And finally, here’s our updated news story:
That’s probably all for today. Thanks for reading and commenting. GW
UK deficit: What the papers say
The Government’s tax haul is on the rise as the economy grows - so far this financial year current tax receipts have come in at £164.2bn, up 4.7pc on the £156.8bn raised last year.
However, total current spending has risen by 5.6pc to £176.7bn, so the Government has had to borrow more to plug that widening gap.
Higher interest payments on the national debt were a particularly large cost.
Financing the debt cost £4.9bn in June alone, a rise of more than £1bn from £3.7bn in the same month of 2016.
Hammond has come under pressure from within the ruling Conservative Party as well as from the opposition Labour Party to loosen his grip on public spending, chiefly by relaxing a cap on pay for public workers.
Spending on debt interest jumped an annual 33 percent in June to 4.9 billion pounds, the highest for any month of June since 2011, reflecting a sharp rise in inflation which has pushed up the cost of index-linked bonds for the government.
The deficit was also widened by higher payments to the European Union budget and bigger purchases of goods and services by the government.
Lucy Meakin of Bloomberg says today’s figures show the risks facing the public finances.
The figures may raise fresh questions about whether Chancellor of the Exchequer Philip Hammond can limit borrowing to £58bn this year, as forecast by his budget watchdog in March.
Hammond is also under pressure to boost wages for millions of public-sector workers and spend more on health and education after the Tories’ catastrophic election performance highlighted the frustration of voters after seven years of austerity.
Bank of America picks Dublin for its post-Brexit hub
Newsflash: Bank of America has chosen Dublin as its European Union hub, as it prepares for life after Brexit.
The decision will allow BoA to continue operating in the EU, once the City of London loses its ‘passporting rights’.
Brian Moynihan, Chairman and CEO of Bank of America, said Dublin was the “natural” choice, as it currently houses more BoA employees than any other European City (apart from London, of course).
And with no clarity on Britain’s final Brexit deal, BoA is pressing on with its plans.
Moynihan says:
We already have a fully licenced and operational Irish-domiciled bank which, combined with Ireland’s strong commitment to business and economic growth, makes Dublin the natural location to consolidate our legal entities as we transition.
We will move roles not only to Dublin but to other EU locations, with the focus on how we can best support our clients in these markets.
While we await further clarity around the Brexit negotiations, we are making all necessary preparations to serve our clients however those discussions conclude.”
Ireland’s Taoiseach, Leo Varadkar, welcomed the announcement, calling it “a strong endorsement of Ireland’s attractiveness as a location for investment”.
Bank of America already has 700 staff in Dublin, and has been based in Ireland for almost 50 years. Earlier this week it contributed €880,000 to a music education program, following a €700,000 contribution a few years ago.
This chart shows how the repayments on Britain’s national debt has risen in line with inflation, as measured by the retail price index.
UK public finances suffer inflation hit, adding to Hammond's headache https://t.co/B0io2cZgrN pic.twitter.com/bcag8Oxbtj
— Andy Bruce (@BruceReuters) July 21, 2017
(Not all UK debt is index-linked of course - some is sold with a fixed coupon that doesn’t move in line with inflation)
Cable: It's Brexit's fault
Liberal Democrat leader Vince Cable blames last year’s Brexit vote, and the resulting tumble in the pound, for the rising deficit.
Cable (who was appointed leader yesterday) argues that those who voted to leave the European Union to free up more money for healthcare have been misled.
“This rise in borrowing is a direct consequence of the dramatic fall in the pound since last year’s Brexit vote.
“Instead of the £350m for the NHS that was promised, people’s living standards are falling and borrowing is going up.
“It shows why we need to offer people an exit from Brexit.
“Nobody voted last year to become poorer or to increase the amount of their taxes spent on paying down the national debt.”
OBR: Three reasons why the deficit went up
Britain’s fiscal watchdog, the Office for Budget Responsibility, has issued a commentary on today’s public finances.
It says Britain’s borrowing was forced up by higher debt costs on bonds linked to inflation, delayed payments to the European Union, and changes to the way self-assessment taxes are collected.
Here’s the details:
-
Higher debt interest spending, primarily as higher RPI inflation raises accrued interest on index-linked gilts. Debt interest spending is up 24.3 per cent on a year earlier in the first three months of 2017-18, compared with our full-year forecast of 15.3 per cent.
-
Changes to the timing of expenditure transfers to EU institutions within calendar year 2017, which move spending from the end of 2016-17 into 2017-18. Transfers are up by 78 per cent in the first three months of 2017-18 from a year ago, having been down more than 40 per cent in the final two months of 2016-17. This timing effect explains most of the year-to-date increase, while around a fifth of it is attributable to an additional £0.3 billion payment in relation to historical adjustments to the calculations of VAT- and GNI-based contributions.
