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UK to unveil record 400 billion-pound borrowing plan next week

  • With Britain in the midst of a second wave of Covid-19 cases and economic recovery on hold, Sunak has postponed longer-term plans for the public finances.
  • Spending on the pandemic is on track to exceed 200 billion pounds ($265 billion) this year after the extension of job protection programs, and other costs are likely to spill into the 2021/22 fiscal year.

British finance minister Rishi Sunak will announce the heaviest public borrowing since World War Two when he spells out his spending plans next week after the biggest economic crash in over 300 years.

With Britain in the midst of a second wave of Covid-19 cases and economic recovery on hold, Sunak has postponed longer-term plans for the public finances.

Spending on the pandemic is on track to exceed 200 billion pounds ($265 billion) this year after the extension of job protection programs, and other costs are likely to spill into the 2021/22 fiscal year.

Only the armed forces will receive a multi-year increase in funding as Prime Minister Boris Johnson seeks to boost Britain's profile outside the European Union.

Sunak's other spending announcements on Wednesday are likely to be dwarfed by the scale of new borrowing forecasts which will underscore the need for future tax rises.

"Events next week might… prove an important prelude for a pivot to a tighter fiscal approach in the spring budget," economists at Citi said in a note to clients.

As Sunak starts to look for ways to begin reining in the huge surge in borrowing, media reported that he plans to freeze pay for public-sector workers other than health staff.

Prime Minister Boris Johnson has refused to commit to maintaining spending on overseas aid.

Britain's economy shrank by 20% between April and June, more than any other major economy, and it has been slower to recover.

The Bank of England has penciled in an 11% fall in GDP for 2020, a drop last seen in 1709.

Government borrowing this financial year is likely to be around 400 billion pounds, according to Citi, while HSBC has forecast 365 billion pounds.

This is equivalent to between 17% and 20% of GDP, well above its 10% peak at the height of the global financial crisis.

Data published on Friday showed 215 billion pounds of borrowing in just the first seven months of this financial year, nearly five times more than at the same point in 2019.

This is likely to fall as emergency pandemic spending is scaled back but HSBC expects it will be a still unsustainable 8.5% of GDP in 2021/22.

Citi predict an extra 800 billion pounds of borrowing over the next five years, compared with forecasts in March.

Tax rises

Sunak has warned of hard decisions ahead to get the public finances "on a sustainable path" over time.

Big spending cuts are less likely than after the financial crisis because public service have undergone a decade-long squeeze and pressures from an ageing population are growing.

The scale of any tax rises will not become clear until the economy is on a more even keel.

The Resolution Foundation think tank says tax rises raising 40 billion pounds a year will be needed before the 2024 election just to stabilize the public finances and fund social care.

For now financial markets are happy to fund the borrowing at almost record low interest rates. Britain's Debt Management Office will publish bond sale plans on Wednesday.

HSBC sees a further 100 billion pounds of gilt issuance this financial year, taking the total to a record 480 billion pounds, and up to 300 billion pounds more in 2021/22.

The government will also publish a delayed review on when to phase out the RPI measure of inflation used to calculate payments on inflation-linked bonds, which now overstates price rises.

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Business

Dominic Cummings Quits as U.K. Prime Minister’s Top Aide

Dominic Cummings quit as Boris Johnson’s most powerful aide and will leave by the end of the year, a person familiar with the matter said.

The news will plunge the prime minister’s leadership into crisis at a critical time for the U.K. as it navigates the closing stages of Brexit. Cummings earlier told the BBC’s Laura Kuenssberg that his position “hasn’t changed” since he wrote in January that he wanted to be “largely redundant” within a year.

@bbclaurak

1. Senior No 10 source says Dominic Cummings is out by Christmas – after hours of speculation HE tells me ‘rumours of me threatening to resign are invented, rumours of me asking others to resign are invented’… ..11:52 PM · Nov 12, 2020

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He is the second key adviser to Johnson to go in the space of a day, after tensions blew up over the way the prime minister’s inner circle operates. Late on Wednesday, Communications Director Lee Cain announced he was standing down.

