Reflections on the morning after - and especially the markets… 🧵

It may well take some time for the dust to settle on #KwasiKwarteng’s first #Budget (yes, 'Budget’: if it looks like a duck, walks like a duck and quacks like a duck, then it’s fair to call it a duck)...
The initial reaction from most economic commentators and in the financial markets has been a loud boo! There are some things I would have done differently. But the overall strategy is sound, and sentiment should recover as the economic benefits become clearer...
There are two aspects I particularly liked. One is the emphasis on breaking the ‘doom loop’ of weak economic growth and rising taxes, both with tax cuts and – at least as importantly – structural reforms on the supply-side...
The second is the willingness to take decisions that are unpopular but still right for the economy, such as scrapping the cap on #bankersbonuses and abolishing the additional 45% rate of income tax. Policy should not be based on opinion polls or focus groups...
This is not about #TrickleDownEconomics... 🙄

If #trickledown means anything it is about giving rich people more money in the hope they will spend it, boosting *demand*. Instead, #Trussonomics is about improving the *supply-side* performance of the economy...
It is right to worry about the reaction in the markets, but not to panic. Much of the commentary here is increasingly OTT.

In my view, the fall in the #pound is less of a concern than the rise in #gilt yields (the cost of long-term government borrowing)...
The slump in #sterling is still primarily about dollar strength. The US currency has been strong across the board, reflecting the relatively aggressive #Fed tightening (three ¾ point rate hikes in a row), the lower exposure to Europe’s #energycrisis, and safe-haven demand...
On a trade-weighted basis against a basket of currencies, the recent fall in the #pound is still large (about 5% since the start of August, which might add 0.5% to #inflation if sustained), but not disastrous. The UK does not have an exchange rate target and should not intervene.
The rise in #gilt yields is more worrying. Unlike a weaker pound, which helps exporters, everyone loses from higher long-term interest rates.

There is a risk of an alternative ‘doom loop’ of rising interest costs and more borrowing, offsetting the good done on the supply-side.
My advice would have been to delay the announcement of the additional cuts in income tax (which is what seems to have most spooked the markets) until a full #Budget later in the year.

These cuts are the right thing to do, but will not come into effect until April anyway...
This would have allowed #KwasiKwarteng more opportunity to set tax cuts in the context of a full medium-plan for the public finances, with a full #OBR analysis.

(The fiscal documents published yesterday do go into more detail, but few read beyond the speech.)
Nonetheless, the surge in #gilt yields is not disastrous either.

Like the fall in the pound, it partly reflects a global rise in interest rates. UK 10-year yields have risen nearly 3%-points in the past 12 months, but French yields are up 2½%, and the US and Germany 2¼%...
To some extent too this reflects a long-overdue adjustment – and probably an overshoot. The markets are now speculating the #BoE may have to raise rates as high as 5%. That is the upper end of what *might* be the ‘new normal’ (4-5%, based on 2% inflation and 2.5% real growth)...
But I suspect that UK rates will still peak between 3-4%, partly because higher levels of debt make the economy more sensitive to higher rates.

UK bond #yields have now also risen to levels that should attract international buyers, especially with an under-valued currency...
In short, talk of 'market meltdown' and a 'sterling crisis' is still overdone.

It may take more time to win over investors and the general public, but the most important thing is to get the economics right. This is a good start, despite the negative headlines.

"medium-term plan", obviously 🙁

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More from @julianHjessop

Sep 6
Some thoughts on the proposed #energy bill freeze... 🧵

Based on media reports, the idea is to cap the unit cost of energy by subsidising suppliers so that they do not have to pass on higher wholesale prices in full, either to households or to businesses… (1/10)

On the plus side, this would lift the huge cloud of uncertainty which is now hanging over the whole economy. The peak in #inflation would also be much lower.

With this plan in place, the new government can score a big 'win' and quickly move on to other priorities... (2/10)
But this is another huge intervention which will distort markets even further, mainly help higher users of energy, and could be very expensive.

Consumers will still have some incentive to reduce bills by using less energy, but much less than if prices were free to adjust. (3/10)
Read 10 tweets
Aug 11
A few features of the #energy market that Gordon Brown (and his many fans here) don't seem to understand... 🙄

1. Energy suppliers are not the ones making big profits. None of his ideas - including #nationalisation - would reduce the prices they have to pay in global markets.
2. The Ofgem price cap is already based on an assessment of the ‘actual costs’ of supplying energy, including a small profit margin. As such, the cap already forces suppliers to ‘keep prices down’...
3. North Sea oil and gas profits are already taxed at a headline rate of 65%. Raising this even further - in an ad hoc way, and retrospectively - would send a terrible signal to all businesses thinking of investing in the UK.
Read 5 tweets
Jun 9
A quick 🧵 on the potential economic impact of the rail strikes.

In short, not a game-changer, but certainly another blow the UK could do without... 🙄 (1/5)

Unions must give warning, so there is some time to make alternative plans.

The series of 1-day #strikes (Tue 21, Thur 23, Sat 25) might be less disruptive than a single, prolonged stoppage, because some customers may be able to reschedule their use during the breaks... (2/5)
Some of the costs to the economy could also be reduced by ‘home working’, and by the diversion of leisure spending to other activities.

Nonetheless, there will be significant disruption to passenger traffic, and possibly to freight, including supplies of essential goods... (3/5)
Read 5 tweets
Mar 22
The UK government borrowed about £5bn more than expected in February, as higher debt interest costs offset a rise in tax revenues.

But favourable revisions to past months mean that borrowing is still on track to undershoot the OBR forecast for FY 2021-22 by about £24bn... (1/4)
Looking forward, rising #inflation will keep debt servicing costs high. But OBR analysis (Box 3.2 Oct EFO) has already shown that an inflation shock is likely to reduce borrowing overall, thanks to the boost to revenues, even with much larger hikes in interest rates... (2/4)
#Inflation will surely reduce the burden of #debt relative to national income, especially with real interest rates likely to remain low - even negative - for the foreseeably future.

Indeed, debt has already fallen to 94.7% of GDP, from a recent peak of more than 100%. (3/4)
Read 4 tweets
Jan 14
Just updated my UK #GDP forecasts with today's data... 🤓🧵

Some key points and international comparisons

1. UK economic growth in 2021 is likely to be just shy of 7½%, 1% higher than assumed in the October Budget and 3% higher than the consensus at the start of last year... 👍
2. This means that the UK was almost certainly the fastest growing G7 economy in 2021.

Many like to dismiss this as a 'dead cat bounce' after the relatively large fall in 2020. But the UK still did much better than expected, even taking account of this favourable base effect...
3. To illustrate this, this chart compares different vintages of the OECD's forecasts for last year.

In December 2020 the OECD expected the UK to grow by 4.2% in 2021, and to be outpaced by France and Italy. This turned out to be the biggest forecast error for any G7 economy...
Read 10 tweets
Jun 11, 2021
Some more thoughts on the economics of delaying #FreedomDay (please read the whole thread before shouting at me!).

Keeping the remaining Covid restrictions for a few weeks longer would be unlikely to derail the recovery, but could still have some significant impacts… (1/6)
The sectors that are still severely restricted account for less than 5% of GDP, and most are already open to some degree.

Money not spent in pubs or nightclubs (or holidays abroad) can also still be spent elsewhere in the UK economy... (2/6)
The direct cost of postponing Freedom Day would therefore be relatively small compared to full #lockdowns, probably no more than 2% of GDP, or less than £1 billion for every week of delay.

That’s not peanuts, but nor is it prohibitive. (3/6)
Read 6 tweets

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