Closing post
Time to recap…
Bank of England policymaker Swati Dhingra has warned that there are real economic costs to delaying interest rate cuts until we see more signs that underlying inflation pressures are easing.
Dhingra, the most dovish rate-setter at the BOE, warned that delaying interest-rate cuts comes at a cost for living standards and could trigger a hard landing for the UK economy.
She says today:
“Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates comes with a cost of foregone improvements in living standards and a risk of lowering supply capacity for the future.”
Bank of England policymaker Swati Dhingra warned that delaying interest-rate cuts comes at a cost for living standards and could trigger a hard landing for the UK economy https://t.co/PG8oX28Rps
— Bloomberg Markets (@markets) February 21, 2024
Economists have said the chancellor has ‘limited’ room for tax cuts in next month’s budget, after the UK recorded its biggest budget surplus for a January since records began in 1993.
Falling interest costs on the UK national debt helped the UK post a surplus of £16.7bn last month, and means the government has borrowed over £9bn less than expected this financial year.
Economist Dr Roger Gewolb explains:
“Jeremy Hunt has been handed a pre-budget tax boost of £9.2 billion today, which he could - and had certainly better - use for his upcoming Budget next month.
Today’s data sees the UK recording its biggest budget surplus in at least 30 years. Hunt has some room for tax cuts, but perhaps not enough for a significant giveaway. The government is expected to borrow £10 billion less this financial year compared to the £123.9 billion predicted by the OBR during the Autumn Statement.
I predict that Hunt will have enough extra funds to decrease income tax by at least 2p and/or move thresholds and also cancel the planned increase in fuel duty”.
But, the Resolution Foundation has warned that any tax cuts next month will come between £20bn of tax increases already implemented and a further £17bn of hikes pencilled in for after polling day.
Shares in HSBC have tumbled over 8% today after the bank took a $3bn charge on its stake in a Chinese bank amid mounting bad loans in the country, knocking its profits in the last quarter.
BT’s iconic telecommunications tower in London is to become a hotel, in a £275m deal.
Increased military spending prompted by Russia’s war on Ukraine and the Israel-Gaza conflict have helped the British weapons manufacturer BAE Systems to record profits last year.
The cost of filling up a family car in the UK increased by about £2 this month as the jump in the oil price caused by the Red Sea attacks is felt at the pumps.
Food businesses sending products to the EU have had to fork out an extra £170m in export costs because of Brexit red tape, data shared with the Guardian shows:
Banknotes featuring King Charles will be issued for the first time on 5 June, prompting the Bank of England to warn businesses that they need to make sure their machines are ready to accept them.
Swati Dhingra has also pointed out today that UK consumption had still not recovered to levels seen before Covid-19, unlike in other major economies.
She says:
Despite an easing in inflation and some real wage recovery, consumption remains below its pre-pandemic level. This is in striking contrast to the Euro area and the United States where consumption bounced back some time ago.
Dhingra also points out that the impact of the recent run of 14 rate hikes in a row would still continue to be felt for some time.
Yesterday, governor Andrew Bailey estimated that around 70% of that impact has been felt.
MPs on the Treasury committee have heard that UK economic growth will remain weak this year, while inflation is expected to fall.
The committee is holding a hearing on economic forecasting – as covered earlier, they are disappointed that neither the IMF nor the OECD would attend and discuss their own forecasts for the UK.
But they do have three UK experts.
Nina Skero, chief executive of the Centre for Economics and Business Research, tells the committee that the CEBR expects growth of 1.1% this year.
That’s a pick-up compared to 2023, but still “historically low”, Skero points out.
The CEBR expect inflation to approach but not return to the Bank’s 2% target, with headline inflation forecast to be 2.2% at the end of 2024.
Charlie Bean, the former BoE and OBR economist, predicts UK output will “pretty much flatline” this year, and possibly pick up a bit through the year.
He doesn’t believe the 0.3% drop in GDP in October-December is the start of a “deeper downturn”, as it’s partly due to a fall in retail sales in December which unwound in January.