Brexit Mastermind

Cummings has been at the premier’s side since he took power in July 2019, and was the mastermind of the successful Brexit referendum campaign that catapulted Johnson into the front rank of British politics three years earlier. His departure will deprive the premier of his most important adviser and strategist, who has wielded huge influence over all aspects of government policy, from its pandemic response to Brexit and economic reform.

Johnson’s Senior Aide Resigns Amid Tensions in U.K. Government

Cain and Cummings were the two closest aides to Johnson in his political team and he will feel their absence. It’s a critical time for the U.K.: with the country in a second national lockdown and the pandemic death rate rising again, Johnson has just a few days left to finalize a Brexit trade deal with the European Union before it’s too late.

With Cain already gone, Cummings’s departure at year end will dovetail with the U.K.’s departure from its post-Brexit transition arrangements.

Divisive Figure

His presence alongside Johnson at the top of government has always been controversial. In the first turbulent months of Johnson’s premiership in 2019, Cummings waged a campaign against anti-Brexit sympathizers inside the governing Conservative Party, forcing some rebels out for good and ripping up political conventions.

Then Cummings helped steer the prime minister toward a historic election victory last December, winning the biggest Tory majority in more than 30 years on his platform to “level up” economically neglected regions of the U.K.

But when the pandemic hit at the start of the year, the Cummings project ran into a wall. All government focus was turned to combating coronavirus and Cummings himself inevitably became part of the story.

In May Johnson put his own authority on the line to defend Cummings, who was accused of breaking lockdown rules by driving more than 250 miles to seek childcare help when the public were being ordered to stay at home.

The premier was so determined to keep Cummings that he appeared in public at press conferences and in parliament to answer questions and repeatedly defend his adviser’s actions.

Cain Connection

Cain announced he was standing down as Johnson’s director of communications in a statement on Wednesday evening. “It was an honor to be asked to serve as the prime minister’s chief of staff,” Cain said, following reports that he had been lined up for the role by Johnson.

It is not clear why Cain did not take up that role. According to one version of events, Cain and Cummings lobbied the prime minister to give Cain that coveted position. But Johnson was unhappy that the appointment was made public in Wednesday’s newspapers before he had reached a final decision, people familiar with the matter said.

It remain unclear throughout Thursday if Cummings would follow Cain out the door. The answer came, in staggered fashion, late on Thursday night.

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World News

U.K. Steps Up Talks With Industry as Brexit Disruption Closes In

In this article

The U.K. government is intensifying talks with industry as it seeks to avert Brexit disruption at year-end, with companies facing upheaval even if Britain and the EU sign a trade deal.

Ministers will hold weekly meetings with the country’s five biggest business groups and particularly-affected sectors to discuss Brexit preparations, the Cabinet Office said in an e-mailed statement. The government has previously expressed concern that many firms have their “heads in the sand” and are ill-prepared for Brexit.

“We recognize that this is a challenging time for everyone,” Cabinet Office Minister Michael Gove said in the statement. “We are determined to support businesses to be ready for 1 January 2021 and beyond.”

@Quicktake

U.K. PM Boris Johnson says he’s serious about walking away from Brexit talks without a trade deal.
Here are 4 reasons to believe him:
http://bloom.bg/2Zjye71

6:23 PM · Sep 8, 2020

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When Britain leaves the EU’s single market and customs union, and irrespective of whether there’s a free-trade agreement, firms will face a wave of new red tape and regulatory barriers on commerce with the bloc. The U.K. government has warned of 7,000 truck-long queues around the port of Dover in a reasonable-worst-case scenario due to firms not being ready for new EU customs checks.

Brexit Upheaval ‘Significant’ Even With Deal, Watchdog Says (1)

“Sectors know there will be disruption no matter what the outcome of ongoing talks,” said Josh Hardie, acting director-general of the Confederation of British Industry, one of the lobby groups that will join the meetings. “Helping firms prepare and mitigate wherever possible is vital.”

