Introduction: Borrowing rises, but Hunt gets £17bn boost for tax cuts
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Britain borrowed almost £15bn to balance the public finances last month, more than expected, new figures show.
However, borrowing so far this financial year is nearly £17bn lower than forecast – giving room for some policy changes in tomorrow’s autumn statement.
Public sector net borrowing excluding public sector banks rose to £14.9bn in October, the Office for National Statistics reports. That’s £4.4bn more than in October 2022, and also more than September’s £14.6bn.
Economists had expected a smaller deficit last month, of around £12bn.
It’s the second highest October borrowing since monthly records began in 1993, after October 2020 (when Covid-19 pandemic spending pushed the deficit up to almost £20bn).
Public sector net borrowing, excluding public sector banks, in October 2023 was £14.9 billion.
£4.4 billion more than in October 2022 and the second highest October borrowing since monthly records began in 1993.
➡️ https://t.co/3pz6P3drkT pic.twitter.com/9e5524XQ9g
— Office for National Statistics (ONS) (@ONS) November 21, 2023
This takes borrowing this financial year (since April) up to £98.3bn, which is nearly £22bn more than a year ago.
But, despite some upward revisions to borrowing over recent months, it is still £16.9bn less than the Office for Budget Responsibility (OBR) forecast in March 2023.
That confirms that chancellor Jeremy Hunt does have some more ‘headroom’ to raise spending or cut taxes while sticking to the UK’s fiscal rules, when he delivers the autumn statement at 12.30pm on Wednesday.
Hunt has responded to the news, saying:
“We met our pledge to halve inflation, but we must keep on supporting the Bank of England to drive inflation down to 2%. That means being responsible with the nation’s finances.
“At my Autumn Statement tomorrow, I will focus on how we boost business investment and get people back into work to deliver the growth our country needs.”
Yesterday, prime minister Rishi Sunak hinted that business taxes could be cut to boost economic growth.
Sunak promised to reduce the tax burden “carefully and sustainably” and “over time”, stressing that he is focused on “the supply side” of the economy.
Also coming up today
The Treasury Committee will question the Bank of England governor, Andrew Bailey, and members of the Monetary Policy Committee (MPC) today, about inflation and economic data.
The committee are likely to quiz witnesses about the latest wage growth and unemployment, and if there’s a risk the Bank has overtightened monetary policy….
Last night, Bailey said there was more work to do to bring inflation back to its 2% target – and there remained a risk that borrowing costs might need to increase in the coming months.
The governor declared:
“Let me be very clear: it is far too early to be thinking about rate cuts.”
The agenda
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7am GMT: UK public finances for October
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10.15am GMT: Treasury committee to question Bank of England governor Andrew Bailey on inflation and economic data
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1.30pm GMT: Canadian inflation rate for October
Key events
Will Bank maintain rates at 5.25%?
Q: So all other things being equal, with inflation at 4.6%, you’ll keep rates at 5.25% for an extended period?
Andrew Bailey says his view is that it is sensible to keep rates where they are, as the Bank did three weeks ago.
But he repeats that risks are to the upside.
MPC member Catherine Mann (one of three hawks who voted to raise rates this month) argues that rates should be higher, due to price pressures next year.
She tells the Treasury Commmittee that BoE surveys show firms expect to raise prices by 4.5% to 5% next year, or up to 6% in the services sector.
Those firms expect to offer wage rises of 5% and increase workforces by 1.2%, Mann says.
So they’re looking for next year to be more robust than it is now.
More tightness now is important, Mann insists, to cement the Bank’s commitment to the 2% target.
Harriett Baldwin then reminds the Bank of England governor of the analogy used by chief economist Huw Pill in August.
Q: We’ve reached Table Mountain, in terms of interest rates?
Andrew Bailey says Table Mountain is qite a good analogy, because:
There is a case now, I personally think, for holding the rate where it is… for an extended period.
But the risks are to the upside too, Bailey adds.
He cites two risks.
First, that domestic inflation remains high, partly due to inefficiencies in the jobs market leading to higher wages.
Second, the risk that turmoil in the Middle East drives up the oil price. So far, that hasn’t happened, but it could happen “if there was a wider regional engagement”.
Bailey: Fall in inflation was good news, but largely expected
Treasury Committee chair Harriett Baldwin begins by asking the Bank of England about the drop in inflation in October, “to 4.7%”.
Q: Do you agree with the market expectation that you have done enough on interest rates to bring inflation down to 2% in the next year?
Andrew Bailey apologises for correcting Baldwin, but inflation was actually 4.6% in October (Baldwin may have been using the newer CPIH measure, rather than the CPI measure which the Bank targets).
Bailey says the fall (from 6.7% in October) was “obviously good news”, but news which was largely expected.
Bailey explains the Bank expects some more of last year’s surge in prices to unwind in the next few months, including on food prices.
But beyond that, further falls in inflation will depend on the unwinding of second-order effects (where inflation expectations push up wages).
The BoE governor warns there is a “weakening picture of demand in the economy”, while in the labour market wages are still well above levels consistent with the 2% inflation target.
But, Bailey says he thinks the UK is on target to come back to 2%.
[Reminder: Six of the MPC’s nine members voted to leave interest rates on hold this month, while three voted for a rise to 5.5%].
Bank of England appears before MPs
Andrew Bailey, governor of the Bank of England, is about to testify to MPs on the Treasury committee.
He’s being accompanied by Sir Dave Ramsden, Deputy Governor for Markets and Banking, and two external members of the Monetary Policy Committee – Jonathan Haskel and Catherine Mann.
