WEBVTT - Could a Fiscal Crisis Bring Down the Government? 0:00:02.720 --> 0:00:16.520 Bloomberg Audio Studios, Podcasts, radio News. 0:00:17.960 --> 0:00:20.200 Welcome to Meren Talks Money, the podcast and its people 0:00:20.200 --> 0:00:23.160 who know the markets to explain the markets. I am Meren, 0:00:23.239 --> 0:00:26.880 Somerset Web. We are recording this episode on September twenty fourth. 0:00:27.560 --> 0:00:30.080 Now this week I am speaking with Roger Lee. Roger 0:00:30.160 --> 0:00:32.879 is currently head of equity Strategy at UK based investment 0:00:32.920 --> 0:00:35.199 bank Cavendish. He's been in the equi market for a 0:00:35.280 --> 0:00:38.600 long time, nearly thirty years, spending time at HSBC, Deutsche 0:00:38.600 --> 0:00:40.960 Bank and JP Morgan. Most recently he was head of 0:00:41.000 --> 0:00:43.959 the UK equity strategy at Investork. He's got a lot 0:00:44.000 --> 0:00:47.480 of experience here. He's covered UK equities, European equities, US 0:00:47.479 --> 0:00:50.120 equities and of course crucially he's also a fellow of 0:00:50.159 --> 0:00:53.840 the Institute of Chartered Accountants, a physics graduate, and a 0:00:53.880 --> 0:00:59.440 frustrated politician. How's that for an intro. Roger, thank you 0:00:59.480 --> 0:01:01.120 so much for joining us today. I think we might 0:01:01.160 --> 0:01:02.760 all be frustrated politicians. 0:01:04.560 --> 0:01:07.920 Oh thanks, thanks very much for that wonderful introduction. In 0:01:07.959 --> 0:01:11.760 factor frustrated politician in fact, the least successful politician ever 0:01:11.959 --> 0:01:15.639 because I tried to get selected twice and failed both times, 0:01:15.680 --> 0:01:18.840 dismally frustrated, but not so frustrated now I have to say. 0:01:19.880 --> 0:01:21.600 Yeah, no one wants to be a politician right now, 0:01:21.640 --> 0:01:23.680 and that is exactly what we're going to talk about. 0:01:23.760 --> 0:01:25.280 And one of the reasons that I asked you on 0:01:25.440 --> 0:01:26.959 Roger Bisk is I've read some of the things that 0:01:26.959 --> 0:01:29.880 you've written about the fiscal situation of the UK and 0:01:30.040 --> 0:01:32.560 just how bad it is and whether there is a 0:01:32.560 --> 0:01:35.240 possibility that it is so bad that it genuinely does 0:01:35.600 --> 0:01:38.360 cause a fiscal crisis and possibly the downfall of this 0:01:38.440 --> 0:01:40.720 government in the UK. So it seems an extraordinary thing 0:01:40.760 --> 0:01:42.600 to say, given that this is a government with a 0:01:42.720 --> 0:01:44.640 huge majority. We look at them and you think, well, 0:01:44.640 --> 0:01:47.319 surely they'll go a full term. But actually, of course, 0:01:47.440 --> 0:01:50.120 as my colleague John Steppeck always says, we must try 0:01:50.120 --> 0:01:52.520 to think of this less as a majority government than 0:01:52.520 --> 0:01:55.560 a coalition government because of all the different viewpoints inside 0:01:55.600 --> 0:01:59.520 the tent, and with that in mind, and the fiscal 0:01:59.560 --> 0:02:01.960 position in things may be a little bit more tenuous 0:02:01.960 --> 0:02:04.440 than perhaps our Prime minister would like to think. So 0:02:04.760 --> 0:02:09.080 why don't we start by looking at the fiscal position 0:02:09.480 --> 0:02:12.320 in the UK and just run us through quite how 0:02:12.320 --> 0:02:12.960 bad this is. 0:02:13.520 --> 0:02:15.600 Let's just step back for a second and just think 0:02:15.680 --> 0:02:16.960 what a fiscal event is. 0:02:17.720 --> 0:02:17.960 Now. 0:02:18.200 --> 0:02:21.240 Most of us have lived through a fiscal event, which 0:02:21.360 --> 0:02:25.520 was clearly Lisztrust back in twenty twenty two, and a 0:02:25.560 --> 0:02:29.040 fiscal event is usually considered something when the guilt market 0:02:29.360 --> 0:02:34.000 gets very concerned and guilt yields rise very rapidly. In 0:02:34.040 --> 0:02:36.919 that particular instance, guilt yields went up one hundred basis 0:02:36.919 --> 0:02:40.560 points or one percent in a four day period and 0:02:40.600 --> 0:02:42.400 there had to be some sort of intervention from the 0:02:42.400 --> 0:02:45.359 Bank of England. And clearly European sovereign debt crisis was 0:02:45.400 --> 0:02:48.000 a series of fiscal events. They are uncommon, but they 0:02:48.080 --> 0:02:52.480 do happen, and it's usually characterized by government debt yields 0:02:52.600 --> 0:02:56.440 going out very rapidly, So that is a fiscal event. Now, 0:02:56.560 --> 0:03:01.560 again for background, there have been since this government came 0:03:01.600 --> 0:03:05.480 into power, there have been three mini fiscal events where 0:03:05.520 --> 0:03:08.760 guilt fields have gone up twenty basis pointser point two percent, 0:03:08.960 --> 0:03:11.320 so not anywhere near the one hundred basis points that 0:03:11.360 --> 0:03:14.720 you would cause some problems, but they have moved very quickly, 0:03:15.080 --> 0:03:16.760 in some cases in a matter of hours. And the 0:03:16.800 --> 0:03:20.639 three occasions were immediately after the October budget last year 0:03:20.680 --> 0:03:23.880 when the market got very concerned about growth outlook and 0:03:24.040 --> 0:03:28.680 increased issuance. In January when guilt yields went up partly 0:03:28.880 --> 0:03:32.120 because US treasury yields were going up, but also concerns 0:03:32.160 --> 0:03:35.920 about growth. And then of course during Rachel Reeves, our 0:03:36.000 --> 0:03:39.800 Chancellor's difficult day in the Commons, when gilt yilds went 0:03:39.880 --> 0:03:44.440 up twenty basis points in a matter of minutes. We 0:03:44.520 --> 0:03:47.960 have had three occasions when there has been some sort 0:03:48.000 --> 0:03:52.000 of stress in the guilt market in this administration. And 0:03:52.640 --> 0:03:55.320 what I think we're going to talk about now is 0:03:55.880 --> 0:04:00.280 what would prompt that to be significantly worse than just 0:04:00.440 --> 0:04:07.240 a zero point twenty basis point move. Okay, And so 0:04:07.320 --> 0:04:09.960 what I think prompted this and what is I think 0:04:09.960 --> 0:04:12.880 has prompted a lot of people's interest in what might 0:04:13.000 --> 0:04:17.039 happen is really following on from the public sector net 0:04:17.080 --> 0:04:20.720 borrowing numbers now to older listeners, that is used to 0:04:20.720 --> 0:04:23.120 be called the public sector borrowing requirement. So if I 0:04:23.200 --> 0:04:25.960 do mix the two up, they are essentially the same. 0:04:26.839 --> 0:04:29.120 So the public sector net borrowing requirement is really the 0:04:29.120 --> 0:04:32.040 funding requirement that the government has, or at least in 0:04:32.080 --> 0:04:34.880 this particular instance, it's obviously a deficit is that the 0:04:34.920 --> 0:04:38.240 government is spending more than they are receiving in tax revenues, 0:04:38.880 --> 0:04:43.960 and the OBR and the ONS publish this data every month. Now, 0:04:44.200 --> 0:04:47.960 in August, which was the data that was published last Friday, 0:04:48.520 --> 0:04:51.280 it was clear that the government is spending a lot 0:04:51.360 --> 0:04:53.920 more than they're generating in tax revenue. In fact, I'm 0:04:53.960 --> 0:04:56.400 not going to burden you with too many numbers, but 0:04:56.440 --> 0:04:59.479 I'll just give you some sort of context here. In August, 0:04:59.680 --> 0:05:04.000 the government had to borrow or the deficit between spending 0:05:04.200 --> 0:05:09.799 and tax revenue was eighteen billion pounds. Now, that compared 0:05:09.839 --> 0:05:12.800 to an OBR forecast for the month of just under 0:05:12.839 --> 0:05:19.320 thirteen billion pounds, so forty percent overshoot. Now, that in 0:05:19.360 --> 0:05:25.279 itself is not necessarily a problem. What is a problem 0:05:25.480 --> 0:05:27.560 is that for the first five months of the year, 0:05:28.040 --> 0:05:33.839 spending has overshot tax revenue by sixteen billion. That's for 0:05:33.920 --> 0:05:38.320 five months. Now, this isn't particularly complicated, so just bear 0:05:38.360 --> 0:05:41.359 with me. But if the government has overspent by sixteen 0:05:41.560 --> 0:05:45.440 billion in five months, that's just over three billion a month. 