On inflation, Bean says it’s “pretty much baked in” that inflation will come near to the 2% target in the spring, as large increases in price levels a year ago drop out of the comparison.
But he (like the BoE) expects inflation to pick up in the second half of 2024.
Jack Meaning, chief UK economist at Barclays, predicts growth will be “pretty stagnant” in the first quarter, and doesn’t see the recession carrying on.
He forecasts sub-trend growth all though this year, with the economy ticking along and stagnating rather than accelerating.
But growth will pick up in 2025, he believes, ending next year above trend.
And on inflation, Meaning predicts it will fall below 2% in April when the energy price cap changes, and stays below 2% through 2024 and first half of 2025.
Updated
Swati Dhingra also criticises claims that wages and services prices are rising too fast for the Bank to hit its 2% inflation target (as other policymakers have argued)
She says:
This is based on summary reasoning that multiplying the labour share of about 60 percent with wage growth rates above 3.5 would take us above target. This reasoning is inconsistent with recent historical evidence. The pre-GFC era in the 2000s was marked with high wage growth of 4-5 percent and yet inflation was subdued.
The UK economy has already “flatlined over the last year”, points out Swati Dhingra.
She says some other advanced economies have not faced “the difficult trade-off between lowering inflation and sacrificing recovery to the same degree as the UK”.
Swati Dhingra argues in her speech that there is little risk of a wage-price spiral, saying:
Nominal wage growth remains stronger than in recent history, but the collective steer from several sources of data suggests wage growth is easing, including in higher frequency and forward-looking indicators.
Quantity-based measures of the labour market that are available in a timely manner provide further evidence of the reduced likelihood of tight labour markets pushing up on wages and hence prices in the future.
BoE's Dhingra warns against delaying interest rate cuts
Swati Dhingra, the most dovish member of the Bank of England’s Monetary Policy Committee, is warning of the risks of leaving interest rates high for too long.
In a speech titled Money’s Too Tight (To Mention) [a nod to the pop hit from The Valentine Brothers, covered by Simply Red in 1985], Dhingra is explaining that the outlook for headline inflation is “bumpy but downwards”.
She argues that delaying the first rate cut until there is more evidence that inflation is easing risks hurting households, and the economy.
Dhingra tells an event organised by Market News International Connect:
Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates comes with a cost of foregone improvements in living standards and a risk of lowering supply capacity for the future.
Dhingra was the only MPC member to vote to cut interest rates, from 5.25% to 5%, last month – two members wanted to raise rates, and the other six voted to leave them unchanged.
The other members of the MPC want to see more signs that inflation is moving sustainably to the Bank’s 2% target.
MORE BOE'S DHINGRA: MARKET OVERREACTION IS ALWAYS LIKELY TO BE AN ISSUE WHEN POLICY REACHES A TURNING POINT, WHETHER HIKE OR CUT#bankofengland #ukeconomy #swatidhingra #interestrates #inflation #monetarypolicy
— Mace News (@MaceNewsMacro) February 21, 2024
Dhingra, though, points out that policy would still be ‘restrictive’ even if rates were cut slightly. It would be a mistake, she says, to favour keeping policy too tight:
Going forwards, the restrictive stance of monetary policy is expected to continue weighing on economic growth and living standards for more time, even if moderation starts now.
In my view, the evidence to err on the side of overtightening is not compelling as it often comes with hard landings and scarring of supply capacity.
The financial markets expect the Bank to cut rates to 4.5% by the end of this year, with the first cut pencilled in by June.
Yesterday, BoE governor Andrew Bailey said he was comfortable with an interest rate profile that has cuts in it, but wouldn’t say by how much rates would be cut, or when.
Over in the US, demand for mortgages took a hit last week as borrowing costs jumped.
Total application volume plunged 10.6% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.
The drop came as the average contract interest rate for 30-year fixed-rate mortgage rose back over 7%.
Mike Fratantoni, the MBA’s chief economist, says:
“Mortgage rates moved back above 7 percent last week following news that inflation picked up in January, dimming hopes of a near term rate cut.”