Negotiations over a trade agreement — which would keep tariff-free trade between Britain and the EU, but wouldn’t remove the new red tape and obstacles — are due to be extended beyond this weekend’s informal deadline and continue in Brussels next week, according to two people familiar with the matter.

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Business

Brexit in a Lockdown Is Worst of Both Worlds for U.K. Businesses

Michael Poultney already has his hands full getting ready for Brexit. Now a fresh national lockdown is about to make matters worse.

“It’s just making the whole process that much more difficult,” said the managing director of Albion Stone Plc, who’s been working remotely with his accounts department on the paperwork needed to trade with the European Union starting Jan. 1. “It puts hurdles in the way — everything takes longer.”

The company, which mines limestone in Portland, England, and sells it worldwide, gets about 15% of its 8 million pounds ($10.4 million) of revenue from the EU.

Businesses must get ready to exit the EU single market at year-end, even if Britain and the bloc end up signing a free-trade agreement. With staff off work, an economic slowdown, and swings in the supply and demand for essential goods, the new Covid-related restrictions will add to pressure on logistics firms and supply chains, said Allie Renison, head of EU & Trade Policy at the Institute of Directors.

“Planning for Brexit proper will be infinitely more difficult,” she said. “While businesses have been through lockdown before, they weren’t also struggling to contend with major changes in regulatory and trading arrangements.”

The stakes are high: If companies aren’t prepared, Britain could face widespread disruption to commerce with its largest trading partner in the difficult winter months.

Boris Johnson decided on a second round of national restrictions, taking effect Thursday, after data showed the pandemic exceeding the worst-case projections of his scientific advisers. Pubs, gyms and non-essential shops must close, and social contact between households will be restricted. For weeks the prime minister opposed a second lockdown, and his U-turn sparked distress among business leaders.

Johnson Wins Lockdown Approval After U.K. Sees 492 Daily Deaths

The government is already concerned about poor levels of Brexit readiness. Businesses will need to file new customs paperwork, food products will be subject to new animal health certificates and lorries will need to comply with new government IT systems to cross the U.K.-EU border.

In September, Cabinet Office Minister Michael Gove said a government survey showed less than a quarter of firms were fully ready for the changes. Because of the poor state of preparations, the British government expects 7,000-truck-long queues around the port of Dover in a reasonable worst-case scenario.

“We understand that businesses are under significant pressure as a result of Covid-19,” the Cabinet Office said in a statement. “With fewer than 60 days to go until the end of the transition period, we will continue our intensive engagement with businesses to make sure they have the support they need to capitalize on the new opportunities available to a fully independent United Kingdom.”

Andrew Mair, who heads the Midlands Aerospace Alliance, sees parallels between the way the lockdown decision was communicated and the lack of clarity on Brexit. “Like in the Covid response, it sometimes seems as if government acts as if companies don’t plan, so new policies are introduced overnight and companies expected to act in new ways immediately,” he said.

Read more:
  • Jaguar Land Rover Sees Border Morass No Matter How Brexit Goes
  • M&S Warns Brexit Could Weigh on Retailer’s Business in Ireland
  • Tesla and Heinz Hit Brexit Snag as Customs Capacity Runs Out
  • On Brexit’s Front Lines: Coronavirus Is Practice for Upheaval
  • Brexit’s Reality Dawns on European Companies Losing Hope of Deal

The Federation of Small Businesses, one of the country’s biggest business lobby groups, is calling on the government to give companies vouchers to fund expenses tied to preparing for the end of the Brexit transition period. The matter is being discussed by the Cabinet Office and Treasury, but no final decisions have been made, the FSB said.

“Business owners are struggling to plot their survival to Christmas,” said Craig Beaumont, head of external affairs at the FSB. “For many, transition preparations have not started and are likely to be done at the last possible minute.”

A key pinch-point is a shortage of customs agents to handle the hundreds of millions of extra forms that will be required annually for U.K.-EU trade. Recruitment will be made harder by the lockdown, said Shane Brennan, CEO of the Cold Chain Federation, which represents businesses operating frozen and chilled storage distribution vehicles.

