Spend, spend, spend

PM Sir Keir Starmer is backing extra investment in transport, schools, and hospitals – spend, spend, spend. This is at a time when taxes are at an historic high and the national debt is at the highest level since the early 1960’s!

Chancellor Rachel Reeves, is now rumoured to be considering £40bn in Budget tax rises and has vowed to ‘invest, invest, invest.’ One of the areas earmarked is housing, with a target of 1.5 million new homes in the next five years, including the biggest increase in social and affordable housing in a generation. Angela Rayner is planning a ‘council housing revolution’ to double council house building, with a reported £1bn Budget boost.

Labour MPs are believed to have written to the Chancellor seeking her to review the current fiscal ground rules. This would involve a change that could see the value of new assets built with investment reflected in the calculation of Britain’s debt. The move could unlock as much as £50bn, according to the Institute for Fiscal Studies (IFS).

Meanwhile, the social housing sector – housing associations and councils, are facing a ‘perfect storm’ of financial uncertainty, interest rates, environmental regulation, and huge bills for repairs. Over 90,000 affordable and social homes need to be built a year, but these challenges are currently preventing this. There are also currently too many one-bedroom flats, but not enough family homes. Furthermore, many properties have gas boilers that don’t meet council goals to reach net zero targets. Higher interest rates have made borrowing more expensive, with more councils unable to balance their books and many are now facing effective bankruptcy. Councils are also being squeezed by the cost of providing temporary accommodation, which is thought to have totalled over £1bn last year alone.

In the wake of the Grenfell and Awaab Ishak tragedies, new legislation has also increased the financial burden on housing associations and councils to improve fire safety and fix damp problems. The National Housing Federation (NHF), which represents housing associations, estimates this will cost its members £6bn while the Local Government Association has put the bill for councils at £7.7bn.

To add to these challenges, housing associations are making less money from renting social homes.  Over the last decade, the government cut and capped the rent paid by social housing tenants. The NHF estimates this has resulted in £3bn in lost rental income for the housing associations.

Put simply, more government money is required to address the social housing crisis, but Chancellor Rachel Reeves is constrained by the current level of the UK’s public debt. If she borrows more, then that would risk keeping interest rates higher for longer, which, in turn prolongs the financial pain for the sector.

Building a better future, may be easier said than done. The UK is also facing a critical shortage of skilled construction workers.

 

What have we been watching?

 

AI investors are propelling US mega-tech, central bank interest rate cuts and lower than expected UK inflation. However, in the UK, this was overshadowed by even greater Budget uncertainty, with £40bn, not £22bn, reportedly now required which would make it one of the biggest tax-raising Budgets since 1970! 

The US market touched another record high as we enter the third quarter earnings season. The market was pushed higher by AI chip behemoth Nvidia, which itself hit another high. Nvidia is close to overtaking Apple as the world’s most valuable business. This follows comments from Nvidia’s chief executive suggesting that $1trillion invested in global datacentre infrastructure would eventually shift from traditional server processing units (CPUs) to graphics processing units (GPUs) to cope with AI workloads. He believes the datacentre industry is $150bn into the $1bn transition process, which will take place over the next four to five years.

As if there wasn’t enough to worry about with the war in Ukraine, conflict in the Middle East and China undertaking wargames against Taiwan. It looks as if tensions between North Korea and South Korea are increasing. The former has been destroying road and rail links along the border that once symbolised peaceful cooperation. In the latest spat, North Korea has accused South Korea of flying drones over Pyongyang. North Korea’s constitution now officially defines South Korea as a ‘hostile state.’    

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The UK International Investment Summit is hopefully the start of more positive rhetoric from the government, albeit many businesses are in a holding pattern awaiting the Budget. National Insurance on employer’s pension contributions looks odds on, along with a Fuel Duty increase. Alongside the Summit, the government announced a new Industrial Strategy Council chaired by Microsoft UK CEO Clare Barclay to focus on key growth sectors. Investments announced at the Summit ranged from a £1.1bn expansion of Stanstead Airport to over £6bn in new datacentres.

UK inflation fell to 1.7% in September, which was under the Bank of England’s official 2% target. The lower-than-expected inflation numbers paves the way for a 0.25% interest rate cut in November as well as a possible 0.25% cut in December. Sterling dropped back under $1.30. However, positive news on interest rate cuts continued to be overshadowed by ongoing uncertainty ahead of the Budget. Government sources said Chancellor Rachel Reeves is now looking to make tax rises and spending cuts of up to £40bn, compared with the £22bn ‘black hole inheritance’ as she looks to ‘add a fiscal buffer against her golden rule.’ Sir Keir Starmer is reported to be facing a cabinet revolt over plans to impose ‘huge’ cuts on some departments in the Budget.             

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The European Central Bank (ECB), as had been widely expected, cut its deposit rate by 0.25% to 3.5%. The vote for the cut was unanimous. ECB President Christine Lagarde stuck to the well-rehearsed message that future cuts will be data-dependent and on a meeting-by-meeting basis.

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The US election on November 5^th is fast approaching and remains a very tight race, which is too close to call. Nonetheless, markets have been leaning towards a Trump victory, judging by the ‘Trump trade’ with both Trump’s Media & Technology Group and crypto-currencies moving higher.

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Japan’s exports fell unexpectedly by 1.7% in September, the biggest decline since February 2021.

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China announced further support for its troubled property market. Some $500bn of credit is to be provided for local authorities to complete unfinished housing projects. China’s central bank also cut two key interest rates to historic lows. This follows news that the Chinese economy grew at its weakest pace since early 2023. GDP slowed to 4.6% in the third quarter. Economists are forecasting 4.8% GDP growth for 2024 but a potential slowdown to 4.5% in 2025.

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Despite events in the Middle East, Brent oil slid to $73 as OPEC lowered its 2024 and 2025 oil demand growth forecasts, while China’s oil imports dropped for the fifth month-in-a-row.

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Finally, with the Budget fast approaching and given Labour’s renewable investment ambitions. The UK had the highest electricity prices globally at 25.46p per kWh in 2023, significantly exceeding the rates in various European countries. Germany and Italy, both major European manufacturing economies, had charges of 15.64p and 18.33p respectively. While we all support plans that protect the planet, having the highest electricity prices is not going to help the UK’s competitive position or Labour’s plans to grow the UK economy.

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Read Last Week’s Alpha Bites – Sir Doom and Mrs. Gloom

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