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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Britain faces tax rises to eliminate deficit; trade war fears weigh on markets - as it happened

Britain’s Chancellor Philip Hammond, who delivered the spring statement yesterday.
Britain’s Chancellor Philip Hammond, who delivered the spring statement yesterday. Photograph: Kirsty Wigglesworth/AP

And finally, Wall Street has closed lower for the third day running.

Jitters over the possibility of a trade war with China saw the Dow Jones Industrial Average finish 247 points lower at 24,759.39, a drop of 1%.

The S&P 500 lost 0.6%, while the Nasdaq dipped by 0.2%.

Traders are now pondering the prospect of Larry Kudlow joining the White House; as a critic of tariffs, could he steer Trump away?

Here’s our news story about Kudlow’s appointment:

That’s all for tonight. GW

Dow falls amid trade war worries

Three-quarters of the 30 stocks on the Dow Jones industrial average are now in the red, pulling the index down by 253 points, or just over 1%.

Chemicals group DowDuPont is now leading the selloff, down 1.95%, followed by airline maker Boeing (-1.8%), consumer goods producer Johnson & Johnson (-1.3%) and pharmaceuticals firm Pfizer.

The sectors of the Dow today
The sectors of the Dow today Photograph: Thomson Reuters

The prospect of an escalating trade war, involving China, is worrying Wall Street.

Yesterday, it was reported that Donald Trump was seeking to impose tariffs on up to $60bn of Chinese imports, and could target the technology and telecommunications sectors.

Boeing could be a major casualty if China retaliated, explained Richard Aboulafia of consulting firm Teal Group Corporation to the New York Times:

The likelihood of retaliation by their biggest single market, China, elevates this from an irritant to potentially disastrous, if not catastrophic.

“A trade war is the simplest way to cut off this fantastic growth they have enjoyed.”

More here: Trump’s Tariffs Make Boeing a Potential Target in a Trade War

Larry Kudlow "to become Trump's top economic adviser"

Donald Trump appears to have a new economic adviser, less than a week after Gary Cohn resigned, according to reports from America.

CNBC is reporting that Larry Kudlow, the Wall Street economist-turned-TV commentator has accepted the post, and will be named on Thursday.

Reuters has more info:

Trump told reporters on Tuesday that Kudlow, a Republican who served as an economic adviser to former President Ronald Reagan in the 1980s and also worked on Wall Street, had “a very good chance” at being selected to replace Cohn.

Kudlow, an informal advisor to Trump’s 2016 presidential campaign, had criticized the president’s decision last week to place steep tariffs on imports of steel and aluminum, saying they would harm steel-consuming producers. Cohn also opposed the tariffs.

But Trump said on Wednesday that Kudlow had “come around” to view tariffs as a useful tool for renegotiating trade deals.

After a bright start, the FTSE 100 ended the day down 6 points, or 0.1%.

The Europe-wide Stoxx 600 dipped by 0.15%.

Trade war fears are swirling through the markets again, warns David Madden of CMC Markets.

Growing fears of a trade war is weighing on US stocks, and indices like the Dow Jones are losing ground quickly. Dealers are fearful that China will react to President Trump’s tariffs by imposing levies on the aerospace industry, and Boeing shares have taken a hit.

Update: the markets are turning south, after Donald Trump threw more fuel on investors’ trade war fears.

Having opened higher, the Dow is now down almost 300 points in New York. Boeing, the aircraft maker, is driving the sell off.

Europe has handed back its earlier gains too.

This comes after Trump tweeted a threat to take more action on trade, amid speculation of new tariffs on China.

European and US stock markets are mostly higher today.

Despite the IFS’s gloomy prognosis on Britain’s finances, the FTSE 100 index of major blue-chip companies has gained 28 points, or 0.4%. Prudential is leading the way, up 6.5%, after announcing plans to split itself in two.

Shares are also up across Europe, after ECB president Mario Draghi gave a dovish speech this morning.

Draghi insisted that eurozone monetary policy ‘will remain patient, persistent and prudent’ - which weakened the euro, helping exporters.

