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