Blain’s Morning Porridge EXTRA – Oct 14th 2022: Adults Back in the Room. U-Turn Opportunity for the UK.
“Hammersmith Palais, the Bolshoi Ballet, Jump back in the alley and nanny goats….”
This Morning: Budget U-Turns and a P45 should take the edge off the UK’s Financial Woes for a few days, but the big question is what comes next, and who should iterate the New New Conservative Thang. It looks like we have Adults Back in the Room!
Very quick comment on the UK…. The Adults may be back in the Room when it comes to the UK’s financial stability.
Liz Truss and Kwasi Kwarteng were not for turning. Yesterday afternoon we learnt they are spinning like tops. The Kwarteng not-a-budget plans will be abandoned, and word is his P45 might just be sitting on his desk as he gets back from Washington. (P45 – the tax statement you are handed when sacked.) I understand its not yet a done deal… but..
It’s been the most extraordinary period in the UK politics, and whatever the Tory faithful believe – it will not quickly be forgotten.
There are plenty of clever and effective Conservatives in Parliament, but the current cabinet broadly comprises the dross left after 12 years of progressively bitter infighting which allowed some very average and ideologically driven, (and I don’t just mean frothing-at-the-mouth Brexiteers), to float to the surface and sit in positions of power well above their competency. A number of Truss yes-men/women should follow Kwarteng.
It’s a funny thing to say, but we now need a Government of Conservative Unity to dig the UK out of the Truss/Kwarteng hole. As it will be messy to chuck her out the window immediately, Truss can probably stay. Let her chair cabinet as a caretaker till the General Election. The goal of the party should be very simple: Do good, be effective and therefore minimise the scale of the electoral wipe-out at the next General Election.
Who replaces Kwarteng? What we need is a Chancellor who can reconcile the Tory party and convince the markets someone competent is back in charge.
- The obvious choice would be Rishi Sunak, but that would just hold open the existing festering wounds of the Tory party. I’m told he’s already checked out from supporting Truss – the pair of them together would be toxic.
- Sajid Javid, the short-lived Chancellor who honourably stood up to Boris Johnson and Dominic Cummings, would an even better choice. He had a successful career in the City, understands how finance works, the importance of collaboration with the Bank, OBR, DMO and Treasury, and the critical importance of nuance and the delivery of the message – the fine skills Kwarteng’s arrogance ignored. More importantly, without Rishi’s film star-looks, or Penny Mordaunt’s party appeal, he’s unlikely to become prime minister unless he can succeed by demonstrating utter competence.
Whoever gets the role faces some mighty challenges – the rumoured £60 bln of department cuts highlights just how far out of kilter the national budget is.
The immediate priority will be to announce an interim rescue budget that is not reliant of massive unfunded tax-give-aways. Here’s some ideas for the next Chancellor to consider:
The Energy Bailout remains critical to avoiding a consumer and SME meltdown. UK households need some clarity on costs and how much energy bills are going to hurt.
- Funding the bailout can be improved – partly though windfall taxes on the energy companies and banks that fund them, but mitigate the consequences by stressing preferential access to new gas licences. (New gas does not sound terribly green – but we will absolutely need Gas security to transition the economy to renewables including new nuclear.)
- The second component of the bailout should be New Energy Bonds to fund the bailout and bought by the Bank of England. This is “unfunded”, but would effectively be QE on a clear outside track, allowing the Bank to continue addressing inflation with interest rates and its quantitative tightening plan. (Take a look what Germany has done.)
- Targeting the Energy Bailout should be considered. In its present form its regressive. It basically keeps the cost of energy down, but the marginal cost of running an electric blanket for a rich person is nothing compared to that of a struggling pensioner. Add in an element of progressive benefit so the amount of energy subsisdy is related to household income favouring low earners.. or even a simple tier system.
Abandon Corporation tax cuts and slash VAT for smaller enterprises – that will do more to keep them afloat through the coming recession.
A 50% additional Post-tax Windfall Tax on Discretionary Banker Bonuses. (well… why not.)
Raise tax thresholds to benefit low earners. Keep tax cuts in hand till a fuller budget is released.
Announce full consultation with the OBR on a full budget and New National Growth considering measures to address everything from childcare, training, and other growth multipliers.
Be seen to work with the OBR, Debt Management Office, and Treasury to define the optimal approach to funding growth with debt without crashing the market. Tell the Bank to look at how it could open repo lines with Pension/Insurance firms as they are now effectively part of the wider shadow banking system. Basically – speak to the people who know!
