Finance Director Rishi lets rip amidst market meltdown

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Finance Director Rishi lets rip amidst market meltdown
Cubankite /
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He is “the Finance Director to Boris’s CEO”. The Tories aspire to cut taxes, increase expenditure and to maintain fiscal prudence – self-evidently impossible. But on Wednesday, Mr Sunak proved himself both emotionally and economically intelligent, writes Victor Hill.

The virus budget

This budget was delivered in (ahem) most unusual circumstances. The Chancellor, Mr Sunak, came to the despatch box, barely three weeks into the job, to deliver the Johnson government’s first budget – and indeed the first budget further to Britain’s formal exit from the European Union on 31 January. This should have been a moment of synthesised triumphalism wherein the course of Global Britain would be set with great fanfare. Just six weeks ago the British economy was apparently in robust good health and all kinds of things seemed possible.

Instead, as he rose, the backdrop was the precipitous fall in global stock markets on New Black Monday with the FTSE-100 trading at levels not seen for over ten years. The price of oil had plummeted to $34 on Monday but had since risen to $37.64; gilt yields were crashing. Currencies were lurching on the exchanges. Supermarkets were running low on loo rolls and baked beans (no correlation inferred) and a shadow lay across the land – and indeed the world at large. Brexit, left unmentioned, seemed long ago and far away.

Mr Sunak was not physically wearing a face mask but he was in prophylactic mode. His entire speech had been pre-sprayed with anti-viral sanitizer. He manifested himself as a prized, speed-skinny greyhound – indeed the pace of delivery accelerated during nearly one hour on his feet; and he seemed to grow in confidence after a somewhat shy beginning.

The Labour benches remained oddly mute throughout. They must know that power for them is but a distant dream – even if no British political party has ever been re-elected for a fifth stint in power since the Glorious Revolution of 1688 established the principle of rule by the people. And that is the key to this budget: Boris and Rishi intend to be around for quite some time to come, and to set the ship of state on course to a brave new world…

Four major themes

The first theme of Mr Sunak’s budget was reassurance. Thankfully, it seems, we are not all going to die; and even gig-economy workers will get sick pay, while small firms with less than 250 employees will have their sick pay refunded by HMRC. Swaths of the High Street will be lifted out of business rates for a year. These ameliorative measures will hopefully ease the pain for smaller companies hit by the pandemic. There was consolation also for the home-bound self-isolators as alcohol duties were frozen.

The second theme was investment in infrastructure – much as pre-figured. The government will spend more than £600 billion over the next five years on infrastructure projects designed to improve the nation’s flagging productivity. Full details of the spending spree will emerge in the spring but he cited a number of candidate projects including ring roads and new flood defences (soon, no doubt, to be challenged by their worships). Will all that money be well spent? I tilted at an answer last week. But let’s not rain on the parade for now.

The third theme of the Sunak budget was, more originally, ideas – a word he repeated many times. The idea is that post-Brexit Britain will be the go-to hub for innovation, research and technology. To some extent that is already the case but the message is welcome.

The fourth theme was stability and continuity. This budget was much more about spending pledges than tax changes. Income tax rates and bands and corporation tax (my prediction of a cut in corporation tax three weeks was undone by the virus) remain unchanged. Only the rise in the NIC threshold from £8,632 to £9,500 next year will impact most people’s pockets. That was a manifesto commitment – but the tax cutting agenda has been put on hold for now. As result, the tax-take will actually go up next year.

Generally, there is little that finance ministers can do to propitiate falling stock markets – that role is now exercised by central banks. Mr Sunak has little to fear from the gilt markets as some UK government maturities began to offer negative yields last week, just like their German counterparts. Though, as I delight in telling young people, negative gilt yields suggest that they will never get an old-age pension – which doesn’t bode well for the future.

The outlook for Government finances

Effectively all the austerity measures of the Cameron-Osborne years have been junked. Cameron-Osborne cut the government payroll by about 500,000; Johnson-Sunak will increase the number of people working for the government by about the same number over the next three years. Government spending is to increase by £30 billion in the next financial year – £12 billion of which is directly attributable to combatting the effects of the coronavirus (and thus temporary).

Over the next five years Mr Sunak plans to borrow £125 billion more than previously planned, so the total UK national debt is set to top £2 trillion by 2024-25. Government spending will exceed 40 percent of GDP next year. The tax-to-GDP ratio will reach a 46-year high of nearly 35 percent. The UK will edge up towards the OECD average next year for total tax as a proportion of GDP – though we shall still be behind stolid Germany and spendthrift France. But, in the round, spending will go up faster than the tax-take over this parliament, so the fiscal deficit will just get bigger – to about £60 billion in 2023-24. And nobody seems to care.

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Mr Sunak claims that the current forecast does not breach existing fiscal rules but he has left himself the option to review those rules in a second budget scheduled for the autumn. Hopefully, by that time, the virus scare will be over – even if its scars still linger. The real fault line is that a rise in interest rates, on the back of renewed inflation, would blow government finances out of the water. For the moment at least, that looks unlikely.

