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0:00
As the fragile ceasefire in the Middle
0:01
East continues to strain, City AM has
0:04
uncovered financial modeling from the
0:06
Office for Budget Responsibility,
0:08
basically the organization which marks
0:10
the government's math homework, on what
0:12
the fallout of further closure to the
0:14
Strait of Hormuz could be if it goes on
0:17
much longer. Joining us now for his
0:19
Business as Usual debut is our politics
0:22
and economics reporter, Mauricio
0:24
Alencar. Welcome to the studio. Thank
0:26
you. Very pleased to be here. Making my
0:28
debut. Yeah, I'm pleased you found it.
0:31
Um so, we know that the Strait of Hormuz
0:33
has been closed. We know that oil prices
0:35
have gone up. And the question actually
0:38
will be in a few months' time when we
0:40
get to that budget and the pre-budget
0:42
speculation is, you know, are my taxes
0:45
going to go up? You know, is Rachel
0:47
Reeves, the Chancellor, or if she is a
0:49
Chancellor by then, um is she going to,
0:52
you know, keep her spending plans
0:53
intact? And what I've sort of gone and
0:56
looked at is has the OBR ever sort of
0:59
done this before? I've spoken to a few
1:00
economists about this. And actually in
1:02
2024, um Iran and Israel were were sort
1:06
of exchanging fire. And the OBR actually
1:08
started modeling what would happen if
1:11
oil prices went up by 70% and gas
1:13
prices, too.
1:14
What would that happen for public
1:16
finances? And they found that on average
1:19
each year at that point in 2024, the
1:22
government would have to borrow an extra
1:25
23 billion pounds
1:28
every year on average.
1:30
Um
1:31
you know, it's a big big figure. I mean,
1:33
we can talk about the nuances and
1:35
complexities of what that means for
1:37
taxes and headroom.
1:39
So, with that figure, then, how how
1:41
would that how does that fit into the
1:43
overall scale of government borrowing?
1:44
So, the government borrowing is
1:46
obviously, you know, I mean, the size of
1:48
debt right now is is about 200 billion,
1:51
right? It's So, the obviously the
1:52
government borrowing is about 160 to 180
1:56
billion pounds Okay, so so so so it's a
1:58
pretty substantial fraction of that
2:00
>> Yeah, it'd be a massive amount. Yeah,
2:02
yeah, it'd be a massive amount. I mean,
2:03
it's always Talking about public
2:05
finances is always a bit bit, you know,
2:07
a little bit complex because there are
2:10
so many different moving parts and
2:11
different rules and debt rules and
2:13
calculations and rolling forecasts. And
2:15
then all of that is just messy and we
2:17
could talk about it in a nicer, crazier
2:20
podcast. But actually we actually want
2:22
to enjoy what we
2:24
>> [laughter]
2:24
>> I hope not. And so, all this extra um
2:27
borrowing, is is that just due to the
2:30
cost of borrowing going up or is this
2:32
extra state expenditure that they're
2:34
going to have to spend in this case?
2:35
That is all the sort of impacts of
2:38
growth and inflation.
2:40
Um well, particularly growth. I guess
2:42
inflation might have a
2:44
different effect. But
2:46
I guess what what it's just showing is
2:49
um you know, if the government really
2:51
wants to keep its spending rules intact,
2:54
the war is obviously going to be really
2:56
tough to sort of
2:58
keep up with um all those pressures we
3:00
have in the economy. So, And what is uh
3:03
Rachel Reeves's fiscal headroom at the
3:05
moment? Which For for the people sort of
3:07
listening at home who aren't tuned in so
3:09
much to politics, fiscal headroom is
3:11
essentially her emergency fund, right?
3:13
The difference between
3:15
what we take in and what we spend. Yeah,
3:17
so when we talk about headroom, it's
3:19
we're talking about slightly different
3:20
area because that's kind of
3:22
what the government says it it they they
3:24
base their figure on the current budget,
3:26
which is basically rather than the sort
3:27
of capital investment, um it's a sort of
3:30
day-to-day spending. And I know when I
3:33
asked economists, you know, using this
3:34
OBR sort of analysis that's been done in
3:37
the past, what does that mean actually
3:39
today for Rachel Reeves's headroom? And
3:41
they said, well, Rachel Reeves left left
3:44
headroom of about 24 billion pounds. Um
3:48
that's what the figure was um in March
3:50
just as the war broke out. And now the
3:53
headroom has probably been knocked off
3:55
by about 10 billion pounds because of
3:57
debt interest payments being higher.