0:05:46.360 --> 0:05:50.040 If that run rate continues for the year, then that's 0:05:50.080 --> 0:05:53.560 clearly thirty six or thirty eight billion rounding up, So 0:05:53.640 --> 0:05:58.040 let's call that forty billion of overspend for the year. Now, 0:05:59.839 --> 0:06:06.039 that again isn't necessarily a problem, except compared to what 0:06:06.240 --> 0:06:09.480 the OBR are forecasting for the debt for this year. 0:06:10.560 --> 0:06:14.479 So the OBR are forecasting that debt levels actually start 0:06:14.520 --> 0:06:18.039 to come down, or the rate of the deficit slows 0:06:18.640 --> 0:06:21.720 towards the end of the year. There's always this kind 0:06:21.760 --> 0:06:23.720 of seasonal effect in this as well, because we are 0:06:23.839 --> 0:06:28.000 payout taxes in January, so borrowing does come down seasonally. 0:06:28.760 --> 0:06:34.000 But they're expecting debt to come down significantly from last year. Again, 0:06:34.080 --> 0:06:35.880 I'm sorry to give you some numbers, but I can't 0:06:35.880 --> 0:06:40.200 text it. I'm threatened. So last year the government borrowed 0:06:40.240 --> 0:06:42.800 about one hundred and fifty billion. That was the deficit 0:06:42.880 --> 0:06:45.840 last year, one hundred and fifty billion pounds, and this 0:06:45.960 --> 0:06:49.680 year the OBR are forecasting the deficit to be around 0:06:49.720 --> 0:06:53.560 one hundred and twenty billion pounds, so clearly less. 0:06:53.440 --> 0:06:55.120 Than Okay, hang on, to take me back a bit, 0:06:55.160 --> 0:06:56.840 how does that connect to the forty billion we were 0:06:56.880 --> 0:06:58.320 just talking about. I thought you said it was going 0:06:58.400 --> 0:07:00.000 to be around forty billion by the end of the year. 0:07:00.720 --> 0:07:06.080 So we're currently overspending by forty billion if we annualize 0:07:06.080 --> 0:07:12.000 the current overspend. But the OBR is expecting debt to 0:07:12.120 --> 0:07:14.520 be lower this year than the. 0:07:14.560 --> 0:07:16.680 Last year, so they're expecting it to turn into an 0:07:16.800 --> 0:07:19.160 underspend over the next seven months. 0:07:18.960 --> 0:07:22.800 Yes, or they're expecting the revenues to pick up and 0:07:22.920 --> 0:07:29.200 spending to slow. Absolutely. So the question I think people 0:07:29.280 --> 0:07:34.240 are beginning to ask themselves is what if spending doesn't slow, 0:07:34.920 --> 0:07:39.600 What if tax revenues don't increase. What happens if we 0:07:39.720 --> 0:07:44.000 carry on spending at the same rate as we did 0:07:44.520 --> 0:07:49.640 last year. Now, if that is the case, then last 0:07:49.720 --> 0:07:53.360 year we spent or overspent by one hundred and fifty pounds, 0:07:54.720 --> 0:07:58.000 So if we have the same outturners last year, that 0:07:58.200 --> 0:08:03.280 is still more the and the OBR are forecasting. But 0:08:03.360 --> 0:08:08.240 as we stand today, we're spending all the deficit is 0:08:08.400 --> 0:08:13.160 higher than it was last year. So there are two 0:08:13.240 --> 0:08:17.360 issues here. One why will the deficit come down in 0:08:17.480 --> 0:08:22.040 the second half of this year? And secondly, if it 0:08:22.160 --> 0:08:26.800 doesn't come down and the deficit run rate continues as 0:08:26.840 --> 0:08:29.240 it is in the first five months of the year, 0:08:30.480 --> 0:08:34.600 then the conclusion is that the deficit will be one 0:08:34.720 --> 0:08:36.719 hundred and fifty billion if it was the same as 0:08:36.800 --> 0:08:42.199 last year, but including the overspend or the increased deficit, 0:08:42.280 --> 0:08:44.600 increased run rate, however you want to describe it, that 0:08:44.720 --> 0:08:46.760 is an additional forty billion pounds. 