- Self-assessment (SA) receipts will be depressed in 2017-18 by the unwinding of the income shifting ahead of the April 2016 dividend tax rise. We expect receipts to fall £3.9 billion on a year earlier, but unlike the two spending factors, which are already evident in the data, this will only affect the public finances in early 2018 when self-assessment payments are due.
Spending pushes deficit higher - read the latest commentary at https://t.co/k0nGloBMMW pic.twitter.com/6UpU6raBtG
— OBR (@OBR_UK) July 21, 2017
The big picture from today’s public finances is that the national debt kept rising over the last year, and is heading towards £1.8 trillion.
The ONS says:
Public sector net debt (excluding public sector banks) was £1,753.5 billion at the end of June 2017, equivalent to 87.4% of gross domestic product (GDP), an increase of £128.5 billion (or 3.6 percentage points as a ratio of GDP) on June 2016.
It’s more useful to look at national debt in terms of the size of an economy, rather than as a raw figure.
So in GDP terms, Britain’s debt pile is now its largest since the 1960s, when it was paying down the cost of the second world war:
Here’s my colleague Phillip Inman’s take on today’s public finances:
The UK borrowed more than expected in June, with the country’s budget deficit rising to £6.9bn - almost 50% higher than the same month last year.
Higher inflation forced the government to spend more on financing its debt mountain, other factors included lower GDP growth in the first quarter, a fall in corporation tax receipts and a bigger than expected contribution to the EU budget in June . Analysts said the deficit could now exceed forecasts over the rest of the financial year.
The Treasury said the persistent shortfall in the government’s income compared with spending illustrated the need for a “credible fiscal plan” and that allowed ministers to support “sound public finances” while “promoting a stronger economy”.
But opposition parties were quick to say that the higher deficit showed austerity had failed and delivered weaker public services without strengthening the public finances or the economy......
More here:
Updated
Here’s some more details on the public finances, via the Press Association:
The ONS said Government spending rose by 8.3% to £59.9bn in June compared with last year, while tax receipts lifted by 4.6% to £54.3bn.
The Treasury saw VAT climb by £400m to £11.4bn over the period, as income tax takings also stepped up by £800m to $12.7 billion.
However, corporation tax dropped by £200m to £4.8bn last month.
Labour: Borrowing figures show government's failure
Labour’s shadow chancellor John McDonnell has laid into the government over today’s public finances.
McDonnell argues that chancellor Hammond should raise taxes on large corporations and the rich, to help fund a pay rise for public sector workers.
He says:
“These figures reveal the continued failure of Philip Hammond and the Conservatives.
“Seven years of Tory cuts have left our economy weaker, with falling wages, yet the deficit has not been eliminated two years after they claimed it would be, and the national debt continues to rise.
“The Chancellor should stop handing out massive tax giveaways to big businesses and the super-rich, and instead give our hard-pressed public sector workers a pay rise, so we can end the travesty in our country of nurses having to rely on food banks.
“Only a Labour government will set out a serious plan for the public finances, with strategic investment underpinned by our fiscal credibility rule, to help build the high wage, high skill economy of the future for the many, not the few.”
The rise in borrowing in June means chancellor Philip Hammond has less wriggle room for tax cuts or spending rises in his next budget.
Howard Archer of EY Item Club says:
“June’s shortfall highlights the fact that the public finances are still far from healthy.
At the same time rising public dissatisfaction with austerity and the public sector pay cap is exerting pressure on the government to recalibrate fiscal policy in November’s Budget.
However it currently looks more likely that there will be limited adjustments, rather than radical changes, to the fiscal approach.”
Bad news for Chancellor as #UK #public #finances see clear y/y deterioration in June; PSNBex comes in at £6.9bn vs £4.8bn in June 2016.
— Howard Archer (@HowardArcherUK) July 21, 2017
Updated
UK public finances, what the experts say
The jump in Britain’s borrowing last month shows that the public finances have deteriorated, according to John Hawksworth, PwC chief economist.
But he’s hopeful that Britain could still hit its deficit targets, as last year’s borrowings have been revised down.
Hawksworth says:
“June saw a modest deterioration in public finances, with borrowing around £2 billion higher than a year earlier. This followed two months in which the deficit was almost identical to the year before. The general pattern is consistent with the OBR’s March forecast that we might see some increase in the budget deficit this financial year, as the economy slows and some one-off favourable factors from last year unwind.