The Tory Party is haunted by the ghost of Margaret Thatcher. The internet has been full of variants of the same question: what would The Lady have thought? For many this was not a Tory budget at all – it was Blairite in tone and Keynesian in method. But, as I tried to explain to a French intellectual recently, the Tory Party is an organism that exists in order to perpetuate itself. Autre temps, autres mœurs.


Pandemic Update

There was always going to be a trade-off between expected mortality and short-term economic disruption. The Chinese, very early on in this pandemic, took the view that it was much better to take a short-term economic hit (knowing, of course that it would have global fall-out) in order to avoid the quite credible downside risk of mass fatalities. Thus much of Hubei Province and elsewhere has been in lockdown since late January – though there are some signs that the lockdown may be eased shortly, as the pace of new infections in China slows and the recovery rate trends upwards.

There are now more closed cases than open cases – where closed means recovered plus fatalities and open means all currently infected, of which mild, severe and critical. According to my spreadsheet the global mortality rate over the last week has remained remarkably stable at 3.61 percent (though it ticked up to 3.67 percent on Thursday). Let’s be clear – that is much higher than for seasonal flu.

The British ruling elite, including all those who inform COBRA (the emergency committee of the nation chaired by the PM) seems to have taken the view from the outset that the lives of a slew of care home residents would be a cheap price to pay if economic disruption were to be minimised. Right across Asia one cannot enter a bank, let alone an airport, without having one’s temperature scanned by men (they are mostly male) in hamzat-suits. All visitors arriving in Taiwan, Hong Kong and Singapore are screened. Testing is ubiquitous.

Yet in Britain, thus far, the entire public safety programme has consisted of ministers expatiating on the need for punctilious hand-washing (something of which Mr Rees-Mogg’s Nanny surely approves – though I and most of my readers do that anyway). There have been no limitations on public gatherings and no systematic screening – not even of people arriving by air from South Korea, Iran or Italy. Most people who think they may have succumbed to the virus have been unable to get tested – and some of those who have been tested report that it takes nine days to get a result.

In Italy (on Thursday morning) the mortality rate was running at over 6.64 percent as compared with less than one percent in South Korea where the virus has had an equivalent penetration[i]. That may be because of demographics: Italy has more elderly people than South Korea. Also, the Italian strain of the virus seems to be more aggressive and was probably entrenched even before the first case was diagnosed on 20 February. But while the whole of Italy is currently in lockdown, Italians can still fly to the UK without restriction (if they can find a flight).

Over the next 2-3 weeks the number of cases and fatalities in the UK will soar exponentially. That will not be, socially and economically speaking, the end of the world; but it betokens a relaxed attitude on behalf of the British authorities (and my Asian friends agree with me). I suspect that Mr Johnson’s reputation could suffer as a result. We’ll find out at the 07 May local council elections (if they take place). The dismal Mr Khan is likely to be re-elected Mayor of London almost whatever happens.

The really scary thing is that even the epidemiologists advising Mr Johnson know more-or-less what they learn overnight from the internet – such is the fast-evolving nature of a disease that was unknown until the end of last year.

We now know that Covid-19 causes little more than a cough if it stays in the nose and throat, which is the case for the majority of people who get infected. The real danger occurs if the virus reaches the lungs. About one in seven patients develop severe breathing difficulties, while 6 percent (not all oldies) become critical. These patients typically suffer failure of the respiratory system and subsequent organ failure; and they sometimes develop sepsis, according to a report by last month’s joint WHO-China mission. Anecdotally, there is a desperate shortage of respirators in Britain’s NHS. If that is true then our mortality rate could tend towards Italy’s rather than Korea’s.

Professor Francois Balloux of Imperial College London thinks it likely that the UK will follow the same trajectory as Italy over the coming weeks. In that case the UK may be obliged to follow Italy’s strategy of national lockdown. On the other hand, Professor Paul Hunter of the University of East Anglia thinks that, unlike Italy and China (and now the USA which has had a cluster of infections in Washington State), the pattern of infection in the UK is less concentrated, so banning movement would not make much difference. “Experts” often disagree with one another.

Then there is the issue that it appears that not all patients who recover develop permanent immunity. Already some immunologists are talking about a second round in the autumn. That was the case with the Spanish flu[ii] pandemic of 1918-19.

On Wednesday morning the Bank of England followed the Fed and the central banks of Australia and Canada in cutting interest rates – from 0.75 percent to 0.25 percent (so we are back to the lowest rate ever!). The priestly caste of central bankers does not imagine they can contain pestilence through monetary policy – but they do think they can contain the economic fallout, given simultaneous supply and demand side shocks. That is highly questionable. Many commentators think that the Fed’s cut was premature.

The very day that the pandemic was formally declared by the WHO the bear market became official also. The DJIA is now more than 26 percent off its 12 February peak; the ASX-200 in Sydney is down by 20.5 percent in less than two weeks, marking real bear territory. Mr Trump’s decision in the wee hours of Thursday morning (GMT) to ban flights from Europe to the USA spooked the markets yet further. On Thursday (12 March) the FTSE-100 closed at 5,294 – a level last seen in 2009 at the depths of the financial crisis.