US MBA MORTGAGE APPLICATIONS (WOW) ACTUAL:
— Seaside Trader (@csidetrader) February 21, 2024
-10.6% VS -2.3% PREVIOUS
US MBA 30 YEAR MORTGAGE RATE ACTUAL:
7.06% VS 6.87% PREVIOUS#Transitory
MP blasts IMF for avoiding scrutiny of its forecasts
Parliament’s Treasury Committee have fired a blast at the International Monetary Fund for not attending their session today on economic forecasting.
Chair of the Treasury Committee, Harriett Baldwin, says both the IMF and the OECD were invited to take part, and she’s “disappointed” neither has accepted the invitation.
The committee had hoped that both groups would discuss the assumptions which underpin their forecasts on the UK economy, ahead of next month’s budget.
Baldwin says it is “incredible” that the IMF won’t show up today, despite issuing forecasts about the UK, but reports that the OECD were more forthcoming.
She says:
“I’m disappointed neither has accepted our invitation to come to Westminster ahead of the Spring budget and discuss the assumptions which underpin their forecasts on the UK economy.
“I am heartened, however, by the positive intent and engagement shown by the OECD during our discussions. We will continue to work with them to find a suitable time for a public session when schedules allow, to ensure proper democratic scrutiny of their work can be carried out.
“On the contrary the IMF’s outright refusal to let us scrutinise their forecasts of the UK economy in public is infuriating. Yet they continue to utter public pronouncements about the UK from their perch in Washington. As the IMF is a public body partly funded by the UK as a shareholder, I find this incredible.”
Last November, the OECD predicted that UK growth would remain “stable but low”, with national output rising by 0.5% in 2023 and by 0.7% in 2024.
The IMF has ruffled feathers in Westminster; first it predicted the UK would go into recession last year, then changed its mind last May. Then in January it issued a strong warning to Jeremy Hunt against cutting taxes in the budget.
The session starts at 2.15pm today, with MPs hearing from Professor Sir Charles Bean (a former member of the Monetary Policy Committee and the OBR Budget Responsibility Committee), Dr Jack Meaning, the chief UK economist of Barclays, and Nina Skero, chief executive of the Centre for Economics and Business Research
Heathrow Airport has reported its first annual profit since the Covid-19 pandemic.
Heathrow made an adjusted pre-tax profit of £38m in 2023, up from a loss of £684m in 2022, and the first profit since 2019.
It handled 79.2m passengers last year, making 2023 the third-busiest in Heathrow’s history. It hope to break the record this year, and is aiming to welcome a record 81.4m passengers.
Updated
German economy in difficult waters as government slashes forecast
Barely a day goes by, it seems, without downbeat economic news from Germany.
And today’s is that Berlin’s government has slashed its growth forecast for this year.
The German government expects the economy to grow 0.2% this year, far less than a previously forecast 1.3%, as weak global demand, geopolitical uncertainty and persistently high inflation dent hopes for a swift rebound.
The revised forecast was approved by the cabinet on Wednesday as part of the government’s annual economic report, government sources told Reuters.
A draft of the report seen by Reuters says:
“The German economy continues to find itself in difficult waters at the beginning of the year.”
Germany’s economy shrank by 0.3% in the final quarter of 2023, and would enter a technical recession if it shrinks in the current quarter too.
Share your memories of the BT Tower
We want to hear people’s memories of the BT Tower following the news that it will be converted into a hotel.
Did you visit the restaurant or work there?
Speaking of UK manufacturers…weapons manufacturer BAE Systems has reported record profits last year, thanks to increased military spending prompted by Russia’s war on Ukraine and the Israel-Gaza conflict.
BAE Systems made underlying profits before interest and tax of £2.7bn on record sales of £25.3bn in 2023.
Charles Woodburn, the BAE chief executive, said the weapons manufacturer was expecting “sustained growth in the coming years”.
He told reporters on Wednesday:
“Instability in Europe, the Middle East and other parts of the world brings into sharp focus the vital role that we play in protecting national security.”
