The threat of inflation is not as imminent as No. 11 would have us believe | Budget 2021


THere was a warning after last week’s budget that Rishi Sunak’s recovery plans could be derailed by a surge in inflation of such force that it would force central banks to raise interest rates. A modest increase of just 1% in interest paid on public debt would add between £ 20bn and £ 25bn to the cost of financing UK debt and would scuttle any hopes Sunak had of balancing daily income and expenses. by 2026.

Sunak said the same in his budget speech, using the prospect of higher interest bills as a reason to raise taxes on homes and businesses in the second half of parliament.

The government’s economic forecaster, the Office of Budget Responsibility, repeated the warning, giving it an almost ecclesiastical imprimatur. The Institute for Fiscal Studies devoted much of its budget analysis to the subject.

When such prominent bodies spice up their budget verdict with almost hysterical warnings of lava-like costs waiting to fall from the financial volcano, it is reasonable to ask three questions. Is inflation likely to increase? Would central banks react by raising interest rates? And why, after all the lessons learned during the 2008 financial crisis, has the UK become so vulnerable to a rate hike?

The answer to the last question is the purchase of public debt by the Bank of England through its quantitative easing program. With more than a third of public debt on its books, the central bank has become a major mortgage lender to the UK government, and that debt is no longer in fixed-rate terms for 10 or 20 years, instead it is rolled over overnight with international money. markets.

For the moment, that means a better deal for the government, reducing a 2% charge in the debt markets to the Bank’s most favorable base rate of 0.1%. The flip side of this benefit comes when the Bank, in the face of spiraling inflation, raises the base rate and raises the costs of servicing UK debt.

At the moment, there are mixed messages from the world economy about the inflation outlook. The vaccine program is doing well in the US And there is strong pressure on individual states to relax restrictions to the point that even demands that people wear masks in stores and interior services will be removed.

Many experts in the feverish world of stock investing have bet that a surge in demand from American consumers will cause prices to rise. Last week’s economic forecast in Beijing by Prime Minister Li Keqiang, when he said that China’s growth this year would be 6%, increased the number of inflation hawks.

Maritime traffic is increasing as trade recovers and commodity prices have skyrocketed. Copper is at a nine-year high, while oil prices have recovered to their pre-pandemic levels. In the first lock, a barrel of Brent crude slipped from more than $ 60 to less than $ 20. Last week it had risen again to $ 68.

All signs point to inflation rising. However, there will probably be only a temporary mismatch between supply and demand. It happened in 2011, when UK inflation soared above 5% before rapidly falling below 2%.

And for this reason, central banks will seek more fundamental long-term pressures on inflation. Above all, that means expecting high levels of employment coupled with persistent wage increases above 4%. Is that possible when Brexit is still affecting exports and the costs of the pandemic are likely to persist for several years?

In his latest speech, Jerome Powell, chairman of the US Federal Reserve, said that a prolonged recovery would be needed before interest rates rose. The European Central Bank is of the same opinion. There is no reason why the Bank of England should take a different view.

Tidal could leave Dorsey holding a failed package when the music stops

The streaming boom has been another success when Jay-Z and his circle of superstar partners sealed a $ 297 million (£ 214 million) deal to sell a majority stake in their music service, Tidal. The sale is undoubtedly a blow to the rapper and his fellow artist owners, including Beyoncé, Madonna and Rihanna, who acquired Tidal for $ 56 million in 2015. However, it is not so clear whether its new owner, Square, the mobile payment company. by Jack Dorsey, co-founder of Twitter, has struck a first-rate deal.

Tidal, which originally distinguished itself from other services by offering high-fidelity video and audio quality at superior prices, suffered pre-tax losses that widened significantly from $ 37.6 million to $ 56.3 million between 2018 and 2019, according to financial filing more. recent.

The company has had a rough ride in its short life, including a dispute with artist and owner Kanye West, who broke ranks and terminated his exclusivity deal with Tidal in 2017, and remains involved in an investigation by Norwegian authorities over allegations of that was inflated. the number of album streams, including Beyoncé’s Lemonade and West’s The life of Pablo. Tidal has repeatedly denied any wrongdoing.

The company is heading in the right direction, with revenue growing 13% to $ 166.9 million in 2019, and it said it had enjoyed “constant demand” during the pandemic. It’s still a minnow, however, with the latest publicly reported numbers putting subscribers at 3 million in 2018, while music research firm Midia estimates it had around a million at the start of the pandemic. Spotify has 155 million paying subscribers, with 345 million overall globally, and together with Amazon Music has targeted Tidal’s unique selling point by launching high-fidelity subscription tiers. Throw in Apple Music and there’s a formidable global top three to battle against.

Four years ago, Tidal found a cash lifeline in mobile phone company Sprint (now T-Mobile), which acquired a 33% stake for $ 200 million, which Jay-Z recently bought and sold as part of the deal with Square. Now it’s Jack Dorsey’s turn to see if he can keep the music playing.

A budget more notable for omissions than for actions on emissions

Less than a month after the Treasury published a landmark study on the need for economic policy to keep the green agenda at its core, the chancellor delivered a budget that failed to do exactly that.

The 600-page review, conducted by Professor Sir Partha Dasgupta, an economist at the University of Cambridge, was commissioned by the Treasury to assess the economic importance of nature. It was published last month amid a growing chorus of voices calling on governments to push green policies to rekindle the world’s struggling economies after Covid. But missing from last week’s budget was any sign that the chancellor hoped to stimulate a green economic recovery in the UK.

Sunak’s path back to economic growth involves protecting jobs, leveling the regions and attracting new investment to Britain. The green issue is not on the chancellor’s three-plank plan, but he apparently fails to acknowledge that putting climate policies at the heart of the UK’s economic recovery would achieve all three, while laying the foundations for a more sustainable economy.

Instead, policies designed to boost the country’s green economy were isolated in a two-minute slice of Sunak’s half-hour budget speech. It included green bonds for investors, green savings bonds for the public, and a greener mandate for the Bank of England.

But there were notable omissions: no mention of a plan to address the UK’s drafty housing stock after the collapse of the Green Home Grant; no plans to implement fast charging of electric vehicles nationwide; and there are no new ideas to directly address emissions from aviation and shipping.

All of these policies would help the UK reach its net zero carbon target by 2050, but crucially stimulate investment and create green-collar jobs in all regions, starting today. The Treasury plans to respond to Dasgupta’s review in due course, but based on its post-Covid budget, it is clear that the message has yet to get home.

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