No 233: Watch this space...

JUST been announced - some time this afternoon the new Chancellor, Jeremy Hunt will be making more changes to the mini budget of a few weeks ago. 

This is a bringing forward of a bringing forward of the government's "medium term" fiscal plans. Originally they were going to be revealed on Nov 23rd, then Oct 31st, and now, at least partially, today. The main reason for this is probably to try to calm down markets, especially for UK bonds and for Sterling exchange rates.

What do you think will be announced? Most commentators believe that the 1p cut in basic income tax will be postponed by a year. Other tax cuts could also be reversed, such as that on VAT for overseas visitors. Might there be something brand new? Some have mentioned a "windfall" tax, most likely on energy producers but maybe even banks. What is certain is that very little will be left of the measures from a few weeks ago that so strongly shocked the economy.

No 232: Busiest Day Ever?!

 SO MUCH news, so many events today in the UK Economy. Here is a rundown of them with links to BBC news stories.

Some good news today - UK unemployment fell slightly to 3.5%. However, the main reason for this seems to be due to a continuing trend of people leaving the workforce and joining the economically inactive due to long term illness such as Long Covid. Meanwhile, vacancies are still high (bad for firms looking for workers) and wage rises are well below inflation on average (bad for workers!).
https://www.bbc.co.uk/news/business-63204333 

The Bank of England took further action in UK bond markets today. They do not tend to give warnings irresponsibly, so their statement today that there is "a material risk to financial stability" is a worying piece of possible understatement. However, this seems to have been contradicted later by the BofE then saying that they will not extend their action beyond the previously set deadline of Friday. This worried people too!
https://www.bbc.co.uk/news/business-63211743

At the same time, Kwasi Kwarteng (the Chancellor) was receiving a serious grilling in the Houses of Parliament from other politicians. He defended his plans, saying he was "all about growth" and that the IMF agreed that his actions would lead to more of it. This does not seem to tell the whole story of what the IMF said today. A more accurate version is that the IMF did say that the Truss government plans would bring some short-term growth to the UK, but that the measures also endangered even more inflation by cancelling out the effects of interest rate rises by the Bank of England.
https://www.bbc.co.uk/news/business-63206733

Who knows what tomorrow will bring?

No 231: More market turbulence

 THE Bank of England are upping their buying of UK government bonds today out of continued fear that changes in the market may have huge negative consequences especially for pensions.

Here is a summary from the BBC:

Follow the story live here: https://www.bbc.co.uk/news/live/uk-63212398 

No 230: Best Summary of UK Government Finances and Economic Situation

THIS article (https://tinyurl.com/3mhprbkh) is essential reading. It predicts what the Office For Budget Responsibility (OBR) may be going to say about the government's tax cuts and the impact they will have on the government's finances. But it also places this in the wider context of other current economic events.

This is the most comprehensive summary I have seen of this - make sure you read it!

No 229: OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget

 USEFUL for all of us, but particularly for Upper Sixth students just starting to look at Public Finances in their Macro classes, is this article from the Guardian: https://tinyurl.com/mr3dnmt8 

It is important to understand what is meant by a "hole" in the finances. This does not mean there is an extra £60-70bn of borrowing planned; it actually means that the government provided figures might not actually add up, with £60-70bn for which no information has been given yet.

Here is a key quotation from the article that summarises the government's options:

The government's response would be that none of these measures might be necessary, if their actions lead to the 2.5% economic growth they are aiming for. Achieving this growth target therefore has huge significance for not only improving the government's finances, but also in determining the political future of the Truss administration.

No 228 - Where Newspapers Are On The Political / Economic Spectrum

 SINCE the whole point of this blog is get you reading more newspaper articles about Economics, I thought perhaps it might be useful to write a post about where different UK newspapers would be placed on the policitical / economic spectrum. It's always useful to know the ideological background and possible biases when you read an article.

Here's an illustration I made to try and show this:

As you can see, of both the "serious" broadsheet and the tabloid papers, most are right of centre and more supportive of the free market than government intervention.

The Economist is interesting - it pronounces itself both "liberal"in Politics (which makes it left of centre) and "liberal" in Economics (which makes it more free market than interventionist). This unique perspective is just one the reasons why it so worth reading. Don't forget to sign up for your free subscription if you are a CLC student!

Of all the broadsheets, the Guardian is also the only one whose online articles can be accessed for free, which might explain why I tend to favour them......!

No 227: Bonds - the basics

 FOR those of you just starting Economics, or those who just need a recap, here are some basics about government bonds.

Often, especially during crises, government spending is greater than the tax revenue it is receiving. In such a case, it needs to borrow money. It cannot just go to a bank to get a loan like ordinary people do. Instead, it announces to the bond market that it needs to borrow, and issues bonds at an interest rate high enough to attract investors.

A bond is a piece of paper that works like a receipt (or used to be, they are electronic now).

Any bond contains the following information: 

• How much money the bond is worth (i.e. how much is being lent to the government).
• When this money will be paid back to the lender by the government.
• In the time before this, how much interest the lender will receive per year from the government.

This diagram shows how this works with a 10 year UK bond, if its yield were 5% :

 

As you can read in previous posts, the current problem with bonds in the UK is that markets are worried by the recent government plans for tax cuts and for keeping energy bills low. Investors are concerned how/if these policies will be paid for,  so they have more doubts about buying UK government bonds (i.e. doubts about lending their money to the UK government). Therefore, they are asking for a higher interest rate in order to buy them - the 10 year bond rate was around 1% in January, and rose to 5% before the recent Bank of England action (see previous post).