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 226: The Bank of England Comes to The Rescue!

 IN a very uncommon move, the Bank of England has committed to spending £65 billion over the next two weeks in the UK Bond Market, in order to counter the effects in the market since the mini-budget last Friday. 

As one Conservative MP said (albeit someone who is not a Trussite), “The Bank of England is saving the UK economy from the policies of the UK Government.”

Since the mini-budget on Friday, which announced tax cuts without any clear indication of how these would be paid for, interest rates on UK Government borrowing lept from around 1% in January to nearly 5% yesterday. This is due to lack of confidence in the government’s policies.

The first few paragraphs of this article (https://news.sky.com/story/bank-of-england-takes-action-to-restore-orderly-market-conditions-after-mini-budget-panic-12706827 ) explain what the Bank of England did yesterday:

“The Bank of England has launched a temporary bond-buying programme as it takes emergency action to prevent "material risk" to UK financial stability.

It revealed that it would buy as many long-dated government bonds as needed between now and 14 October in a bid to stabilise financial markets in the wake of the mayhem that followed the government's mini-budget last Friday.

In addition to the plunge in the value of the pound, it has also seen investors demand a greater rate of return for UK government bonds - essentially IOUs.

That is because the level of borrowing required to fund the government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which  government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which immediately questioned the sustainability of the government’s finances.”

This article (https://www.theguardian.com/business/2022/sep/28/what-bank-of-england-doing-pound-dollar-uk-economy-interest-rates-bonds?CMP=Share_iOSApp_Other ) has a good more advanced explanation of the aims of the Bank of England’s actions.

No 225: Useful place to see live market data

 IF you want to see live changes in stock markets, exchange rates, bond rates etc (and who doesn't in the current economic situation), this has a good dashboard: https://www.marketwatch.com 

You can also click through to see charts. For instance here is the "Rates" dashboard which tells us about different interest rates governments are having to pay on their 10 year bonds:

If you click on a certain country's bond, you get more information including charts. Of course, what we all want to see at the moment is what's happening to UK government borrowing:

It's going up today, but it is even more striking to see what's been happening just in the last five trading days.

As you can see, the rate has increased by almost 1% since last Tuesday.

If you want to know why this is happening, read this previous post: 

https://spoteconomics.blogspot.com/2022/09/no-223-ers-irs-government-borrowing.html