European and US stock markets

The US stock market has also opened a little higher, as traders tried to focus on economic fundamentals rather than the chaos in the White House following Rex Tillerson’s sacking yesterday.

Labour: More bad news for working families

John McDonnell MP, Labour’s Shadow Chancellor, has responded to the Institute for Fiscal Studies’ report into the UK’s finances:

“The IFS today confirmed the further bad news working families face after nearly eight years of Tory economic failure. Despite the Chancellor’s spin yesterday, the IFS has revealed that there may be £30 billion of new tax rises and spending cuts to come.

“Under the Tories, it won’t be the richest who are hit by these tax rises and austerity cuts, but the poorest – largely families and children – who will bear the brunt of their heartless economic plans.

“The next Labour government will end austerity and build an economy that works for the many, not the few.”

An American flag
An American flag

In other news, American retail sales has fallen for the third month running.

It’s a small drop - just 0.1% in February - but also the third decline in a row, for the first time since 2012.

Economist had expected a rise of 0.3%, so this may signal that US consumers aren’t quite as optimistic as thought. The report shows that demand for big-ticket items, such as cars, declined.

Here’s our news story on the IFS’s spring statement analysis:

Toys R Us stores to close

A Toys R Us store in Coventry, Britain.
A Toys R Us store in Coventry, Britain. Photograph: Hannah Mckay/Reuters

Breaking away from Britain’s finances, we have bad news from the retail sector.

Toys R Us is shutting all 100 of its UK stores after administrators failed to find a buyer for the collapsed retailer - meaning 3,000 jobs are being lost.

Moorfields, who took control of Toys R Us late last month, has been unable to find a buyer for Toys R Us.

Press Association has more details:

It is thought that Moorfields will now begin a six-week “wind down” of the store estate.

Moorfields will begin with the closure of at least 26 loss-making stores earmarked late last year, when Toys R Us pushed through a restructuring before its demise.

An official announcement is expected later on Wednesday.

Over in parliament, Theresa May and Jeremy Corbyn are clashing over NHS spending (and other issues). My colleague Andy Sparrow is covering all the action in his Politics liveblog:

Treasury: Hard work of British people is paying off

The Treasury building, in London.
The Treasury building, in London. Photograph: Alamy Stock Photo

The Treasury has responded to the IFS’s analysis, pointing out that the deficit has fallen steadily in recent years.

A spokesperson says:

“Our balanced approach has reduced the deficit while also cutting taxes for over 30 million people and investing in our vital public services. We are training more doctors, more schools are rated as outstanding and we are funding the second largest defence budget in NATO.

Thanks to the hard work of the British people we will now see the first sustained fall in debt in 17 years.”

Yesterday, the Office for Budget Responsibility reported that Britain’s current budget (day-to-day spending, rather than investment) will move into surplus in the next financial year.

The IFS’s verdict might come as a nasty surprise to readers of the Daily Express, who woke up to the promise of tax cuts today.

But as the BBC’s Laura Kuenssberg points out, some politicians have been suggesting taxes may have to rise to cover the NHS’s demands :

Economics journalist Dharshini David points out that Britain might actually need to raise more than £40bn in extra taxes (£30bn to eliminate the deficit, plus £11bn to address the ageing population).

That’s a substantial bill for each adult:

So much for Hammond’s promise of light at the end of the tunnel....

Britain could avoid the need to hike taxes by £30bn if it abandoned the aim of eliminating the deficit by the mid-2020s.

Recent history shows that deficit reduction targets are more honoured in the breach than in the observance (George Osborne’s original plan was to balance the books two years ago).

The IFS’s Carl Emmerson suspects that the government won’t balance the books by 2025. But even if it doesn’t, there are many “significant and politically difficult” challenges to be addressed, given the rising spending needs, looming welfare cuts, pressure on public services, and Brexit.

IFS: Austerity squeeze on NHS and prisons

The IFS’s Carl Emmerson is outlining how Britain’s public sector has faced sustained pressures in recent years, with the health and prison services seeing particular strain.

He’s also showing how the ageing population will put more demands on public services, making it even harder to cut the deficit or resist tax rises.