Reinforce The Bank of England’s independence and make clear the Governor is free to clear the Bank of the disloyal staff who undermined him for political gain through the crisis. The Bank should announce secondments of senior trading and market bankers from the City into its market division.
The UK is a developing situation – but there are reasons to be cheerful this morning.
Full comment to follow later..
Bill Blain
Strategist – Shard Capital
Although Germany and other countries are investing in new LNG import facilities, this will do nothing to reduced the price of gas on the open international market, in fact it might well increase competition for individual LNG cargoes; thereby increasing the price.
The only possibility of reducing the price of gas on the open international market is a significant increase in supply. But, even setting aside the “minor” dispute with their owner, it seems extremely unlikely that, given the amount of work that would be required, either of the two sabotaged Nord Stream pipelines could be brought back into service much before Spring 2024 at the very earliest.
Also, the time lag involved in designing and building new LNG production facilities means that unless construction is already in hand, no significant increase in supply is likely to come from this quarter any time soon. Therefore, there will be no means of applying downward pressure on the price of gas available from that quarter.
In fact, given the fact that the majority of gas now in storage in Europe was imported whilst NS1 was still in operation, the incentive to replenish any storage capacity released during the 2022/23 winter will likely drive the price higher than that seen today.
Now, with winter fast approaching there was clearly a need for Truss et al to act quickly in order to ameliorate its impact on at least the poorest households, and therefore a quick and dirty solution needed to be found; hence the across the board cap on charges to all and sundry.
However, it is just as clear that such a level of support through at least until April 2024 cannot possibly be afforded, and some of the multiple problems with the current scheme need to be corrected as soon as possible, certainly within the next 3 months.
The first of these is that by subsidising the per unit cost of gas and electricity we are hiding the true price of the energy being used. Rather, it would be much better to provide a fixed amount per household which they will retain, however much they consume, but then show the actual cost of the energy they are consuming so as to provide the vital incentive to reduce consumption.
Secondly, the size of that fixed amount should be based on a sensible calculation of what might be needed to fuel say a 2 parent, 2 child family, living in a well insulated 3 bedroomed semi-detached house. Obviously this ought to be reduced for smaller households, living in more cramped accommodation, but clearly shouldn’t be made any larger for those who have chosen to live in much larger and/or less well insulated homes; the sense of this last can be judged by the subsidy currently being funded from the national debt by a billionaire living in, and heating, a multi-bedroomed mansion, and re-charging his fleet of Tesla cars on a daily basis!
Thirdly, no additional subsidy should be offered to households owning second or third homes, or to any form of short term or holiday let property. (If this were to lead to the release of such property for locals in popular tourist areas then all well and good.)
Lastly, no subsidy whatsoever should be offered to non-UK residents or anyone else who is not liable to pay full UK tax on their world-wide earnings.
Well said, one additional piece is fracking. Onerous restrictions have been modified by Secretary of State for Business Jacob Rees-Moog.
However localities must vote to allow drilling by a simple majority. Solicitors are now ringing doorbells in areas with promising prospects offering 100 Pounds for an affirmative vote.
A bit of filthy lucre and the knowledge that one is likely to freeze in the dark in a month or so should convert virtue signalers into cheerleaders for fracking.
Fingers crossed…
Bill any chance YOU can be convinced to accept a secondment to being Chancellor until after next election??
don’t be daft!
This Morning’s Porridge informing readers Adults were Back in the Room went out to subscribers at 7.17 am, 4.5 hours before the BBC announced Kwarteng had been sacked. About 3 hours before Kwarteng himself landed at Heathrow… The only matter of doubt was whether he would resign, be sacked, or threaten to go nuclear.
We’re not in the business of Scoops… but…
Kwasi Kwarteng with a nuclear weapon?
Sounds like the plot of a Woody Allen film or the remake of the Peter Sellers movie The Mouse That Roared.
Forget Kwarteng, the crisis moves on…
She has settled on Jeremy Hunt as new Chancellor.
The best that can said of him is he didn’t work for Boris. Long ministerial career, but zero experience of finance. We need a chancellor with expertise and credibility.
Truss remains on Defcom 5.
Bill
I’m a bit puzzled. The defense readiness condition (DEFCON) is a five level condition. It ranges form DEFCON 5 (least severe) to DEFCON 1 (most severe).
Based on recent happening is the Prime Minister’s level at the least severe? If so she is an Iron Lady.
Ok – you got me there…