There have been some winners. B&G Foods (NTSE:BGS), producers of canned foods, is up; online education providers such as the Chinese TAL Education (NYSE:TAL) are thriving; sales of washing machines are soaring in America. Not that that is much consolation. On the downside, airlines, travel and hospitality companies have been hammered. Carnival (LON:CCL), the cruise line giant which owns, amongst other lines, Princess Cruises, has lost nearly 60 percent of its value in a month. The memory of the awful experiences of passengers on the Diamond Princessand the Grand Princess will linger long after the virus has been and gone.

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My best guess is that the markets will remain extremely weak until well after Easter. But don’t bank on a post-pandemic bounce. I can’t see bourses regaining late-February levels for years.

I don’t doubt that we will get through this and that an altered normality will return by early summer. But, just as viral micro-organisms affect the DNA of the hosts that they infect, the global economy will be perceptibly different from hereon in. Anti-globalisation is obviously gathering momentum as a new economic doctrine called national resiliencetakes hold. Call it Trumpery Version 2.0 if you will. That will have massive consequences which I shall unpack shortly.


Meanwhile, Middle England has been convulsed not by coronavirus but by events in Ambridge, the location of BBC R4’s long-running radio soap The Archers. Grey Gables Hotel has suffered a mysterious explosion, leaving one much-loved character in intensive care. (Will she pull through?) It’s all a bit much for this loyal listener.

Oh, roll on summertime: dog-eat-dog bake-offs; fight-to-the-death marrow-growing competitions; anarchic meetings of the Cider Club… That’s the Ambridge I know and love: it being the microcosm of a decent nation that never panics.

[i] 167.9 per million in Italy and 151.3 per million in S Korea. See:

[ii] The virus actually originated in Kentucky, USA and was brought to Europe by US service personnel.

Comments (1)

  • Jeff Nash says:

    Yesterday businesses who could get through to their commercial banks to discuss the availability of funding under the Rishi Sunak’s Coronavirus Business Interruption Loan Scheme (CBIL) ran straight into a brick wall because the offer of funding came with the requirement for the commercial banks to provide 20% of the loan advance with only 80% of the loan guaranteed by CIBL.
    Like ourselves, most borrowers approaching the scheme already have lines of credit and mortgages with their banks. As a result, the banks’ understandable position was that, for the bank to accept incremental exposure to this CIBL 20% risk portion, the borrower’s loan security and business plans would need to be reassessed against the whole of their existing facilities including the new CIBL risk.
    Doing this kind of underwriting assessment even in “peacetime” involving revaluation of buildings, new business plans with “Coronaparadigm” assumptions etc. would take a minimum of 2-3 months for a single existing customer. Trying to do this to dispense £300bn of credit all at once is a gargantuan (and probably impossible) task that would take years and many times the existing banks’ underwriting capacity.
    Even after this underwriting effort, the task of assessing bank capital requirements on the risk portion of these loans would be very difficult. The total banks’ risk portion of CIBL could be up to £60bn – enough to sink the banks on a major default that would be correlated with all their other current exposure. Accepting this risk would be unacceptable and irresponsible to take in the Coronaparadigm environment.
    As a result, yesterday it was apparent amongst the financial community that not a single loan was likely to be advanced under this scheme within a period of less than several months and, more likely, no CIBL loans would be offered at all until the underlying assumptions stabilise.
    The only way this can be quickly made to work is for CBIL to either be 100% guaranteed or for the banks to be allowed to adopt an alternative security structure that protects them in dispensing the loans quickly and provides time and also an incentive in underwriting their 20% risk and efficiently “triage” the borrowers in the very long queue.
    Under the alternative structure, which has been suggested to the Treasury, banks would be allowed to agree CIBL loans to cover the cash outflows for mortgages, rent, wages, VAT etc. to existing customers with no unresolved credit/payment history but with only 80% of the loan advanced immediately. The remaining 20% would be left on ringfenced deposit with the bank and held as security whilst the bank manages its risk assessment or the borrowers substitute alternative security the bank can due diligence (i.e property, receivables etc.). On drawdown, the CIBL would be a near zero risk to the bank, 80% government guaranteed, 20% cash security and the interest is government backed for 6 months.
    Any fees and interest should be held back from the banks until they have some “skin in the game” – this will incentivise the banks to prioritise potentially viable credits. The banks should know who these credits are and in this situation the banks are best placed to do the “financial triage” with the scarce administrative resources available. This approach will efficiently incentivise them to do this with an immediate source of new business to release onto their books. For an existing borrower/customer with a good past credit history this type of advance could be activated almost instantly. For the economy this will focus resources more efficiently than a blunderbuss approach of 100% government guaranteed loans or grants.
    The follow-on due diligence to release the 20% bank risk portion (which would be the last tranche of cash required for the borrower to survive Rishi’s “pause button” period) could be done in the following months with the banks clearly incentivised to release and earn their income on the whole loan and hopefully against an environment when the underlying assumptions improve and the long-term outlook stabilises. If it doesn’t… it doesn’t even bare thinking about!
    Jeff Nash – Stoke on Trent

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