I’m Sorry, Prime Minister arrives on the London stage next year, offering – I have no doubt – a reminder that deliberate government leaks are nothing new. Back in the 1980s hapless Jim Hacker would say: “I occasionally have confidential press briefings, but I have never leaked.” Let’s just say this government seems to have taken the art of the confidential press briefing to a new level.
In the coming weeks we can expect every possible tax hike the chancellor is considering to be tested out on the British public through media leaks. Presumably, those that trigger the most outrage will be demoted to the “only as a last resort” list. In Belfast that’s what we call the “follow me, I’m right behind you” school of leadership.
It means that waiting for the actual Budget has become as stressful as waiting for dental treatment. I had root canal surgery a few weeks ago. The build-up to it turned out to be much worse than the actual drilling and filling. It’s the anticipation that kills you.
That’s how it is with the Budget – like in the movies when the torturer comes in and slowly unrolls a toolkit that includes all sorts of sharp stainless-steel implements!
I think it’s inevitable that it will hurt – we just don’t know where or how much. But here’s a thought – what if it’s like my root canal surgery and not as bad as many fear? What if we’re relieved on the 26th of November?
There are grounds to believe this could be so.
I was reassured by the move of Darren Jones from 11 to 10 Downing Street, where he serves as chief secretary to the prime minister, leading government delivery. He is reportedly from the right wing of the Labour Party (what probably used to be called the political “middle ground” in the Hacker days – I’m not sure I know what the middle ground is anymore).
The rest of the Cabinet reshuffle was also positive. I think Pat McFadden, as secretary of state for work and pensions, has more chance than most to deliver the welfare reforms that are needed. The market has priced in peak pessimism. But with the hard left tearing itself apart, Labour has more hope of holding its own internal tensions in check to focus on doing what it has to do – and that is to face up to some tough questions on what we can and can’t afford.
If the government can cut the welfare bill it would send a strong signal to bond markets. With default risk reduced, that could result in yields falling, lowering the cost of debt and improving the government’s chances of paying it. That could send the doom spiral of debt into reverse.
I believe that the Bank of England stopping quantitative tightening (QT) would also help, and it’s coming under pressure on that front. It has moderated its QT – from selling £100bn a year to £70bn – but needs to stop it altogether. It seems madness that, just as the government is issuing new debt, the Bank of England is swamping the market with old debt.
This is ruinous for the taxpayer. While the mathematics behind QT is complex, the main problem is that pumping more government bonds into the market to digest is forcing yields higher, pushing up the cost of new debt for the government.
Finally, we have to contend with the idea that the data may not be as gloomy as we think. Former Tory chancellor Norman Lamont used to tell a good story about his first day in office in November 1990. Inflation was at its highest level in 20 years. He was greeted in the hallway of 11 Downing Street by the secretary to the Treasury, who said: “You will soon be the most unpopular man in the country.” Lamont’s rueful punchline? “In all my years as chancellor, that was the only forecast the Treasury got right.”
Lamont was ridiculed a year later when he said he saw some green shoots of recovery. But, sure enough, recovery began in the second quarter of 1992.
If politicians have a long tradition of leaking, Treasury civil servants have an equally long tradition of revising their figures. They did it to Lamont, and they’re doing it now. As if to prove my point, earlier this month we learned that the Office for National Statistics found it has been miscounting the amount of VAT cash receipts. Around £3bn was discovered down the side of the sofa.
What does this mean for bond markets? I think it means that the long-term picture could be much better than it seems. At 5.425%, yields on 30-year gilts could prove to be a very good deal indeed for the investor.
Of course, they may go higher in the febrile pre-Budget atmosphere. But with the Bank of England base rate at 4% and forecasters looking only for cuts, this seems like a good deal for those who can see beyond the coming month.
Stephen Snowden is head of fixed income at Artemis. The views expressed above should not be taken as investment advice.