UK factories report highest selling price inflation since July
Just in: Output at UK manufacturers has fallen over the last quarter, while prices are heading upwards.
The CBI’s latest Industrial Trends Survey, just released, shows that a net balance of 19% of firms reported a drop in output in the last quarter – worse than the 10% recorded in the thee months to January.
However, manufacturers expect output to rise marginally in the quarter to May.
The latest CBI Industrial Trends Survey found that manufacturing output volumes fell in the three months to February at a faster pace than in the quarter to January. Output is expected to rise marginally in the three months to May. #ITS pic.twitter.com/3drEd21zAX
— CBI Economics (@CBI_Economics) February 21, 2024
And there’s worrying news for the Bank of England: Expectations for average selling price inflation accelerated in February.
A balance of 17% of companies are rasing prices this month, up from 9% in January.
Tha’s the highest reading for selling price expectations since July 2023, but still much lower than the multi-decade high of +80% in March 2022.
Expectations for selling price inflation accelerated in February, climbing above their long-run average. Selling price expectations were the strongest since July 2023, but remained well below the multi-decade high seen in 2022. #ITS pic.twitter.com/zq55QWCyxy
— CBI Economics (@CBI_Economics) February 21, 2024
Anna Leach, CBI deputy chief economist, says:
“UK manufacturing conditions remain challenging, with lower output volumes widely reported across the sector this month. But there were also some hopeful signs.
Order books improved - in the case of export orders to above their long-run average - and manufacturers continue to expect output to improve in the months ahead.
FTSE 100 in red
The UK stock market is having a weak morning, with blue-chip shares in the red.
The FTSE 100 index has lost 66 points, or 0.85%, to 7652 points.
HSBC are dragging the index down; its shares have lost 8% this morning, after reporting a fall in profits in the last quarter.
Mining giant Glencore are down 3.2%, after it posted a 75% drop in net income for last year, from $17.3bn to $4.28bn.
Joshua Mahony, chief market analyst at Scope Markets, says:
HSBC represents the biggest drag on the FTSE 100, as shares in this banking giant tumbled in spite of their record full-year profits for 2023. Investors took a dim view of the $3 billion impairment charge associated with the bank’s Chinese investment, dampening sentiment around the Asia-focused bank. With continued concerns around the Chinese real estate sector, and global interest rates expected to fall, investors are taking a somewhat cautious approach after both earnings and revenues fell short of expectations.
Glencore shares have slumped into a two-year low this morning, following on from an earnings report that has seen this mining giant report a collapse in their adjusted core earnings, which halved from $34 billion to $17.1 billion. This served as a stark reminder of the impact felt by falling commodity prices, with continued difficulties in the Chinese economy highlighting ongoing concerns that we may see further struggles this year.
Aldi has announced plans to create 5,500 new roles across the UK this year.
The supermarket will be seeking to recruit for a variety of positions including store assistants, managers and cleaners for new stores opening in 2024. More here.
Aldi has announced plans to create 5,500 new roles across the UK this year including store assistants, managers and cleaners for 500 new stores opening in 2024. https://t.co/ZmGMcz4wwG #retail #retailnews
— PRShots Retail (@PrshotsR) February 21, 2024
Full story: BT Tower to become hotel as London landmark sold for £275m
King Charles III banknotes to enter circulation on 5 June
Just in: Banknotes featuring a portrait of King Charles III will be issued from 5 June, the Bank of England has announced.
The portrait of the monarch will appear on existing designs of all four banknotes (£5, £10, £20 and £50), with no other changes to the existing designs.
The new banknotes will only be printed to replace those that are worn, and to meet any overall increase in demand for banknotes, the Bank says.
And there’s certainly no need to throw existing notes away! Polymer banknotes that feature the portrait of Queen Elizabeth II will remain legal tender, and will co-circulate alongside the King notes.
But businesses that use machines that accept, sort or check banknotes will need to adapt them so they accept these new designs (there are details of what to do here).
The Bank says:
Machines requiring updates include those receiving notes, such as transport ticketing machines, self-service checkouts, gaming machines, vending machines, back-office machines and any other machines that are used to check banknotes are genuine.