0:08:47.200 --> 0:08:48.960 Okay, now we get to that turn. 0:08:49.800 --> 0:08:55.880 So the outturn could an ice stress could be closer 0:08:55.920 --> 0:09:01.439 to one hundred and ninety billion of deficit, not one 0:09:01.520 --> 0:09:06.280 hundred and twenty that the OBR are forecasting. So that 0:09:06.720 --> 0:09:11.640 is the kind of the punchline here, And it is 0:09:11.679 --> 0:09:14.240 not just me doing the numbers. And as I say, 0:09:14.280 --> 0:09:17.600 this is just purely arithmetic. It's not a forecast, it's 0:09:17.679 --> 0:09:20.800 not our house view, it's not a central case. It 0:09:20.880 --> 0:09:25.720 is just merely extrapolating the arithmetic that we've seen over 0:09:25.760 --> 0:09:31.040 the last five months and making a not unreasonable assumption 0:09:32.040 --> 0:09:34.920 that the deficit this year is going to be closer 0:09:34.960 --> 0:09:37.680 to the deficit that we saw last year, and then 0:09:37.800 --> 0:09:39.880 adding that overshoot onto us. 0:09:40.280 --> 0:09:44.160 Okay, let's carry on with this terrifying conversation by talking 0:09:44.200 --> 0:09:48.160 about what it is that the OBR expects to bring 0:09:48.200 --> 0:09:51.800 tax revenues up and spending down over this year and 0:09:51.920 --> 0:09:53.959 the extent, which is that may or may not happen. 0:09:53.960 --> 0:09:57.080 Are they expecting an increase in tax revenues for example. 0:09:57.679 --> 0:10:02.040 So there are essent three areas where the OBR are 0:10:02.080 --> 0:10:05.679 forecasting that tax or forecasting both tax will be higher 0:10:05.720 --> 0:10:09.360 and spending will be lower. And we can discuss the 0:10:09.440 --> 0:10:11.600 likelihood of whether this will actually come to pass. But 0:10:11.679 --> 0:10:15.240 the three areas that they're talking about is that capital 0:10:15.280 --> 0:10:19.480 receipts capital tax receipts will be higher in this fiscal 0:10:19.559 --> 0:10:24.760 year than last year. Now most economists think that might 0:10:24.840 --> 0:10:27.360 be the case. There is a possibility that could be the. 0:10:27.320 --> 0:10:29.480 Case, and that would be the case. Sorry, just to interrupt, 0:10:29.480 --> 0:10:31.440 that would be the case. Why because the rate has 0:10:31.480 --> 0:10:35.120 gone up, and because with markets doing very well, etc. 0:10:35.360 --> 0:10:38.200 And more people will be making capital gains because people 0:10:38.280 --> 0:10:40.760 are beginning to sell, for example, by to let properties 0:10:40.760 --> 0:10:42.240 they've held for quite a long time, and there'll be 0:10:42.280 --> 0:10:44.600 a rade of capital gains coming from those. So all 0:10:44.600 --> 0:10:46.600 these things combined, I think. 0:10:46.400 --> 0:10:50.600 That's the general argument. Yes, yeah, thank you. The second 0:10:50.640 --> 0:10:54.319 area where the OBR think that the deficit will start 0:10:54.400 --> 0:11:00.440 to fall is because lower debt interest, that is, the 0:11:00.480 --> 0:11:03.840 debt interest that the government have to pay to issue 0:11:04.120 --> 0:11:08.800 new guilts into the market. Now that the OBER, again 0:11:08.880 --> 0:11:12.760 broadly speaking, forecast tenure treasury yield are ten year guilt 0:11:12.840 --> 0:11:16.560 yields to be four and a half percent. Guilt yields 0:11:16.600 --> 0:11:18.319 are already higher than that today. 0:11:18.720 --> 0:11:21.119 What are they today at four point seven. 0:11:23.160 --> 0:11:26.800 And obviously thirty year guiltields are even higher at close 0:11:26.880 --> 0:11:30.040 to five and a half percent. So it is very 0:11:30.080 --> 0:11:36.240 difficult to see how lower funding costs are going. 0:11:36.040 --> 0:11:37.920 To help. 0:11:39.120 --> 0:11:42.560 This deficit issue. In fact, if anything, it will be 0:11:42.640 --> 0:11:47.200 the reverse. And the third area that the ober are 0:11:47.520 --> 0:11:50.960 still believing the world reduced the deficit, and this is 0:11:50.960 --> 0:11:54.200 a spent on the spending line again, is that they're 0:11:54.240 --> 0:12:00.840 expecting lower growth in welfare spending. Again, it's difficult to 0:12:00.920 --> 0:12:03.920 see how that is going to be the case, given 0:12:04.080 --> 0:12:07.200 that the welfare cuts that had been proposed clearly were 0:12:07.240 --> 0:12:13.240 rejected by the Labor Party back in July. So it's 0:12:14.840 --> 0:12:18.560 difficult to see why this deficit is going to come 0:12:18.600 --> 0:12:19.520 down in the second half. 0:12:20.080 --> 0:12:20.480 Now. 0:12:21.200 --> 0:12:25.880 What is perhaps easier to see is if the economy 0:12:25.920 --> 0:12:29.360 continues to slow as it's doing at the moment, and 0:12:29.440 --> 0:12:33.120 if the labor market continues to deteriorate, and we source 0:12:33.360 --> 0:12:37.439 some disappointing survey data earlier on in the week, If 0:12:37.480 --> 0:12:41.560 the employment market continues to slow, then growth will slow 0:12:42.160 --> 0:12:46.200 and therefore tax revenue will slow. So the income side 0:12:46.360 --> 0:12:51.400 of this might slow because of slowing growth, and the 0:12:51.480 --> 0:12:55.600 expenditure side might rise because of increased welfare payments in 0:12:55.720 --> 0:12:58.600 order to support those who are no longer in work. 0:13:00.000 --> 0:13:03.640 I've already seen an element of this in last Friday, 0:13:03.679 --> 0:13:07.559 which again I think is why last Friday's PSNB numbers 0:13:07.679 --> 0:13:11.040 were so interesting is we've already seen an element of 0:13:11.080 --> 0:13:14.360 this because one of the reasons that the Ober said 0:13:14.520 --> 0:13:18.720 for this overshoot in the deficit or overshoot in the 0:13:18.720 --> 0:13:22.960 borrowing requirement was because of lower VAT receipts. Now, lower 0:13:23.040 --> 0:13:28.240 VAT receipts are directly linked to demand, they're directly linked 0:13:28.400 --> 0:13:32.480 to growth, and they're directly linked to consumer confidence. And 0:13:32.520 --> 0:13:37.320 so what we're already seeing is that lower demand feeding 0:13:37.360 --> 0:13:43.000 through into lower purchases, lower basket sizes, and that is 0:13:43.040 --> 0:13:46.360 feeding directly through into lower VAT receipts. And AVIAT is 0:13:46.400 --> 0:13:51.040 one of the largest tax generators in the UK. Now, again, 0:13:51.559 --> 0:13:55.880 this is not a huge surprise, Lord Wolfson in his 0:13:56.000 --> 0:13:59.280 next report, which I think you referred to recently in one. 0:13:59.160 --> 0:14:01.800 Of you and I talked about it in one of 0:14:01.840 --> 0:14:06.160 our market round ups, because those reports are always incredibly insightful, 0:14:06.280 --> 0:14:08.240 so it was not something I wanted to read. 0:14:08.280 --> 0:14:13.800 He's so good, hugely, hugely insightful, And I think you 0:14:13.920 --> 0:14:17.960 cited the fall in vacancy rates and the issues that 0:14:18.600 --> 0:14:20.920 the lack of vacancies that next now have and the 0:14:20.960 --> 0:14:23.880 number of applicants that they have going up. What he 0:14:23.920 --> 0:14:26.280 also obviously cited right at the front of the report 0:14:26.280 --> 0:14:29.480 in his outlook statement was that he's concerned about slower 0:14:29.680 --> 0:14:35.280 consumer spending now that is already directly seen by the 0:14:35.320 --> 0:14:40.360 OBR in those lower V eight receipts. So again it's 0:14:40.360 --> 0:14:44.880 not a question of being sort of sensation list in 0:14:44.960 --> 0:14:48.240 any way. It is just know. What the ABR said 0:14:48.480 --> 0:14:53.239 on Friday was that net debt or debt had exceeded 0:14:53.320 --> 0:14:56.560 expectations by some forty percent, and the reason for that 0:14:56.720 --> 0:15:00.560 there was also elements of local authority thing, which is 0:15:00.960 --> 0:15:03.520 quite technical and has a habit of reversing anyway. But 0:15:04.440 --> 0:15:09.120 also but what was very tangible was lower V eight receipts. Now, 0:15:09.240 --> 0:15:12.720 I'm not sure anyone out there is forecasting a huge 0:15:12.800 --> 0:15:15.560 search in growth for the remainder of this year. In fact, 0:15:15.680 --> 0:15:18.240 I would suggest that most people that are forecasting the reverse. 0:15:18.320 --> 0:15:20.240 Most economies are forecasting the reverse. 