UK scales debt mountain
Forecasting is difficult enough in normal times. Britain faces three great uncertainties in the shape of covid-19, Brexit and relations with china.
the decision to ditch Huawei means that ‘global Britain’ optimism about deeper trading relations with china potentially is in jeopardy.
as the People’s republic accounts for 19pc of global gDP, and almost everything we own has chinese content, that’s a big wound.
the impossibility of predicting the covid-19 economy is evident from the office for Budget responsibility’s (oBr) fiscal document. an earlier scenario of a ‘V’shaped recovery, separately endorsed by Bank of england chief economist andy Haldane, is becoming a pipe dream.
in May output bounced by just 1.8pc, way below the consensus forecast of 5pc. Britain is not getting back to work fast enough in spite of a splurge of pandemic spending, subsidies and tax reliefs which would have made Jeremy corbyn blanche.
the oBr knocks on the head the idea that people on furlough will smoothly reenter the workforce. as many as 20pc of furloughed jobs could vanish, sending the jobless rate soaring to 13pc. Depending on which forecast is believed that could mean anything between 2.7m to 4.5m unemployed by the first quarter of next year.
that is a terrible prospect which in itself would impose enormous costs in terms of benefit payments on the public finances.
the budget is shot through. the central forecast for borrowing in the current fiscal year is £370bn but, if recovery proves as stubborn as it is starting to look, £400bn or more could be breached – and £200bn borrowed next year.
all the hard work and sacrifice of the decade since the financial crisis will be wiped out. chancellor rishi sunak will have no choice but to totally redraw the fiscal rules for the current Parliament.
can deficits on this scale and public debt at more than 100pc of gDP as far as the eye can see be sustainable? Japan manages, so does italy and the Us is in the same club.
With super-low interest rates, the twoyear gilt yield is in negative territory. Borrowing, especially for investment in r&D and infrastructure, makes a great deal of sense. Moreover, the Bank of england, by buying increasing volumes of UK bonds, is easing pressure in the debt market.
the legacy for the next generation is frightening. Huge spending choices, notably on social care, are still to be taken. Huawei’s knockback will affect digital roll-out and may require government subsidy.
the idea that wealth taxes alone will erode the borrowing and debt mountain is a Labour fantasy.
only a return to robust growth exploiting Britain’s low-tax model and brilliance in science, tech, creative and financial genius can do that. Virgin rebirth cHanceLLor rishi sunak and the UK government did well to call richard Branson’s bluff.
Britain’s once-favourite entrepreneur was forced back to the drawing board and Virgin atlantic has come up with some selfhelp which should keep it flying.
Branson himself is putting in two separate dollops of money. there is £200m raised from selling down a personal stake in Virgin galactic together with deferral of payouts due to the mother ship.
somehow, 50pc-owner Delta has been persuaded to pony up £200m too. into the mix is american hedge fund Davidson Kempner capital Management, with £170m.
all of this, together with some rephasing of aircraft deliveries, amounts to a £1.2bn package. Key to recovery will be getting its aircraft back in the skies.
the caribbean is a big opportunity but reopening the north atlantic routes will be the life saver both for the company and passengers who need choice and competition. Waiting game tiM steiner is the best remunerated chief executive in europe and has ridden ocado’s market value up to £15bn.
the online grocer remains Britain’s best hope of a digital champion as it rolls out its robotics and logistics to supermarkets around the world. its superior online service is a big plus for M&s from this autumn when the UK joint venture kicks off. ocado’s thirst for capital is undiminished and there are still only pre-tax losses.
the glimmer of joy for the shares is slice of the income from its global partners which at a minimum is worth £3.5bn but could be worth tens of billions. the long wait for an earnings bonanza continues.