Today we have announced that banknotes featuring the portrait of King Charles III will be issued from 5 June 2024. For more information on the King Charles III banknotes see here: https://t.co/oBPgbpbXmf pic.twitter.com/hb9jFnBX4M
— Bank of England (@bankofengland) February 21, 2024
Jeremy Hunt won’t be celebrating yet, says Ellie Henderson of Investec, despite the UK racking up a record surplus last month (see opening post).
Henderson says the £16.7bn January surplus is ‘slightly disappointing’,
Although the healthy January figure will no doubt be an accolade that the Conservative party will publicly celebrate, in regard to the readthrough to the fiscal headroom available for the upcoming 6 March Budget, today’s data was slightly disappointing.
The OBR had expected an even larger surplus of £18.2bn at the time of the Autumn Statement, meaning the numbers eat into some of the extra headroom gained in the interim relative to the OBR forecasts, when all else is equal (a rather big caveat!). However, thanks to more favourable numbers in the past, on the financial-year-to-January, borrowing is still tracking lower than the OBR had expected (£96.6bn vs OBR’s £105.8bn).
Henderson also points to rumours that Hunt could make a 1p cut to the basic rate of income tax (which could cost £7.2bn by 2026-27.), adding:
With the Chancellor likely reaching deep into that sofa to find the pennies, a cheaper further 1p cut to employee’s National Insurance Contributions may be favoured, costing £4.7bn.
MCR Hotels are the third-largest hotel owner-operator in the US,
MCR says it will work with Camden-based Heatherwick Studio to consider how best to turn BT Tower into a hotel.
Tyler Morse, CEO and owner of MCR, says:
“We are proud to become owners and custodians of the iconic BT Tower.
We will take our time to carefully develop proposals that respect the London landmark’s rich history and open the building for everyone to enjoy.”
Turning a 177 metre-high tower into a hotel sounds like a big challenge.
But MCR does have experience of such projects; it developed the TWA Hotel at New York’s John F. Kennedy airport, which turned JFK’s original terminal building into a hotel with over 500 rooms.
The sale of the BT Tower to hotel chain MCR comes almost 60 years after it was opened for operations by prime minister Harold Wilson, in 1965.
The Tower was London’s tallest building for 16 years, until it was overtaken by the NatWest Tower, which opened in the City of London in 1981.
The BT Tower was open to the public until 1971, when a bomb exploded on the 33rd floor of the Tower. Shortly after the blast the tower and the restaurant were closed to the public.
Looking back at the public finances…new data from HM Revenue and Customs show that tax receipts have jumped by £33.6bn this financial year, to £695.1bn.
That includes a £21.1bn rise in takings from income tax, capital gains tax and national insurance contributions, to £390.9bn.
Nigel Holmes, director for Research and Development at tax services and software provider Ryan, says business tax bills also rose:
“It’s a strong start to the year for HMRC. January’s receipts for business-related taxes totalled £9.3bn, bringing the total from April 2023 – January 2024 to £77.4bn, representing a £8.8bn increase on the same period the year before.
One driver behind the increase in takings will be the Chancellor’s decision to increase Corporation Tax to 25% in April 2023.
“All eyes will be on the upcoming Spring Statement to see if the Chancellor will announce new changes to help boost British businesses.
Last year, full capital expensing was made permanent, enabling companies to deduct the entire cost of their investments on IT and machinery from their taxable profits in the year of spend. Let’s hope that the needs of UK businesses will be at the front and centre of next month’s budget too.
BT Tower to become hotel
Just in: BT is selling its telecommunications Tower in the centre of London to MCR Hotels, for £275m.
MCR Hotels plan to turn BT Tower into a hotel, which means it will remain as a London landmark for the future, the telecoms group says.
Brent Mathews, property director at BT Group says:
“The BT Tower sits at the heart of London and we’ve been immensely proud to be the owners of this important landmark since 1984. It’s played a vital role in carrying the nation’s calls, messages and TV signals, but increasingly we’re delivering content and communication via other means.
