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Bums on seats, pencils out please!
Having school-age children, the start of September is always a bittersweet moment. Summer holidays end (boo) but the children go back to school (yay). That feeling of starting a new chapter, school year or job has almost certainly been felt along Downing Street. Prime Minister Burnham took up his role in late July and installed his cabinet shortly thereafter. But with little (visible) happening over the summer, as we get closer to the upcoming October budget, work for the PM and the Chancellor will be ramping up.
Chancellor John Healey has evidently already started sharpening his pencil in readiness for his budget (due in October). In a speech made on 7 September he flagged that the budget would, of course, balance the books and remain compliant with the fiscal rules. As my colleague Ian wrote about a few weeks ago, US bond yields have been rising due to concerns about ballooning deficits and inflation.
Unfortunately, this has not been unique to the US market. Chancellor Healey mentioned some of the same factors driving gilt yields higher – notably high levels of national debt. Yields in the UK are a little higher and this is largely due to the UK’s higher inflation sensitivity (including a higher proportion of government debt which is inflation linked).
Don’t forget to show your workings
While the speech was short on detail, there were still a few interesting themes worth highlighting. Perhaps the most notable was the emphasis on devolution as a driver of economic growth. The argument is that decisions made closer to local communities and businesses should lead to better outcomes, although exactly how this translates into tangible economic gains remains to be seen.
Business leaders will also have welcomed the repeated references to deregulation and the recognition that investment and capital are critical ingredients for growth. That may sound obvious, but it is an important acknowledgement after a period in which the policy discussion has often focused more heavily on redistribution than wealth creation. In the wake of the newest round of AI model releases, I was also pleased to see artificial intelligence feature prominently. Whatever your views on AI, it was encouraging that the government are mindful of ensuring the UK is not left behind. The importance of one of the defining technological shifts of our generation is far too great to ignore.
Sorry, Miss, the dog ate my homework
The challenge, however, is that optimism alone does not solve the underlying fiscal arithmetic. The speech came against a backdrop of some uncomfortable headlines, including Jaguar Land Rover's announcement that it intends to cut 3,000 jobs and reports that hedge fund manager Chris Rokos plans to leave the UK, potentially taking a sizeable tax contribution with him (the BBC reports £330m last year). Against that backdrop, the reality remains that fiscal headroom is extremely limited.
It is entirely possible that many of the tax measures announced in recent years are doing little more than creating compliance buffers and preserving room for manoeuvre, rather than funding meaningful new spending commitments. Initiatives designed to mobilise private capital, including greater use of public financial institutions such as the National Wealth Fund, are undoubtedly interesting. However, there are limits to how much these vehicles can achieve on their own. Ultimately, there is no easy workaround. Sustained economic growth remains the most effective way to close the fiscal gap organically.
The overall tone was undoubtedly positive, and that should not be dismissed. However, the previous Labour government also talked about growth, but delivered very little. So, Chancellor Healey gets top marks for ambition, but the devil will be in the detail. Accordingly, we will wait to see if his marks are up to scratch when we get his October report card.
Key takeaways
- The Chancellor signalled a pro-growth agenda, with devolution, deregulation and investment identified as key priorities.
- Despite the positive tone, limited fiscal headroom means economic growth remains critical to improving the UK's finances.
- October's Budget will provide a clearer test of whether ambition can be translated into action.
Sacha Chorley
Portfolio ManagerSacha is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Prior to joining Quilter Investors in 2011, Sacha worked at Broadstone with their team of economists before moving into asset allocation and fund manager research.
Sacha is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. Sacha has a degree in Maths from the University of Bath.