The IFS also remind us that three-quarters of the savings from welfare cuts announced since July 2015 have not yet hit (as Resolution pointed out earlier).

The IFS’s Paul Johnson ends his presentation by urging us all to focus on the reality of Britain’s financial situation.

Don’t be lured by the “spin and bluster of politicians on all sides” who pretend there are easy solutions, that the promised land is just around the corner, or that they can reinvent the laws of economics, Johnson says, concluding:

There aren’t. It isn’t. And they can’t.

The IFS’s Helen Miller is tweeting some key points from the IFS’s report - none of them are very pleasant reading, alas.

Britain faces 'severe consequences' if high earners leave

The IFS has also warned that it will be difficult for the government to raise taxes, especially if Brexit drives EU citizens away.

Director Paul Johnson says:

He [Philip Hammond] has been unable to tackle the problems posed by the increasing numbers of self employed and company owner managers, who pay less tax than similarly remunerated employees: the cost of this is forecast to grow from a bit over £10 billion now to around £15 billion or so in five years time.

He – like his predecessor – looks wholly unable to maintain the real value of fuel duties. By taking huge numbers of people out of the income tax net, while raising tax on those with the highest incomes, we have become very dependent on a very small number of taxpayers to pay a very large fraction of the overall tax bill. That may be desirable on distributional grounds, but it makes tax revenues very sensitive to the incomes and behaviour of a small number of people. If high paid jobs (and EU citizens, who are well represented among high earners in the UK) relocate elsewhere the consequences for the Exchequer will be severe.

The IFS also reckons that “demographic pressures” mean the government needs to find an extra £11bn per year in 2025 to address extra health, pension and social care spending.

IFS: Taxes rises of £30bn needed to eliminate deficit

Boom! The UK government needs to raise £30bn in extra taxes in the years ahead to hit its budget deficit goals without slashing spending further, according to the IFS.

Having analysed the spring statement, the thinktank has calculated that Philip Hammond faces a huge fiscal challenge when he draws up the Autumn budget.

The IFS has calculated that the government needs to spend around £14bn more just to stand still, and avoid shrinking the state. But, unless it raises £18bn by squeezing spending or raises taxes, it will miss its goal of balancing the books by the middle of the next decade.

That adds up to a real fiscal headache for the chancellor.

IFS director Paul Johnson says:

Just to avoid spending falling as a fraction of national income beyond 2019–20 he would need to find an additional £14 billion a year, relative to current plans, by 2022-23.

On the other hand if he really wants to eliminate the deficit by the mid 2020s he would need to find an additional £18 billion or so of tax increases or spending cuts by the mid 2020s.

Put these two together and on current forecasts, just keeping spending constant as a fraction of national income beyond 2019–20 and reaching budget balance by the mid-2020s would require tax rises of £30 billion a year.

UK borrowing forecasts
UK borrowing forecasts Photograph: IFS

Updated

IFS: Britain faces a 'dismal' new normal

The Institute for Fiscal Studies is now presenting its verdict on the spring statement, at an event in London.

Paul Johnson, IFS director, begins with a chilly warning that “The reality of the economic and fiscal challenges facing us ought to be at the very top of the news agenda”.

Johnson then outlines how Britain’s economic future looks rather bleak:

We have had the worst decade of growth since at least the last War. The economy is at least £300 billion smaller than we might have expected based on 2008 forecasts. Yet we are now supposed to be at capacity, with no potential to make up for any of that loss.

What’s more, growth projections remain very subdued. At no point in the next five years does the OBR believe that annual growth will exceed 1.5%. To put an even less positive gloss on the numbers, growth in GDP per capita is forecast to be less than 1% in each of the next five years, half the pre-crisis trend.

Dismal productivity growth, dismal earnings growth and dismal economic growth are not just part of the history of the last decade, they appear to be the new normal.

UK growth forecasts
UK growth forecasts Photograph: IFS

Updated

Amit Kara, Head of UK Macroeconomic Forecasting at the NIESR thinktank, argues that Philip Hammond missed a trick yesterday, by not doing more to protect the UK economy from Brexit.