This deal with MCR will enable BT Tower to take on a new purpose, preserving this iconic building for decades to come.”
The Tower, located in Fitzrovia, was built in 1964 by the General Post Office (GPO), and used to spread telecommunications traffic from London to the rest of the country.
But its role in communications has diminished as fixed and mobile technology changes, and its microwave aerials were removed more than a decade ago as they were no longer needed to connect London to the rest of the country.
As well as containing communications equipment and office space, it also contains a viewing galleries and a rotating restaurant on the 34th floor.
The restaurant has gone, but that floor does still spin, and gives some brilliant views over central London. It’s used for hosting corporate and charity events these days (public access ended in 1971 after a bomb blast).
Updated
EY ITEM Club: Major tax cuts look less likely
Martin Beck, chief economic advisor to the EY ITEM Club, has analysed today’s public finances, and concluded that Jeremy Hunt will have “limited” headroom to cut taxes while sticking to his fiscal rules.
Beck says:
“January’s outturn, combined with downward revisions to earlier months, means borrowing in 2023-2024 should come in below the OBR’s forecast of £123.9bn. But with the Spring Budget approaching, the Chancellor’s focus will be on how much headroom the OBR projects against his medium-term fiscal targets.
On that issue, the market curve for interest rates over the next few years is lower than that adopted by the OBR in November, which should cut forecast spending on debt interest. And the OBR’s new forecast will incorporate the Office for National Statistics’ (ONS) new and bigger population projections which, all else equal, should raise projections for GDP, employment and tax receipts.
“But against these positives, investors have recently reined back predictions of how much rates will be cut this year, narrowing the gap with the OBR’s assumption. The starting point for the OBR’s new economy forecast is weaker, given the level of cash GDP in Q4 2023 was almost 1% smaller than projected in November. And lower-than-expected inflation will weigh on revenue from the freeze in tax thresholds. On balance, the EY ITEM Club thinks the Chancellor will have room to manoeuvre, but major tax cuts are looking less likely.”
Shares in HSBC have dropped by 4.5% at the start of trading, after missing profit expectations this morning.
HSBC nearly doubles CEO’s pay despite fall in fourth-quarter profits
In the banking sector, HSBC has nearly doubled the pay packet for its chief executive, Noel Quinn, despite reporting a drop in fourth quarter profits this morning.
HSBC’s earnings took an unexpected hit from its exposure to China’s real estate downturn.
The London-headquartered lender disclosed on Wednesday that it had settled on a £10.6m package for Quinn, marking a significant rise from the £5.6m he received for 2022, thanks to a long-term bonus in HSBC shares worth more than $5m.
The bank also increased its overall bonus pool for staff by 12% to $3.8m.
It came amid a surprise drop in fourth-quarter profits, which fell to $1bn from $5bn a year earlier, primarily due to a $3bn charge linked to the lender’s stake in the Bank of Communications in China, where lenders are struggling with a downturn in the country’s real estate market.
Quinn has told reporters this morning that he still believes China’s real estate market has bottomed out:
Updated
Despite January’s surplus, the Chancellor will "probably have limited headroom" for tax cuts
Jeremy Hunt will probably only have “limited headroom” in next month’s budget, despite the record surplus racked up in January, predicts Ruth Gregory, deputy chief UK economist at Capital Economics.
Gregory estimates Hunt will only have £15bn to play with, which won’t be enough for a “big pre-election splash”, despite January’s record surplus reported this morning.
She tells clients this morning:
We think that probable downgrades to the OBR’s GDP and inflation projections will mean the Chancellor has just £15bn (0.5% of GDP) to play with whilst still meeting his fiscal rules.
We suspect he will unveil a smaller net giveaway than November’s £21bn of about £10bn (0.4% of GDP) and that he will have to resort to a further squeeze on public spending to meet his fiscal rules.
But resolving the problem of how to deliver such tight spending plans will be a problem left for after the election.
There were reports last week that Hunt was considering billions of pounds of new spending cuts to fund pre-election tax cuts.