3:59
We've seen So, you know, yesterday we
4:01
were speaking about borrowing costs
4:03
hitting a sort of multi-year high high
4:06
that we haven't seen in uh 18, 20 years
4:09
or so,
4:10
um
4:11
depending on which part of the curve
4:12
you're looking at.
4:13
>> We're we're above um Liz Truss levels
4:15
now, aren't we?
4:16
We are we are in that territory, which
4:18
is looking really bad and really quite
4:20
scary. What the Chancellor could do this
4:23
year is what we saw at the at the
4:25
pandemic or in other parts of the
4:27
Ukraine war,
4:29
where the Chancellor turns and says,
4:30
"Okay, this year I'm going to miss my
4:33
borrowing target." So, actually
4:35
because the economy is in such dire
4:37
straits, you know, we can't escape the
4:40
energy shock. For this year we'll allow
4:43
the sort of break Yeah, and just suspend
4:45
Yeah, yeah, yeah. So, let's let so that
4:48
we can keep the economy afloat right now
4:50
this year, you know, whether that's an
4:53
energy support package to sort of keep
4:55
inflation down.
4:57
We can do this break.
4:59
I mean, the more the government does
5:00
that to every single shock and depending
5:02
how much it misses its borrowing rules
5:04
by, adds to the debt load, adds to the
5:06
interest costs, and that's just passing
5:08
on the cost.
5:09
>> And it makes it more dangerous to too
5:11
much borrowing at all. I suppose there
5:12
is also the massive looming political
5:14
question at the end of this week of what
5:16
does the local elections mean? And is it
5:19
even going to be Rachel Reeves making
5:21
those decisions? I mean, what what
5:22
chatter are you hearing about about the
5:24
future of the Chancellor at the moment?
5:26
Well, so last week at PMQs, there was
5:29
this quite a sort of funny line, I think
5:31
it was the main line in my opinion at
5:33
PMQs, which was Kemi Badenoch sort of
5:36
targeting Rachel Reeves saying she's
5:38
toast. She's very She's very good at
5:39
that. She's very good at then getting
5:41
Starmer then not to back her. Yeah, and
5:43
and
5:44
I mean, keen readers of various
5:47
newspapers, including City AM, will know
5:49
that the likes of Ed Miliband um
5:52
apparently wants to be uh the
5:53
Chancellor. Um you know,
5:55
>> he seems to have taken himself out of
5:56
consideration for the leadership itself
5:58
and want and they kind of want to make
6:00
it a condition of of backing anyone that
6:02
they they'd make him Chancellor. Well, I
6:03
guess we'll hopefully we'll have
6:05
We'll have to wait and see how um things
6:07
pan out and how things go.
6:09
>> Good to see all these people are in it
6:10
for the right reasons. Just finally, uh
6:12
we have a new piece of data out today
6:14
from the group Moneyfacts on um mortgage
6:18
bills that they're expecting uh to see
6:20
jump due to Trumpflation if this stuff
6:23
gets any worse. Yeah, so this fig these
6:25
figures are based on the Bank of England
6:27
scenarios from last week. And what that
6:31
Bank of England Monetary Policy report
6:33
already said that mortgages each month
6:36
are set to rise by an average of 80
6:39
pounds. So, people already sort of
6:41
feeling the effects. And what the Bank
6:43
of England did was they set out three
6:44
scenarios of what the sort of benign,
6:47
middle scenario, I guess, and uh the
6:49
worst-case scenario of the Iran war,
6:52
what that meant for interest rates. The
6:54
worst-case scenario, interest rates
6:56
would go up
6:57
basically back to the highest peak the
6:59
peak that we saw after, you know, after
7:02
last week's well well over 5%. Yeah, and
7:06
what that would mean for mortgage
7:07
payments is mortgage payments, wait for
7:10
it, going up by an average of 300 three
7:14
Sorry, 3,000 I built up at 3,000 pounds
7:19
um more than 3,000 pounds a year. So, um
7:22
really hitting the kind of middle class
7:25
kind of homeowners, people who've just
7:27
bought their homes on variable
7:29
mortgages.
7:31
Um and that's in the worst-case
7:32
scenario. Even the most the best-case
7:34
scenario, I mean, we're already seeing
7:36
80 pounds a month increase
7:38
um a month. That, you know, it's about
7:41
1,000 pounds a year. Um Well, we always
7:44
like to leave you with positive news in
7:47
the morning on this show. Yeah, I think
7:49
that we we we're very optimistic and uh
7:51
possibly not about mortgages. Mauricio,
7:53
thank you very much for joining us. I'm
7:55
sure we'll have you back soon,
7:56
especially uh as these pretty wild
7:59
elections start to unfold later in the
8:01
week.
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