Barclays: Government’s commitment to fiscal sustainability doubtful if measures are ‘loaded back’
Barclays is expecting a tough budget from Treasury Secretary Jeremy Hunt but hinted the government could have questions about its commitment to financial sustainability if a significant chunk of the new measures are “reloaded”.
“In order to maintain investor credibility, we believe the government will focus on the extent of fiscal tightening. However, the composition and timing of fiscal tightening will also play a role,” said Silvia Ardagna, Barclays Chief European Economist.
“In the short term, we expect most of the fiscal adjustment to come from tax hikes. We believe that spending cuts will mainly be planned after the 2024 general election. Therefore, the implementation of these spending cuts remains uncertain.”
Barclays Private Bank sees £30bn in tax hikes and cuts in public spending
Barclays Private Bank said on Wednesday it was “pessimistic” about the UK’s growth prospects, citing “wobbly economic data, political turmoil and political confusion”.
“The government mini-budget in September sent a shockwave through UK assets as investors questioned the sustainability of the country’s finances,” said Henk Potts, EMEA market strategist at Barclays Private Bank.
“Additional pressure on the UK’s fiscal position has been created by the deteriorating growth profile, the rapid rise in interest rates and the higher cost of servicing inflation-linked debt.”
Potts estimates that additional tax hikes or public spending cuts totaling around £30 billion ($35.6 billion) will be needed for the government to restore fiscal sustainability and bring the deficit back to 1% to 2% of the budget GDP can be reduced.
“Given the multiple pressures on the UK economy, we believe a deeper and longer-lasting recession is inevitable,” Potts added.
“We expect the economy to post five consecutive quarters of negative growth beginning in the third quarter of 2022.”
“Anything that can be taxed will be taxed,” says the fund manager
Asked about more windfall taxes for energy companies amid rising commodity prices, Daniel Avigad, partner and portfolio manager at Lansdowne Partners, told CNBC on Wednesday that “anything that can be taxed, will be taxed.”
“This applies not only to oil and gas, but to all aspects of the economy as governments have large deficits in terms of primary resources and self-sufficiency to fund and will therefore seek to raise capital from all possible sources,” Avigad said.
UK inflation hits 11.1%, a 41-year high, as food and energy prices continue to rise
UK inflation soared to a 41-year high of 11.1% in October, beating expectations as food, transport and energy prices continued to weigh on households and businesses.
“Indicative modeled estimates of consumer price inflation suggest that the CPI rate was last higher in October 1981, when the estimate for the annual inflation rate was 11.2%,” the Office for National Statistics said.
On a monthly basis, the CPI increased by 2% in October, in line with the annual CPI inflation rate between July 2020 and 2021.
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