That would be on top of the “implausible austerity” already pencilled in for after the election under Hunt’s plans.
Polling last weekend, though, suggested such deep cuts could be counter-productive for the Conservatives, given public concerns over under-funded public services.
Updated
KPMG: Chancellor bags a record budget surplus in January as he eyes more fiscal easing
Jeremy Hunt could have £21bn of headroom for tax cuts (or, say, spending rises) in March’s budget, estimates Michal Stelmach, senior economist at KPMG UK.
Around a third of that flexibility could be used to freeze fuel duty again, Stelmach explains:
“The latest set of data suggests that borrowing could end 2023-24 at £114 billion. We expect the OBR to upgrade its fiscal outlook on the back of a weaker expected path for interest rates, lower spending on inflation-linked debt, as well as a possible upward revision to their net migration assumptions, which are net positive for the public finances. This could increase the headroom to meet the fiscal mandate to £21 billion, up from £13 billion at the Autumn Statement.
“The policy choice lies between fiscal pragmatism and a stated desire to cut taxes. Accounting for the customary fuel duty freeze could leave the Chancellor with around £14 billion to play with.
This would be enough to afford a 2p cut to the basic rate of Income Tax, also benefitting the pensioners who could not take advantage of the recent reduction in the National Insurance contributions. However, it would inevitably come at a cost of a greater constrain on future policy options. Navigating this delicate balance will be a tricky task in an election year.”
Here’s ONS deputy director for public sector Jessica Barnaby on this morning’s public finances:
“January’s surplus is the largest in nominal terms since monthly records began in 1993, although borrowing in the year to January is only slightly lower than the same period last year.
Tax receipts are always higher in January than other months owing to self-assessed taxes, which often leads to a surplus.
Also, with recent reductions in the RPI rate, interest payable on government gilts and without last year’s energy support schemes, overall expenditure was down on this time last year, despite increased spending on public services and benefits.
“As a proportion of gross domestic product, public sector debt is up on the year, and remains at levels last seen in the 1960s.”
The broader picture is that the UK’s national debt, as a share of the economy, is still the highest since the early 1960s.
The public sector net debt was clocked at £2.646bn at the end of January 2024, or around 96.5% of UK GDP – 1.8 percentage points higher than a year ago.
As this chart shows, the national debt jumped after the financial crisis of 2008, and again after the Covid-19 pandemic.
So far this financial year (since April), the UK has borrowed £3.1bn less than in the same ten months last year.
The ONS says it has revised down its previous estimate of borrowing this year by £5.8bn.
Interest bill on national debt falls
In January, the interest payable on central government debt was £4.4bn, £3.5bn less than in January 2023.
This was the lowest January interest payable since 2021 and £2.7bn less than the £7.1bn forecast by the Office for Budget Responsibility, the ONS says.
This chart shows how the interest bill on the national debt soared in the last couple of years, as inflation surged into double-digit levels – driving up the debt repayment cost on index-linked gilts.
Lindsay James, investment strategist at Quilter Investors, says:
“Since November, RPI has fallen from 5.3% to 4.9% on a 12-month basis. Index-linked gilts, which account for around a quarter of government debt issuance, have interest payments linked to RPI, as opposed to CPI.
This has seen interest payable on index-linked gilts decline significantly since January 2023, but it is a small increase on last month’s interest bill.
Updated
Introduction: UK posts record budget surplus in January
Good morning, and welcome to our rolling coverage of business, the financial markets and the economy.
The UK has posted its largest budget surplus for a January in at least 30 years, giving a final healthcheck on the public finances ahead of next month’s budget.
There was a surplus of £16.7bn last month, new data from the Office for National Statistics shows – which is the largest surplus since monthly records began in 1993, and twice as large a surplus as a year ago.
👀
— Ed Conway (@EdConwaySky) February 21, 2024
Biggest monthly surplus for UK Exchequer since records began (in 1993) https://t.co/2CjRCTVwvn
January is typically a good month for the public finances, as it includes the deadline for self-assessment taxpayers to pay what they owe.