0:15:20.880 --> 0:15:24.880 So sorry, carry on. 0:15:25.360 --> 0:15:27.880 I was I was always just going to conclude that 0:15:28.160 --> 0:15:33.040 if anything, the risks to given the risk to the economy, 0:15:33.680 --> 0:15:37.440 the risk therefore would would suggest that the actually tax 0:15:37.520 --> 0:15:40.479 revenue will be less than the A B R are forecasting, 0:15:41.000 --> 0:15:45.880 and also even less than last year, and the risk 0:15:47.160 --> 0:15:48.800 that wilfire spending will be higher. 0:16:05.040 --> 0:16:06.920 So for this to turn around, for the math to 0:16:06.960 --> 0:16:09.960 pan out differently, we either need a sudden, very unexpected 0:16:10.000 --> 0:16:14.080 surgeon growth, a sudden, also very unexpected massive decline in 0:16:14.400 --> 0:16:19.680 our spending, particularly on welfare, which is the obvious area study, 0:16:19.800 --> 0:16:22.720 or a sudden collapse in interest rates in guilt rates, 0:16:22.720 --> 0:16:25.240 and none of those things seem very likely right now. 0:16:25.480 --> 0:16:28.640 Yeah, well, that's an interesting one. Absolutely, to an extent. 0:16:28.720 --> 0:16:31.840 Government finances are very straightforward. They are very similar to 0:16:31.920 --> 0:16:35.720 our own personal finances. They have income from tax revenue, 0:16:35.920 --> 0:16:38.920 they have expenditure, which is what their spending programs are, 0:16:39.200 --> 0:16:41.440 and if there is a gap between the two of 0:16:41.480 --> 0:16:43.760 them a short for then they have to borrow. That 0:16:43.880 --> 0:16:46.760 is no different to any of us in terms of 0:16:46.760 --> 0:16:50.120 how we fund our data day expenditure. Now, instead of 0:16:50.160 --> 0:16:52.680 going to a bank. Clearly they do. They go to 0:16:52.720 --> 0:16:54.600 the Bank of England and or the Debt Management Office 0:16:54.600 --> 0:16:59.320 and they issue guilt. Now, one of the reasons why 0:16:59.360 --> 0:17:02.520 this is bound perhaps more relevant now and certainly why 0:17:03.200 --> 0:17:06.080 we have started talking about it a bit more. I 0:17:06.160 --> 0:17:09.560 stress again that this isn't necessarily a forecast. One of 0:17:09.600 --> 0:17:11.159 the reasons we have talked about a bit more is 0:17:11.200 --> 0:17:13.480 because our view was is that interest rates were going 0:17:13.520 --> 0:17:15.800 to fall quite sharply towards the end of the year. 0:17:16.000 --> 0:17:19.119 So our view was slowing economy as a result of 0:17:19.160 --> 0:17:22.120 the corporate changing behavior as a result of the last 0:17:22.119 --> 0:17:24.919 budget and the National Living Wage would result in a 0:17:24.960 --> 0:17:28.080 slowing economy, which is what we're seeing. There would be 0:17:28.119 --> 0:17:30.399 a response in the labor market, which is what we 0:17:30.440 --> 0:17:35.080 are seeing, and therefore the Bank of England would cut raids. Now, 0:17:35.240 --> 0:17:37.800 the Bank of England are clearly not going to cut 0:17:37.880 --> 0:17:40.560 rates because inflation is still very elevated in the UK 0:17:40.720 --> 0:17:44.320 three point eight percent, and arguably a lot of that 0:17:44.880 --> 0:17:48.000 is to do with the pass through of the National 0:17:48.080 --> 0:17:50.960 Living Wage and the national insurance contributions, particularly in the 0:17:51.000 --> 0:17:54.400 food sector and energy prices related to net zero, which 0:17:54.440 --> 0:17:57.080 again I think you've discussed at some detail in a 0:17:57.119 --> 0:18:00.159 recent PODCAG so I won't go down at and not 0:18:00.240 --> 0:18:02.560 going to add anything to that, suffice it to say 0:18:03.280 --> 0:18:05.920 so it locks in the market, certainly not expecting any 0:18:05.920 --> 0:18:08.600 interst rate cuts anytime soon. In fact, maybe only one 0:18:08.640 --> 0:18:10.680 more this year. Now that's very different to the forecast 0:18:10.680 --> 0:18:13.400 that we would have had two or three months ago. Yeah, 0:18:13.640 --> 0:18:18.040 that's so, that makes a big difference, and that is 0:18:18.080 --> 0:18:20.760 what has changed. What has changed is that we would 0:18:20.760 --> 0:18:22.400 have thought that the Bank of eng That were going 0:18:22.400 --> 0:18:24.440 to be able to cut rates quite aggressively. There is 0:18:24.480 --> 0:18:27.720 a fairly strong correlation between falling into strates and improving 0:18:27.800 --> 0:18:32.240 growth that would have stimulated the economy, and that perhaps 0:18:32.440 --> 0:18:35.520 would have been the surprise that you were just talking about. 