decisions.
The new prime minister made the case for a longer period of reflection in his speech outside 10 Downing Street. He talked of the country facing a profound economic crisis, of how mistakes were made and of difficult decisions ahead. He also pledged to deliver on the Conservative party’s 2019 manifesto promises, including a stronger NHS, better schools, safer streets and control of borders.
The words “difficult decisions” are Westminster-speak for spending cuts. Meeting the 2019 manifesto commitments means spending more. It may be impossible for Sunak to square this circle but how he goes about it will affect the performance of the economy, effect the lives of every citizen and shape politics between now and the next general election.
The UK has a chancellor in position for less than a fortnight, a prime minister appointed only today and a fiscal event of profound importance due in less than a week’s time. Only an incurable optimist would assert that delay can eliminate the possibility of policy error altogether, but the more time spent thinking about it the better.
Not a great look for HSBC
The latest results from HSBC are a textbook example of how banks do well in times when interest rates are going up. Profits rose by a third in the quarter ending in September because the increase in rates paid to savers was smaller than the jump in borrowing costs paid to lenders. As is always the case, the net interest margin widened.
For HSBC – and for all the other big UK banks – rising profitability in the current circumstances is most definitely a double-edged sword. It is not the greatest of looks to be coining it in at the expense of hard-pressed borrowers during a cost of living crisis, especially when the government is desperate for cash.
Ultimately, rising interest rates are bad news for banks if they lead to a recession in which loans go sour, but the temptation for Sunak to impose a windfall tax may be too powerful to resist. When he was chancellor, Sunak said he would compensate the banks for the increase in corporation tax from 19% to 25% by cutting the bank levy from 8% to 3%, saving them £4bn a year.
Will this reduction now be shelved? It looks a reasonable bet. As Louis XIV’s finance minister Jean-Baptiste Colbert once said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” The banks look ripe for plucking.
