Hedge Funds, Free Ports and the Tories Coronavirus Budget
BUDGET TIME: ECONOMIC CONSEQUENCES OF MR SUNAK
WHAT can we expect from Chancellor Rishi Sunak’s first Budget on 11 March? The obscure Mr Sunak, you will remember, enjoyed his instant and unexpected elevation to the Treasury’s top job after Dominic Cummings engineered the defenestration of Sajid Javid.
The former Chancellor got the chop because he was unwilling to fire his personal political advisors at Cummings’ behest, the better to let Number 10 set the Budget rules. Some took Javid’s resignation as personal pique but there was a deeper political meaning.
Since the Tories came to power in 2010, the UK National Debt has near doubled to circa £2 trillion. The City of London was happy to advance the cash and rake in the interest (courtesy of the British taxpayer) if only because global low interest rates mean there are few safer ways of making a predictable income. But that extra trillion in lending is a hefty sum and the bankers and fund managers are anxious that any UK government has the balls to continue to prioritise austerity measures, so as to meet the interest charges. That was the job of Sajid Javid, one of the few ex-City bankers to hold the keys to Number 11 Downing Street.
But that in itself proved a problem. The Boris Government is about spending, not austerity. Boris & Co. represent the interests of the hedge funds who have had a lean time recently, as austerity and a slow economy reduced the opportunities to gamble in financial markets. The Hedgies are also pro-Brexit because ending EU regulation will beef-up their profits. The last thing they wanted was for Sajid Javid to continue to act as a conservative brake on public spending.
On becoming Chancellor, Javid announced he would increase borrowing for spending on infrastructure, but he intended to offset this by curbing revenue spending and brining the current (as opposed to capital) budget into balance by 2023. That signalled more austerity if not more tax rises. Why? Because Javid’s job was to ensure there was enough tax revenue to pay the interest on the National Debt.
That did not make the Hedgies or Dominic Cummings happy. So Sajid Javid had to go – and go he went. The historic import of this means the City has lost its influence over the UK Government – a truly amazing development. To date, Downing Street has refused to confirm that Mr Sunak will stick to Javid’s 2023 target to balance the books. Sunak may not come out formerly and abandon the classic Treasury doctrine of balancing the books but expect him to kick it decisively into the political long grass.
Best prediction: Sunak (a former hedge fund manager) will announce he still intends to “balance the budget” – to keep the City quiescent – but on a rolling, five-year basis, pushing back the target date every year, indefinitely. He might also create wriggle room by introducing a target range of “plus or minus 1 per centage point” – which small but is actually a lot. And you can live in the plus range forever.
A CORONAVIRUS BUDGET?
The big Budget question mark is the emergence of the potential economic shock from coronavirus. This might force Sunak to offer an emergency Budget now and come back with a second one in the autumn – a likely scenario. According to The Guardian, a Number 10 source said that the March Budget would “prioritise economic security” in the face of the threat from the coronavirus. And according to the BBC, the Chancellor has “ordered Treasury officials to work up plans to support the public health response, businesses and the economy”.
Given the worst-case scenario is for up to a fifth of the UK workforce to be absent from work, that could add up to a major Budget boost for the economy. And what better way to dump Javid’s spending rules than to declare the medical emergency trumps everything.
Result: the independent (but economically conservative) Institute for Fiscal Studies is predicting that Government borrowing will increase to around £63bn in financial year 2020-21. That’s £23bn more than previous forecasts. I dare say, the outrun may be even higher if the virus turns into an epidemic. (All that extra interest should keep the City happy for a bit.)
We can infer some other Budget changes from the plethora of Treasury leaks over the last few days. In particular, it looks as if there will be the first rise in fuel duty since the Tories took office in 2010. Of course, Boris flatly denied during the December election that fuel duty would be touched – but that’s tantamount to a guarantee of the opposite.
However, 18 MPs from the Blue Collar Conservatives group have written to Sunak warning that “clobbering” voters by increasing fuel duty would “send the wrong message”. Instead, Sunak may decide to cut back on subsidies for so-called “red diesel”, which makes up 15% of all diesel sales and attracts 11.14p per litre in duty, compared with the standard charge of 57.95p. The subsidy costs the Treasury £2.4bn a year… mind you, any rise in diesel for commercial users will hike retail and house building costs.
There are other ways of raising cash for the Treasury. We might see Channel 4 being flogged off and then there is the proposed new digital tax on giant tech (mostly American) companies. In the last Budget, the then Chancellor Philip Hammond proposed a 2% turnover tax for digital businesses with global revenues of over £500m. This could raise half a billion per annum. But the Trump administration is opposed. We’ll see next week if Sunak and Boris have the balls to stand up to the White House.
Finally, Mr Sunak’s pet idea is Free Ports – massive tax cuts and deregulation inside designated zones associated with ports and airports. In theory FPs are supposed to attract foreign investment and create jobs. In practice they shift jobs and let multinationals avoid tax. Expect him to wax lyrical about Free Ports. The Hedgies love them.