An urgent action point might be to create a range of shovel-ready projects across the country and specifically in regions and sectors that are most vulnerable to an exit from the EU and to simultaneously prepare a strategy for the longer terms consequences of Brexit.”

Updated

Why austerity isn't over

Resolution have also highlighted how Britain’s welfare bill will be squeezed severely in the next few years.

That’s partly due to the ongoing benefit freeze, which is now expected to save £4.5bn by 2019-220 (a billion pounds more than expected) due to higher than anticipated inflation.

Reductions to Universal Credit (UC) work allowances will also hit families, especially those with children.

Resolution say:

While no new tax and benefit policies were announced yesterday, existing policies are set to drag on living standards – especially in the bottom half of the distribution – for a few more years

So, for all the talk of ending austerity, the truth is that more pain is round the corner:

.
.

Resolution say:

Only one-fifth of the £10 billion worth of cuts announced in the Summer Budget of 2015 that directly affect household incomes have so far been delivered. Further cuts in 2018-19 will amount to £2.5 billion, with that figure rising again – to £2.7 billion – in 2019-20. These cuts will of course affect different families very differently.

By 2022-23, the poorest third of households are expected to be £745 a year worse off than they would have been had no policy changes been made after March 2015. In contrast, the richest third will be £140 better off.

.

The Resolution Foundation’s analysis of the spring statement is now online, here.

I’ve culled a few charts, showing why Britain isn’t out of the woods yet:

Spring statement

The chart above shows that Britain won’t reach a balanced budget - a key government target - until 2027.

So to get there sooner, as the government wants, either spending has to be cut deeper to the bone (or through it?), taxes go up, or the economy outperforms expectations (which is Hammond’s plan).

Spring statement
Spring statement

Resolution also points out that households face a tough future:

Ten years on from the start of the pay squeeze, recovery remains seven years away. And the vast majority of the large working-age welfare cuts announced back in July 2015 are still to bite, with low and middle income households likely to fare especially badly over the next two years. Despite some near-term improvement in yesterday’s forecasts, the UK remains in the midst of a squeeze on incomes that is set to last longer than the one experienced immediately after the financial crisis.

Nick Macpherson, the former top civil servant at the Treasury, is also racing to the barricades to save the 1p and 2p piece.

Tabloid fury over Hammond's war on coppers

Given it was a such a short speech, Philip Hammond will have hoped to avoid gaffes and blunders yesterday.

But several of Britain’s newspapers have blasted the chancellor this morning, over the Treasury’s new consultation on whether to abolish 1p and 2p coins, along with £50 notes.

The Daily Mirror have splashed on the plan, warning that charity donations would suffer if people can’t drop spare coppers into a collection tin.

Shadow Civil Society minister Steve Reed told the Mirror:

Cash is the most popular way for people to donate to charities, and much of that comes in small change like 1p and 2p coins.

The Sun have dubbed Hammond a ‘pennies pincher’, urging readers to help ‘save our coppers’.

Hammond has also upset the Daily Mail, which vents:

They may be annoying small change to the better off, but others who count every penny will not thank you when traders inevitably round up those 99p prices.

This looks to the Mail like a PR disaster in the making.

Updated

Resolution: Hammond faces faces tougher choices and tax rises

The Resolution Foundation is hot off the blocks this morning, with its full analysis of Philip Hammond’s spring statement.

And the verdict isn’t great -- the think tank warns that the Chancellor won’t eliminate the deficit unless the economic forecasts improve, or he raises taxes.

Resolution also aren’t impressed with Hammond’s claims of feeling ‘Tiggerish’. They point out that the economic forecasts are little better than the ‘bloodbath’ in last November’s Budget (which was packed with weaker growth forecasts and higher borrowing).

Britain is still expected to grow slower than the eurozone over the next five years, while real earnings are still not forecast to return to pre-crisis levels until 2025.

Hammond’s upbeat performance yesterday sparked some reports that austerity might soon be over. Resolution, though, point out that plenty of government cutbacks are heading out way already -- including a swathe of working age benefit cuts.