0:18:35.560 --> 0:18:37.240 That perhaps would have been the surprise that you would 0:18:37.240 --> 0:18:39.600 have seen in terms of both the growth and therefore 0:18:39.600 --> 0:18:42.800 the tax take and obviously reduced wealthare spending and more important, 0:18:42.840 --> 0:18:44.879 perhaps reduced and clearly that would have had an impact 0:18:44.880 --> 0:18:48.720 on guilt yields now in terms of where the curve 0:18:48.720 --> 0:18:52.119 would have gone, and that would have reduced the funding 0:18:52.160 --> 0:18:57.440 cost it. So, if you wanted to really pin down 0:18:57.600 --> 0:19:01.840 what has changed, two things changed. One is that the 0:19:01.880 --> 0:19:05.119 interest rate cuts aren't likely, and we would certainly agree 0:19:05.160 --> 0:19:08.120 with that as well in the short term. And secondly, 0:19:08.119 --> 0:19:13.400 what's changed is the current spending dynamic is a lot 0:19:13.440 --> 0:19:18.560 worse and tax take dynamic is a lot worse than 0:19:18.560 --> 0:19:21.880 we were expecting. And it's those two stroke three factors 0:19:21.880 --> 0:19:22.480 that have changed. 0:19:22.760 --> 0:19:24.800 Yeah, and the marketer has definitely noticed this. I've talked 0:19:24.800 --> 0:19:26.680 about this a lot on the podcast. But the fact 0:19:26.680 --> 0:19:29.120 that debt costs in the UK are at the moment 0:19:29.119 --> 0:19:31.720 they are still higher than any other G seven economy. 0:19:31.840 --> 0:19:33.720 So even though our debt situation on the face of 0:19:33.760 --> 0:19:37.600 it is not necessarily worse than some other developed economies, 0:19:37.640 --> 0:19:41.560 we're still paying we're paying more for our debt than others. 0:19:41.400 --> 0:19:44.040 Irrefutable on a thirty year basis. In the ustrum some 0:19:45.000 --> 0:19:47.960 structural issues around the thirty year bond yielding, thirty year 0:19:48.480 --> 0:19:52.119 guilt yields. Now just give some context for this. Compared 0:19:52.160 --> 0:19:54.520 to the G seven for the thirty year bond yield, 0:19:54.520 --> 0:19:56.600 it's just around to five and a half percent. The 0:19:56.720 --> 0:19:59.680 US thirty year, which is the next highest, is four 0:19:59.680 --> 0:20:00.800 point seven percent. 0:20:01.160 --> 0:20:02.359 Yeah, it's a big difference. 0:20:02.600 --> 0:20:06.480 It's a very significant difference. Now there are I stress 0:20:06.480 --> 0:20:08.439 some structural reasons why that may be the case, but 0:20:08.520 --> 0:20:12.439 nonetheless it is quite clear that the global capital markets, 0:20:12.480 --> 0:20:15.199 which is where we get most about funding from, because 0:20:15.359 --> 0:20:18.280 up until now, relatively few people in the UK own 0:20:18.400 --> 0:20:23.520 guilts that we tend to save through bank deposits rather 0:20:23.560 --> 0:20:26.080 than buying guilts that is a compare and contrast with 0:20:26.160 --> 0:20:28.919 other countries, So we are very reliant on the international 0:20:28.920 --> 0:20:32.159 markets in order to fund this deficit, in order to 0:20:32.200 --> 0:20:35.760 fund our borrowing, and so therefore we are also very 0:20:35.800 --> 0:20:38.840 prone to how international bondhields move. But as things stand 0:20:38.880 --> 0:20:42.240 at the moment, the markets are clearly demanding a premium 0:20:42.560 --> 0:20:45.320 for a number of reasons, possibly this risk that we're 0:20:45.359 --> 0:20:47.560 talking about, and is partly that. 0:20:48.040 --> 0:20:50.159 Okay, So the question then that brings us to the 0:20:50.200 --> 0:20:54.400 crunch of the whole thing is how long before things 0:20:54.440 --> 0:20:56.399 get