“Nonetheless, the deficit may still come in below the OBR’s £58 billion forecast for 2017/18, given that the deficit in 2016/17 is now estimated to be £5.5 billion less than the OBR projected in March. So the increases in borrowing we are now seeing are from a lower base.
Sam Tombs of Pantheon Economics fears that the public finances show that UK growth was weak in the last three months (leading to less tax being taken).
June's UK public finances show growth in tax receipts has remained below 2016's rate, consistent with GDP growth having remained weak in Q2: pic.twitter.com/jrQLQm6Tty
— Samuel Tombs (@samueltombs) July 21, 2017
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Today’s public finances also show that corporation tax receipts fell by £200m in June (year-on-year), helping to push the deficit up.
VAT, income tax and stamp duty receipts rose, though:
The UK government has responded to the public finances, by admitting that Britain’s national debt is too high.
A Treasury spokesman says:
‘Today’s release shows that our national debt, at £65,000 for every household, is still too high and leaves us vulnerable to any future shocks.
That is why we have a credible fiscal plan to get debt falling and deliver the sound public finances needed for a stronger economy and higher living standards.”
The government’s current plan is to eliminate the deficit by midway through the next decade (around 10 years later than former chancellor George Osborne once promised....)
Inflation and EU contributions pushed deficit up
Digging into today’s disappointing public finances, you can see that the spike in inflation has pushed Britain’s borrowing up.
That’s because the UK has issued index-linked bonds, whose interest payments are linked to the retail prices index.
RPI was 3.5% in June, up from 1.6% a year ago, which has driven up the cost of servicing Britain’s national debt.
As this chart shows, Britain’s interest payments jumped by £1.2bn in June, from £3.7bn to £4.9bn.
This chart also shows that Britain’s payments to the EU jumped by £700m in June.
The ONS says:
In June 2017, the UK paid £1,249 million to the EU budget through GNI and VAT based contributions, which are made net of the UK rebate. This payment consisted of our standard monthly VAT and GNI based contribution of £991 million, along with a £258 million payment adjustment covering earlier years, which will be subject to a further UK rebate.
The higher UK fiscal deficit in June was due to higher debt interest ( RPI based) and a higher EU contribution #BoE #GDP
— Shaun Richards (@notayesmansecon) July 21, 2017
Updated
The public finances report also shows that Britain is on track to borrow more this financial year than in 2016-17.
As you can see, borrowing is already up compared with a year earlier:
UK public finances show bigger deficit than expected
Breaking! Britain borrowed more than expected to balance the books in June, in a blow to the government’s fiscal plans.
The UK’s public sector net borrowing requirement jumped to £6.9bn in June 2017, which is £2bn more than in June 2016.
That’s an increase on May’s £6.7bn.
City economists had expected the monthly deficit would drop to £4.7bn, so this suggests that the public finance are in a worse state than hoped.
These figures show that Britain has borrowed £22.8bn since the start of the financial year in April, £1.9bn more than in the same period in the previous financial year.
More to follow...
Updated
Analysts at French bank BNP Paribas fear that the strong euro will hit exports, as well as keeping a lid on inflation:
ECB should be worried about the euro. Its rise since Sintra set to knock an estimated 0.2% off inflation over next 12 months - BNP Paribas
— Jamie McGeever (@ReutersJamie) July 21, 2017
(that’s a reference to Mario Draghi’s upbeat speech in the Portuguese resort of Sintra last month)
Euro rise a worry for ECB as import volumes = 44% of euro zone GDP, highest in developed world, and inflation already well below target-BNPP
— Jamie McGeever (@ReutersJamie) July 21, 2017
Updated
Economists cut eurozone inflation forecasts
Newsflash: Eurozone economists have cut their forecasts for inflation in the currency bloc, and hiked their growth forecasts.
That’s according to the latest ECB survey of professional forecasters, which highlight why Mario Draghi was so cautious yesterday.
Economists now expect inflation to average 1.5% this year, just 1.4% in 2018, and 1.6% in 2019 -- all down 1.5% compared with April’s survey.
Low inflation is good for the shoppers, of course, but it means the ECB is still struggling to hit its target of getting inflation back to almost 2%.
On a positive note, the forecasts have also raised their forecasts for growth over the next few years:
ECB survey: 2017 GDP growth seen at 1.9% vs 1.7% seen three months ago, 2018-2019 GDP also revised up
— DailyFX Team Live (@DailyFXTeam) July 21, 2017
Australia hits talk of rate hikes for six
Every British sports fan knows that you underestimate an Australian at your peril.
And overnight, a top Australian central banker launched a Steve Waugh-style counterattack against speculation that an interest rate rise is imminent.
Guy Debelle, deputy governor at the Reserve Bank of Australia (RBA), argued convincingly that his central bank wouldn’t be forced to follow Canada’s central bank, which hiked rates last week.
