24 November 2020
The Chancellor of the Exchequer is set to conclude the government’s spending review and unveil departmental budgets for the next financial year on everything from education to defence. His choices will help to define the government’s post-pandemic and post-Brexit priorities. On one hand, the pandemic has opened the public purse like few other events in history: the budget deficit is expected to exceed £400 billion in the current fiscal year, and the UK’s debt-to-GDP ratio recently passed 100%. On the other hand, the Conservative Party perceives one of its traditional roles to be the control of government spending, and the Chancellor himself has described this as being a “sacred duty”.
The momentum is all on the side of increased expenditure, however. Central bankers all over the world are urging politicians to continue spending, fearing a repeat of the post-Credit Crunch austerity that is now believed to have led to excessive social inequality and, from there, to the political populism that threatens to constrain global trade and slow economic growth. The cost of funding government debt is close to zero, and central banks stand ready and willing to acquire any amount of government debt that needs to be issued or rolled over. The risk of too much debt, leading to higher inflation, is generally thought to be worth taking. Even before the pandemic, the British government had already announced the biggest increase in departmental spending in 10 years, prompting the debt rating agency Moody’s to downgrade its outlook for the UK’s creditworthiness.
Recent announcements also suggest the chequebook will remain open. Last week the Prime Minister announced a £12 billion plan for a “green industrial revolution” to boost the UK’s environmental credentials, and a further £24 billion defence spending over four years, instead of the one-year pledge sought by the Treasury. The Chancellor is under pressure to extend a £20-a-week uplift in welfare payments, and has also promised multi-year spending uplifts on health and schools. The government has already U-turned on its decision to cease to provide free meals to the poorest schoolchildren, and decided to extend the furlough program after previously insisting it would end.
Moreover, some of the increased spending can be justified on the grounds that it is required to replace the fiscal, and physical, infrastructure that came with membership of the EU. The new state development bank, also announced last week, is required to fill the hole left by the UK’s departure from the European Investment Bank, which provided funding in the past for projects such as the Channel Tunnel and Crossrail. The bank will be busy: it will help fund infrastructure projects as part of the Prime Minister’s mission to level-up neglected regions of the country (£100 billion of related spending has already been announced). The government’s initial investment of $1 billion to rescue the US-based satellite operator OneWeb (announced on Friday), in partnership with India’s Bharti Global, is required to replace Britain’s role in the European Union’s Galileo global positioning system.
The combination of the pandemic, Brexit, and changing political priorities has temporarily opened the floodgates to more spending, though the result could well be a long-term increase in the size of the state, and its debt burden. Talk about raising taxes will probably remain just talk, for now.
Rolls-Royce Holdings came up in a parliamentary debate last week, connected with a strike over plans to shift employment to Asia. The strike means that Rolls-Royce may miss a deadline for producing a new component for the UltraFan engine, disqualifying it from £50 million in government financing. An opposition MP claimed that Rolls Royce is lobbying the government to extend the production deadline on the grounds that the delay had been caused by the coronavirus outbreak, but asked that the request be refused in order to force the company into union negotiations. Rolls-Royce plans to cut as many as 9,000 jobs, as its business of building and repairing wide body jet engines has been hit by the collapse in global air travel.
BlackRock Inc. is to buy equity-index provider Aperio Group LLC in an all-cash deal for $1 billion. Aperio, part of the 'direct-indexing' industry, helps build custom portfolios and indexes for wealth clients, that can be customised to exclude certain stocks or have more or less exposure to certain sectors. BlackRock has been looking for ways to expand its reach over the wealth management industry and plans to operate Aperio as a separately branded team within its wealth advisory business.
Potentially faulty Takata air-bag inflaters has led to General Motors Co. (GM) to recall 5.9 million SUVs and pickup-truck models that includes some of its best selling models from the 2007 to 2014 range. The National Highway Traffic Safety Administration (NHTSA) says a design flaw can lead to the air-bag inflaters to deteriorate over time, putting them at risk of exploding during a crash and sending shrapnel-like metal fragments into the cabin. GM had tried to argue that evidence from an independent evaluation showed the inflaters didn't need to be replaced and had lobbied the NHTSA not to order the recall. The agency has denied the request and fixing the problem could cost GM more than $1 billion.
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