The ONS explains:
Each January tax receipts are always higher than in other months, owing to receipts from self-assessed taxes; combined self-assessed income and capital gains tax receipts were £33.0 billion, £1.8 billion less than a year earlier.
City economists had expected an even larger surplus, though, of £18.7bn.
Public sector net borrowing excluding public sector banks was £16.7 billion in surplus in January 2024.
— Office for National Statistics (ONS) (@ONS) February 21, 2024
This was more than double the surplus of January 2023 and the largest since monthly records began in 1993.
➡️ https://t.co/Hz0LLO7Kbi pic.twitter.com/iHQOT14JoY
Central government tax receipts rose by £3.9bn year-on-year, to £111.4bn in January, lifted by a rise in takings from corporation tax, income tax and Value Added Tax (VAT).
Self-assessed (SA) tax receipts were a little lower than last January – although some of this money may show up in February’s public finances.
On the other side of the national balance sheet, net social benefits rose by £3.4bn in January to £23.7bn.
The ONS explains:
In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments.
Ending the energy support schemes which provided subsidies to consumers and businesses also cut the government’s spending bill.
Encouragingly, the interest payment on the national debt also fell, due to the drop in inflation over last year (used to set the repayment on index-linked bonds).
Today’s data also shows that the UK has run up a deficit of £96.6bn so far this financial year.
That’s £9.2bn less than forecast by the Office for Budget Responsibility (OBR), which may give chancellor Jeremy Hunt some wriggle room for tax cuts in the Budget.
But, the Resolution Foundation is warning this morning that any tax giveaways next month will be squeezed in between £20bn of tax increases already implemented and a further £17bn of hikes pencilled in for after polling day.
Calling this a “tax sandwich”, Resolution lay out what lies ahead for taxpayers:
Tax rises of around £20 billion were introduced in 2023-24, including freezing personal tax thresholds and increasing Corporation Tax.
Highly unusually, the government has also pre-announced major tax rises for after the next election, with a further £17 billion of tax rises set to come into effect in the next parliament, including a Spring 2025 Stamp Duty rise and three extra years of tax threshold freezes.
History, and significant spending cuts pencilled in for after the election, tell us that further tax rises may well be announced after polling day – as we saw in 1993, 1998, 2011, 2016 and 2020.
Also coming up today
Financial markets are bracing for two important events this evening (UK time). The US central bank will release the minutes of its last monetary policy meeting, where it left interest rates at a 23-year high; they’ll be strutinised for hints as to when cuts may come.
And after Wall Street closes, chip giant Nvidia will release its latest financial results. Given Nvidia’s share pruce has more than tripled in the last year, lifted by AI enthusiasm, the stakes are high.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says Nvidia’s numbers will be the “most expected earnings of the quarter today”, adding:
Nvidia is expected to announce a sales revenue of around $20bn in the Q4 and earnings per share of $4.60. The numbers are huge if you think that sales were worth around $6 billion, and EPS was just 88 cents a year ago.
We are talking about a more than 200% sales growth – which, no matter if the company meets expectations or not – is HUGE. But of course, the price action was big too. Nvidia is up by more than 400% since the beginning of 2023. This is why any correction could be massive.
In US today NVIDIA going to declare their Q4 results, all top analysts expecting its revenue should go up 200%, it means $20.5B, whole street’s eyes on its results, first time ever they’re taking so much interest in the company except Google, Microsoft & Tesla, interesting !
— Riskiest_Poison.1 (@Vodka_Cyanide) February 21, 2024
The agenda
7am GMT: UK public finances for January
11am GMT: CBI industrial trends survey of UK manufacturing
2pm GMT: Bank of England policymaker Swati Dhingra gives a speech on ‘Recent BoE projections – key factors/judgements’
2.15pm GMT: Treasury Committee to question forecasters about economic modelling ahead of Spring budget
3pm GMT: Eurozone consumer confidence report for February
7pm GMT: Federal Reserve releases minutes of its latest FOMC meeting
Updated
