Sajid Javid announced spending plans yesterday and said he’d deploy a net additional £22bn per year into the economy – predominantly on infrastructure. The plans have required a rethink of the current borrowing policy and will invariably end up with the national debt pile rising – though Mr Javid ensures us debt will be lower as a whole at the end of the next parliament.
One issue with big pledges on infrastructure is that projects take years of planning and if there is a race to get the money deployed, the government may well end up making poorly planned choices. Another issue with big spending plans is keeping on track with them if rates start to rise. Tories have already said that they’d put the brakes on if rates increased, which also means risking starting something you can’t finish (HS2 anyone)
The spending plans will limit Boris’ ability to give away tax breaks. The numbers crunched by the FT show that he’ll only have about £7bn left to play with and even his plan to raise the upper rate tax band from £50k to £80k would cost £8bn a year to fund, let alone everything else he’s previously said that he’d do – not that we expected those pledges to be cast iron at any point.
If the Tory spending plan is big, then Labour’s is gigantic! John McDonnell wants to spend £400bn over the next ten years, split between a green transformation fund and a social transformation fund. The former to “upgrade our energy, transport and other networks. To decarbonise as thoroughly and fast as our commitment to a just transition will allow”. The latter will “replace,upgrade and expand our schools, hospitals, care homes and council houses”
The market reaction to the announcements has been pretty nuanced, which is a good thing given how out of control spending could get (even if you discount borrowing for investment in national infrastructure assets) but clearly both parties think the way to the electorates heart is through the electorates wallet.
In Europe; Jean Claude Juncker spoke as a “fully informed man” when he said that Trump won’t be imposing any tariffs on European car crossing the Pond. He warned that there would be some criticism from POTUS but that he wouldn’t be slapping any more import taxes on them any time soon – which must be a relief to Germany.
Italy has surpassed Greece as the riskiest debt in Europe. For the first time in more than a decade the return on holding Italian bonds is higher than that of Greece, despite Athens having had three bailouts in that time! This isn’t just because Italy is becoming more of a risk, Greece’s budget surplus and current (some might say overzealous) control of spending have seen their credit rating upgraded to BB-.
In the US; it’s still all about the trade war. The market might be getting ahead of itself, as money is pouring off the sidelines and into equity funds – as people expect a deal done and stocks to take off. This is still coming as headlines from China talking about both sides rolling back tariffs contradict those from the US saying “there is no agreement at this time to remove any of the existing tariffs”. The difference of opinion is also present in the White House where there’s fierce debate as to if doing so would lead to holding more leverage in the negotiations or not.
Despite the upside and optimism, the FT runs an interesting article talking about the next downturn. They say that because investors have gone chasing yield in the junk bond market and now the BBB- rated bond pile is gargantuan. The credit market is the best performing asset class of them all once you adjust for volatility and the appetite for it shows no sign of waning. This is all well and good “whilst the music is playing” but when it does stop this will amplify the pain.
Today’s calendar is pretty quiet. There’s a European finance ministers meeting – riveting stuff – and some commodities inventories out of the States that might shift oil around. so in lieu of anything significant, we’ll be keeping a close eye on any other parties writing cheques their country can’t cash.
Have a great weekend.