Debelle said:
“Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase.”
This dovish talk sent the Australian dollar sliding, making it the worse-performing major currency today.
Adam Cole of RBC Capital Markets argues that the euro’s rally is misplaced.
There is really nothing in Draghi’s remarks yesterday that calls for this kind of bullishness on the euro and markets may end up getting disappointed before long.
European stock markets have dipped into the red in early trading, on fears that the stronger euro will hurt exporters.
In Germany, shares in BMW, Volkswagen and Continental are all down around 0.75%.
Yogi Dewan, CEO of Hassium Asset Management says the stronger euro could hit profits:
“It added to jitters about whether we’ll get the earnings growth that everyone is hoping for.”
The strong euro is spooking traders https://t.co/VfUs46f91A pic.twitter.com/OzgQHpsQjz
— Bloomberg (@business) July 21, 2017
Curiously, eurozone government bonds have actually strengthened this morning, pushing down the interest rates (or yield) on the debt.
You might expect them to have moved the other way, if the European Central Bank was really poised to trim its bond-purchase stimulus programme [which has been pushing prices up].
Chris Whittall of the WSJ agrees that it’s hard to square this with the euro’s rally:
Still not quite sure I understand this ECB reaction. Euro up again today, bond yields down. Anyone?
— Chris Whittall (@Chris_Whittall) July 21, 2017
It may indicate that investors have been convinced that the ECB will be in the market for a very long time, as Mario Draghi promised. It may also show that they have faith in Europe’s recovery, and believe that the eurozone debt crisis really is over...
The chatter in the City today is that the euro could hit $1.20 against the US dollar soon, for the first time since January 2015.
Bob Parker, investment committee member at Quilvest Investment Management, told CNBC that he expects the European Central Bank to trim its bond-purchase programme this autumn, and end it next year.
That would drive the euro higher.
Parker says:
Investors believe that the ECB QE programme will go to €40bn per month during the fourth quarter of 2017 [from €60bn today] and that the negative deposit rates will go.
This has been my view for the last three months and I assume that QE will end in 2Q18 [the second quarter of 2018].”
#Euro could hit $1.20 by year end as #ECB's Draghi spurs rally: analysts say https://t.co/apZIUXm079 /via @CNBCi
— Yannis Koutsomitis (@YanniKouts) July 21, 2017
Now at $1.1650 $EURUSD
Euro hits two-year high
There’s no holding the euro back this morning!
The single currency has romped to a fresh two-year high in early trading, as traders anticipate that the European Central Bank will cut its stimulus programme in the next few months.
The euro has jumped to $1.1677 against the US dollar, its strongest position since August 2015.
The euro has also hit an eight-month high against the pound, at 89.77p, making foreign holidays more expensive for Brits.
Yesterday, ECB chief Mario Draghi said his governing council would discuss its bond-purchase scheme in the autumn. That opened up the possibility that it could decide to trim the pace of the programme at September’s meeting.
The ECB is planning to buy €60bn of debt each month with newly created money, up until December 2017. It also voted yesterday to keep interest rates at record lows.
Draghi did insist that the ECB would remain in the market for a long time, pointing out that inflation in the euro area is stubbornly below target.
But that hasn’t stopped the euro surging higher. And Peter Kinsella of Commonwealth Bank of Australia thinks it has further to go.
He told clients:
“It’s an armour-plated rally and it won’t stop.”
“Everything speaks in favour of further euro appreciation -- increasing portfolio inflows, changing monetary policy, improved political risks.”
Updated
The agenda: UK public finances in focus
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The main event today is Britain’s public finances for June.
With consumer spending subdued, and businesses fretting about Brexit, these figures will show how much the UK borrowed to balance the books last month. They should also indicate whether the UK is on track to hit its deficit targets this year.
City economists predict that the public sector net borrowing requirement (excluding the impact of state-owned banks) fell to £4.7bn last month, down from £6.7bn in May.
Last night, consultancy firm Fathom warned that the risks of a UK recession in the next year are now over 50%, so weak public finances might indicate that firms are struggling.
Alternatively, a strong reading would reassure investors.
Last week, the independent Office for Budget Responsibility warned that Britain’s public finances are vulnerable to shocks, as a recession is inevitable sooner or later....
We’re also getting a new inflation report from Canada, and a fresh count of how many oil rigs are pumping away in the US.
The agenda:
- 9.00am BST: ECB publishes survey of professional forecasters
- 9.30am BST: UK public finances for June
- 1:30pm BST: Canada inflation rate for June
-
6pm BST: US Baker Hughes weekly oil rig count
Updated