worse? And as we know, we've been talking on 0:20:56.440 --> 0:20:58.720 this podcast and various other places where John and I 0:20:58.800 --> 0:21:01.680 have written and spoken for years about the massive build 0:21:01.760 --> 0:21:04.280 up of debt across the developed world and how uncomfortable 0:21:04.320 --> 0:21:07.159 it is not just here but elsewhere. And we know 0:21:07.400 --> 0:21:09.280 you learn from how long you talk about it, that 0:21:09.359 --> 0:21:11.399 these imbalances can build up and up and not be 0:21:11.440 --> 0:21:13.040 a problem, and not be a problem, and not be 0:21:13.040 --> 0:21:15.920 a problem. Everything's fine, and it goes on for much 0:21:15.920 --> 0:21:19.720 longer than you could possibly imagine, and then suddenly it turns. 0:21:19.800 --> 0:21:23.160 And when it turns, it also turns much much faster 0:21:23.240 --> 0:21:26.960 than you could conceivably imagined before it actually happened. That's 0:21:27.000 --> 0:21:29.560 how we get We give, we become complacent, and then kubum, 0:21:29.840 --> 0:21:32.479 everything goes horribly wrong. And in a situation like this, 0:21:32.600 --> 0:21:34.800 you get to the point where the market says, well, 0:21:34.840 --> 0:21:36.919 we'll hang on. It's costing you so much just to 0:21:37.000 --> 0:21:39.480 serve at the stet you're in a big part of trouble. 0:21:40.000 --> 0:21:42.239 And so what happens next? How do we get to 0:21:42.280 --> 0:21:42.760 this point? 0:21:43.600 --> 0:21:45.840 Okay, well, there's a great quote, and I hope you 0:21:45.880 --> 0:21:48.000 haven't used this too recently, but there's a great quote 0:21:48.040 --> 0:21:50.920 that in economics, things happen slower than you would have thought, 0:21:51.200 --> 0:21:53.760 and then faster than you thought they could Exactly, I 0:21:53.760 --> 0:21:57.840 think is just so true. But what happens next? Now, again, 0:21:58.400 --> 0:22:01.399 just for the benefit of your life, listeners, is now. 0:22:01.280 --> 0:22:03.480 A forecast not a forecast. 0:22:04.840 --> 0:22:09.760 We're now just describing a possible scenario of what happens next. 0:22:09.920 --> 0:22:13.200 Maybe you will indulge me in this flight of fantasy, 0:22:13.240 --> 0:22:15.879 and I'll leave you to judge how real or not 0:22:16.160 --> 0:22:18.520 this may be. Now again, I have to give some 0:22:18.560 --> 0:22:22.200 credit here to Andrew's sentence and some of his great 0:22:22.640 --> 0:22:27.600 ex posts are on this, and he seems to think 0:22:27.680 --> 0:22:30.119 that this event could happen in Q three or Q 0:22:30.280 --> 0:22:32.200 four this year, and I'm going to just briefly talk 0:22:32.240 --> 0:22:35.760 about why that could be the case. So it comes 0:22:35.800 --> 0:22:40.280 back to this public sector net borrowing number that comes 0:22:40.280 --> 0:22:46.040 out every month. Now, if the debt profile of the UK, 0:22:46.560 --> 0:22:50.000 or the deficit profile of the UK continues on its 0:22:50.040 --> 0:22:52.359 current trajectory, as we talked about in some detail a 0:22:52.400 --> 0:22:56.440 few minutes ago, and it doesn't come down as we 0:22:56.440 --> 0:23:00.000 were suggesting, then each month we will get an overshoot 0:23:00.240 --> 0:23:05.000 to what the auber are forecasting. At some point, the 0:23:05.080 --> 0:23:09.960 market may extrapolate that through using the arithmetic that we 0:23:10.040 --> 0:23:14.120 have very simplistically done just a few minutes ago, and 0:23:14.200 --> 0:23:17.600 they may come to the same conclusion that if the 0:23:17.680 --> 0:23:21.000 run rate continues and the debt profile this year, deficit 0:23:21.080 --> 0:23:23.600 profile this year is the same as in twenty twenty 0:23:24.240 --> 0:23:27.560 four or five, and therefore we have a one hundred 0:23:27.600 --> 0:23:30.639 and ninety billion, or as android sentence described, one hundred 0:23:30.640 --> 0:23:35.480 and eighty five, so pretty close to our arithmetic. Now, 0:23:35.600 --> 0:23:39.919 that is a very big number. Again, I'm going to 0:23:39.920 --> 0:23:42.879