HAMISH MCRAE: Government’s growth plan must impress global finance


HAMISH MCRAE: If the government can persuade global finance that the budget will revitalize the economy, it has a better chance of an outcome than Black Wednesday

Emergency budget: Kwasi Kwarteng

The eyes of the world will be on the UK this week, but the day after tomorrow attention will shift from the spectacle of splendor and sadness to the stark reality of how its new government will seek to rebuild the economy and finances from the country.

Seen from this side of the Atlantic, the backdrop of Kwasi Kwarteng’s emergency budget next Friday looks quite bleak.

The dollar rises high as a safe haven in times of trouble, and the pound – well, it’s taken a real hit, below the level it was against the dollar when it was kicked out of the monetary system European on Black Wednesday 30 years ago.

It made George Soros a fortune, destroyed the reputation of John Major’s government and paved the way for New Labor in 1997. It is an uncomfortable memory and the stakes are now high.

There will be the immediate political judgment in Britain, but in some ways the financial and economic judgment of the rest of the world will matter more. If this government can persuade global finance that this budget will revitalize the economy, then it has a chance of a happier outcome than the one that followed Black Wednesday. And for global finance, read the United States, because that’s where the money is. So what will the big bucks be looking for?

Well, the first thing to say is that the fate of the pound sterling doesn’t occupy a lot of space in the mind in America. What matters is the Federal Reserve’s next move – could it raise rates by a full point, not just 0.75%? – whether the bottom of the equity bear market is in sight, the prospect of a global recession, etc.

UK assets are a niche market with exciting opportunities, but still outdated. Fashion changes, but before that happens there needs to be a general rebuilding of trust, and that is the challenge facing the new chancellor. Of course, we don’t know the specifics, but we know enough about the direction of his proposed policies to see the points of the challenge.

The first challenge will be to persuade global investors that the increase in the budget deficit will be temporary. They will only be prepared to fund it at an acceptable cost if they see a path to a deficit of, say, 2% of GDP.

There is no ideological opposition to tax cuts – how could there be in America? In any case, what seems to be proposed is above all not to introduce the tax increases planned by Rishi Sunak, the increase in national insurance contributions and corporate tax. But there has to be a medium-term plan to make the numbers add up.

The second challenge will be to put enough flesh on the bones of this idea for a Big Bang Two to encourage US finance to invest more in the UK. I find the branding of a second Big Bang a bit silly. The initial restructuring of the City’s securities markets in 1986 took place because London applied a different regime to that of the United States – separating intermediaries and brokers, prohibiting foreign investment in securities firms, etc. – and this way of handling things had become unsustainable.

There are a few regulatory changes that can be made now that the UK is no longer a member of the EU, but these are miniscule in comparison. Take this case on the fact that there is no longer a cap on banker bonuses. What really happened was that the banks had to raise their stars’ base salaries to make up for the cap – from their point of view, a nuisance but not a game changer. A change that may help is the idea that regulatory authorities should pay more attention to the international competitiveness of the City.

Promoting London’s financial services was part of the informal mandate of the Bank of England when it was the main regulator. He worked hard on it, including choreographing the reorganization after the Big Bang. This role has been abandoned, so what is happening is a return to past practice.

The third challenge, and I think the defining element of all of this, will be whether the government can significantly increase the underlying capacity to grow to 2.5%. It should be doable.

But the world of finance is a cynical place and won’t be impressed by politicians who set growth targets. If there is a serious effort to reduce or eliminate the blockages to growth that have been imposed, often by governments, then global markets will be impressed. If it’s just grand, they won’t. This is, in many ways, a big week ahead.



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