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This might be the calm before the storm.
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The final stretch of a summer holiday
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that we might look back on as heady days
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before things turn very nasty indeed.
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Welcome to the week in business with me,
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Yesterday in this very room, I
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interviewed the prime minister, the
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chancellor, and the business secretary
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all lined up right in this studio. The
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video will be released soon and it's an
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interesting one because much of our
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conversation focused on how markets work
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and how they respond to signals. Oddly,
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the PM chancellor and business secretary
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asked me lots of questions. Questions
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about how a financial crisis could come
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about and I did my best to explain to
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them the situation of 2008 and the
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situation we face today. Now, all right.
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My three political guests were
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representatives of the UK Children's
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Parliament, a charity whose work we were
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supporting by having some of their
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leading cabinet ministers come into City
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AM. But I tell you what, they were
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asking the right questions, and their
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grown-up counterparts should be asking
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the same ones. My junior politicos
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yesterday asked me to explain the bond
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market, and I think I came out of that
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one okay. I basically told them that it
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comes down to trust and risk. Lenders,
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investors must have confidence that
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governments, nations will meet their
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obligations. If that trust is shaken or
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in doubt, investors will demand a higher
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premium in light of the heightened risk
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of holding UK guilts. In that scenario,
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the cost of government borrowing spikes
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with huge consequences for the public
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finances. In a worst case scenario,
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investors may decide that they simply
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didn't hold UK debt and a sell-off gets
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underway. We'll return to that, but
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let's look at the current state of play.
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And this week, the yield or interest
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paid on the UK's 30-year bond rose to a
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near 27-year high. The climb in
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borrowing costs just in recent months
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has increased the cost of financing the
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UK's debt mountain to a staggering 100
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billion pounds a year. The markets are
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losing faith that the government will be
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able to marshall the forces necessary to
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restore the health of the economy.
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Instead of solid growth, declining
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inflation and sound public finances, the
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bond market can see what the rest of us
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can see. Structural weaknesses in the
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economy, poor confidence, painfully low
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growth, stubborn inflation, a 50 billion
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pound black hole in the public finances,
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and a governing party whose MPs will not
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countenance any spending cuts. If a
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crisis erupts, we will be able to look
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back and say the warning signs were
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clear. Last week, a number of
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heavyweight economists broke cover and
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sounded the alarm. Professor Jaget
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Chada, who recently stepped down from
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running the National Institute for
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Economic and Social Research, the UK's
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oldest economics think tank, warned that
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the UK economy was at risk of collapse.
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He told Liam Halagan's podcast that our
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situation is as perilous as the period
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leading up to the IMF loan of 1976 when
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Britain had to be bailed out. He said he
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could imagine such a catastrophe
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happening again, at which point we will
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not be able to roll over our debt. We
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will not be able to meet our pension
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payments. Benefits will be hard to pay
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out as any rescue package would come
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with the requirement to slash public
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spending in much the same way as
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austerity was imposed on Greece after
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its own crisis. His concerns were echoed
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by Andrew Sentence, a former member of
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the Bank of England's monetary policy
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committee, who also said the situation
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today reminds him of the crisis of the
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1970s. He said that like Chancellor
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Dennis Healey back then, Rachel Reeves
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today has massively boosted public
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spending, borrowing, and taxes. He added
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that unless these policies are reversed,
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we are heading for an economic crash. In
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truth, things are very different now,
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and the chances of the UK going capinand
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to the IMF are remote. But that doesn't
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mean the problems aren't real or that
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this government couldn't make them
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worse. The budget is coming and we know
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it's going to make last year's tax
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raising event look like a pleasant
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memory. Not least because Rachel Reeves
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has appointed the perfect man for the
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job as her point person on this year's
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budget, Treasury Minister, Torston Bell.
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This is a man who has never seen a tax
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he didn't want to raise. In his previous
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life as a labor policy adviser and as
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head of the Resolution Foundation think
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tank, he has advocated hiking capital
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gains tax, raising the dividend tax,
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raising income tax, cutting pension and
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ISER allowances, hitting the
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self-employed with national insurance,
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lowering the VAT registration threshold
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to Ā£30,000, hiking council tax,
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increasing inheritance tax, and
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scrapping entrepreneurs relief. This is
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the man Reeves has asked to cook up some
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revenue raising ideas.
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He's also previously called for the
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introduction of national insurance on
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landlords rental income and lo that very
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story appears in today's papers. You can
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bet your bottom dollar that Torston Bell
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is salivating at the task he has been
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set and you can bet that the bond market
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will take a dim view of a budget that
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simply seeks to extract more money from
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people and businesses. So this crisis
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will come to a head maybe 6 months from
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now, maybe a year, maybe three years and
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it will bring pain and hardship. Tax
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increases will buy the government
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sometime at a high price, but only
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radical reform to our outofc control
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public spending will reassure the world
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that we understand the gravity of the
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situation we face. That's it from me
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this week. Stay up to date and in the
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know with the city app and on