The Committee say:
Members of the committee are likely to ask witnesses for their assessment of recent data on wage growth and unemployment, and how these might feed into future decisions on inflation. The panel may be questioned on whether they believe there is a risk the Bank has over-tightened monetary policy as well as whether they have any concerns about the quality of labour market data on which their decisions are partly based.
The Committee may also choose to question the witnesses about the prospect of changes to the Bank Rate and their individual voting records.
Three in five Brits think closing tax loopholes should be a priority in the autumn statement, a new poll conducted by Tax Justice UK has found.
This rises to nearly three in four of those that voted Conservative at the 2019 general election.
However, only one in four think that cutting taxes, rather than spending on public services, should be a priority for the Chancellor.
Rachael Henry, Head of Advocacy and Policy at Tax Justice UK, explains:
‘Britain has many extremely wealthy individuals and companies that are not paying their fair share. Britain’s tax code is littered with unfair loopholes that benefit the super-rich, while the rest of us are struggling to pay the bills.
The public don’t want to see tax cuts. They want investment in public services so they can see a GP or send their kids to school without fear of classrooms collapsing.
The government can raise desperately needed cash for the NHS and schools by making those that can, pay their fair share of tax. If they choose to leave this cash on the table, it’s clear they have chosen the side of the wealthiest, rather than standing with the majority in Britain trying to get by.’
New research from Tax Justice UK this uncovered over £7 billion available to the Treasury if just five tax loophole areas were closed.
They are:
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End fossil fuel subsidies for oil and gas companies to raise £4.4 billion a year
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2. End classic car exemption to raise £130 million a year
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3. End video games tax relief to raise £197 million
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4. Close capital gains tax loopholes to raise £1.1 billion a year
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5. Close inheritance tax loopholes to raise £1.7 billion a year
Worryingly, government borrowing in October alone was higher than the independent Office for Budget Responsibility had expected.
The OBR had inked in borrowing of £13.7bn for last month, below the £14.9bn which the government actually borrowed to balance the gap between tax receipts and spending.
That breaks the recent trend of borrowing coming in below the OBR’s forecast, which has given Hunt £16.9bn of wiggle room.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Recent months had seen public sector net borrowing come in consistently below the OBR’s forecast, but October broke that pattern.
A deficit of £14.9bn compared with the £13.7bn deficit predicted by the OBR in March and was £4.4bn higher than the deficit in October 2022. The overshoot was more than accounted for by higher-than-expected public spending, notably on debt interest payments. These were the highest for an October since records began. Monthly tax receipts also exceeded the OBR forecast, but to a lesser extent.
Back in the City, UK meat producer Cranswick has lifted its profit forecast this morning, after passing on higher costs to customers.
Cranswick says it expects to hit the “upper end of current market consensus” for the current financial year, ending on 30 March.
Revenues are up 12.3% this year, due to “effective inflation recovery” – the passing on of higher pig prices – and “resilient volume growth”.
Cranswick, which produces sausages, bacon and chicken products, as well as houmous and pet food, says that the broad-based cost inflation it experienced has now slowed.
IEA: Middle East crisis puts oil market on edge
The oil market is “on edge” over the latest crisis in the Middle East, the head of the International Energy Agency (IEA) has warned.
IEA chief Fatih Birol told an energy conference in Norway today that the Israel-Hamas war has not currently had a significantly effect on market prices.
But he warned that this could change, if the conflict escalated.
Birol said:
If one or more of the oil producing countries in the region is directly involved in the conflict, we may see the implications of that.
Brent crude rose towards $94 per barrel in mid-October, after the Hamas attack of October 7. But it then started to dip, falling to $77/barrel towards the end of last week.
Capita to axe 900 jobs in cost-cutting drive
UK outsourcing firm Capita has announced it will cut around 900 jobs worldwide as part of a “significant cost reduction programme”.
The cuts will mainly fall on indirect support function and overhead roles, as Capita tries to cut costs by £60m per year.
Capita, which runs crucial services for local councils, the military and the NHS, employs 43,000 people, mostly in the UK but also across Europe, India and South Africa.
In the UK, it has offices in London, Manchester, Sheffield, Leeds, Edinburgh and Belfast, while its European operations are based in the Republic of Ireland, Poland, Germany and Switzerland.
Jon Lewis, Capita’s CEO, says:
“We are, today, announcing the accelerated delivery of the efficiency savings announced in our Half Year Results with a £20m increase in overhead cost reduction to £60m on an annualised basis from Q1 2024.
As part of the organisational review which underpins the programme we are announcing today, we continue to identify further areas of cost efficiency and will pursue these during 2024.”
Shares in Capita have rallied 9% in early trading.
October’s public finances are no barrier to (some) tax cuts, writes Investec economist Ellie Henderson.
Henderson also explains how inflation added to government spending, and revenues, last month:
Within the headline number, central government expenditure was £13.7bn higher than in October 2022. £4.5bn of this lift comes from added expenditure on net social benefits, largely reflecting the inflation-linked uprating of benefits. Interest payments were also £1.1bn higher than last year, as the index-linked gilt stock is uprated by RPI inflation.
Slightly offsetting this though was a £2.6bn fall in expenditure on net social benefits where falling wholesale energy prices resulted in reduced spending on energy support schemes this October relative to last year.
On the other side of the balance sheet, central government receipts were £2.5bn higher than a year ago. VAT receipts once again received a boost (+£1.2bn) due to the increase in the price level over the year, while income tax receipts (+£1.1bn) were healthy reflecting the tight labour market.