Torsten Bell, Director of the Resolution Foundation, said:

With the elimination of the current deficit and debt falling next year, Britain is set to pass two major milestones on its long austerity journey since the financial crisis. But the end of the tunnel is still a decade away, and significant obstacles remain before the final destination is reached.

“Steering past these obstacles will require the Chancellor to make some tough choices that he avoided setting out yesterday lest he spoil the upbeat mood. Delivering significant reductions in debt while softening currently planned spending cuts to come will require either tax rises or for Britain to heed the Chancellor’s call to ‘beat the forecasts’. Planning for the former, while hoping for the latter might be a sensible approach for the years ahead.

Here’s the key findings from Resolution’s analysis:

  • Welfare cuts – Just a fifth of the over £10bn of welfare cuts announced in 2015 have been implemented so far. The coming year (2018-19) is set to be the second biggest single year of welfare cuts since the crisis (after 2012-13) at £2.5bn. The scale of additional cuts will grow in 2019-20 to £2.7bn as more families are moved onto Universal Credit.
  • Inequality and income – As a result of policies announced since July 2015 the poorest third of households are expected to be an average of £745 a year worse off. In contrast, the richest third are forecast to record an average gain of £140 a year. Projected real household incomes are a staggering £1,400 a year lower than forecast back in March 2016.
  • Departmental cuts – After a short lull in cuts to day to day departmental spending next year, they are set to return from 2019-20 onwards. These include a 12 per cent cut to the Ministry of Justice budget over the next two years, while central government funding of local government is set for a 19 per cent fall. In contrast, DEFRA is set for a 21 per cent ‘Brexit bonus’ next year.
  • The next spending review – Choosing not to feed higher inflation through to day-to-day departmental spending in the period beyond the current Spending Review has contributed to the Chancellor’s better borrowing outlook in 2022-23. However, it also means yesterday’s statement marked a further small real-terms spending cut. As a result day to day departmental spending per person in 2022-23 is projected to have fallen by 17 per cent since 2010.
  • Meeting the fiscal objective – The Chancellor is still forecast to be borrowing 0.9 per cent of GDP in 2022-23. Eliminating it by 2025-26 as originally intended would require a speeding up of departmental spending cuts in the next parliament. The OBR says that even delaying it until 2027-28 would require per capita departmental spending to fall in real terms in each year.

Updated

The agenda: Spring statement reaction; Draghi speaks

Chancellor of the Exchequer Philip Hammond delivering his first spring statement in the House of Commons.
Chancellor of the Exchequer Philip Hammond delivering his first spring statement in the House of Commons. Photograph: PA

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Today we’ll be mopping up the reaction to Britain’s first-ever spring statement. Economic experts have been crunching the numbers overnight, working out what the latest forecasts mean for the UK economy.

The Institute for Fiscal Studies releases its verdict this morning (10am), and other think tanks, research groups and City firms will be having their say too.

Chancellor Philip Hammond did his best to sound upbeat, suggesting that UK could finally be seeing brighter times after years of austerity.

Offering a glimmer of hope for the future, Hammond told MPs:

“If, in the autumn, the public finances continue to reflect the improvements that today’s report hints at, then in accordance with our balanced approach ... I would have the capacity to enable further increases in public spending and investment in the years ahead.”.

But with long-term growth weak, and the Britain’s deficit still stubbornly refusing to be wiped out, the picture is still troubling.

UK growth
UK borrowing

Also coming up today.... European Central Bank chief Mario Draghi is speaking in Frankfurt. We also get new US retail sales figures - they’ll be scrutinised for hints about how fast American interest rates will rise this year.

The markets are a little subdued, following the latest turmoil at the White House. The surprise sacking of secretary of state Rex Tillerson has spooked investors

Jasper Lawler of London Capital Group explains:

With Tillerson out the door, the market is assuming that Trump is aiming for a more aggressive foreign policy; enough to send a chill through the markets.

The agenda

  • 8am GMT: ECB president Mario Draghi speaks at “The ECB and Its Watchers XIX” conference
  • 10am GMT: Institute for Fiscal Studies press conference on the spring statement .
  • 12.30pm GMT: US retail sales for February

Updated

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