External veterinary inspections for animal products will be more difficult, and social distancing at terminals and border control posts will slow down traffic. “At a time when you need more interaction, more people working together, that’s actually going to be impeded,” said Brennan. “Something’s got to give.”

For their part, businesses are concerned that the new restrictions will hamper the government’s own preparations. Peter Alvis, managing director at Lye Cross Farm, set up a company in the EU because of Brexit and is ready for new export formalities. His business sells cheddar cheese into Spain, Germany, Greece and Italy.

“I’m very concerned that we’re not going to be ready at the border, and we’re going to have foodstuffs stuck on containers that are perishable,” he said. “That’s a big concern for all food producers.”

At Albion Stone, Poultney is waiting for clarification from the government on which commodity codes he should apply to his stone so that he can correctly complete an export declaration post-Brexit. He expressed frustration at being sent from one organization to another in search of answers, which still haven’t been forthcoming.

“It’s like the blind leading the blind,” he said. “And if you then go and stick them in lockdown, we might just as well go home.”

— With assistance by Tom Hall

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World News

Japan and Britain sign first major post-Brexit free trade agreement

  • Japan and Britain signed a bilateral free trade deal Friday in the first such major post-Brexit deal, reducing tariffs on Yorkshire lamb sold in Japan, as well as auto parts for Japan's Nissan plant.
  • The deal, estimated to boost British trade with Japan by 15 billion pounds ($19.5 billion), will also make it easier for British companies to operate in Japan.
  • Financial services make up Britain's biggest export to Japan, now at 28%. English sparkling wine, made-in-Britain coats and shoes, Stilton cheese, as well as pork and biscuits from Britain, will become cheaper in Japan.

Japan and Britain signed a bilateral free trade deal Friday in the first such major post-Brexit deal, reducing tariffs on Yorkshire lamb sold in Japan, as well as auto parts for Japan's Nissan plant.

"How fitting it is to be in the Land of the Rising Sun to welcome in the dawn of a new era of free trade," British International Trade Secretary Liz Truss told reporters at a signing ceremony in Tokyo.

Appearing with Japanese Foreign Minister Toshimitsu Motegi, Truss called the agreement a "landmark" as the first major trade deal for Britain since it returned as an independent trading nation.

The deal, estimated to boost British trade with Japan by 15 billion pounds ($19.5 billion), will also make it easier for British companies to operate in Japan.

Financial services make up Britain's biggest export to Japan, now at 28%. English sparkling wine, made-in-Britain coats and shoes, Stilton cheese, as well as pork and biscuits from Britain, will become cheaper in Japan.

Motegi said the bilateral deal ensures continuity from the preceding European agreement, while adding new areas for cooperation such as e-commerce and financial services.

Japan's existing free trade agreement with the European Union includes Britain only until the end of this year, as it exits the EU.

Parliamentary approval is needed in both nations before the agreement takes effect from the beginning of next year. It's expected in Japan next week, as the ruling party controls both houses of parliament.

Japan already exports about 1.5 trillion yen ($14 billion) of goods to Britain, mostly autos, auto parts and other machinery, while importing nearly 1 trillion yen ($9.5 billion) worth from Britain, including pharmaceuticals, medical products and cars, according to the Japanese Foreign Ministry.

Tariffs on Japanese autos are removed gradually and won't become zero until 2026, the same as the terms of the deal Japan has with the EU.

Japan has repeatedly expressed concern about Japanese businesses in Britain, which include Hitachi, with plants making railway cars for East Coast trains, and Nissan Motor Co., employing several thousand workers at its Sunderland auto plant.

Motegi went to Britain in August, his first overseas trip amid the coronavirus pandemic, during which he stressed the importance for reaching a trade deal quickly.

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World News

Boris Johnson Says U.K. Is Now Preparing for No-Deal: Brexit Update

Sign up to our Brexit Bulletin, follow us @Brexit and subscribe to our podcast.

Negotiations between Britain and the European Union are set to continue next week even after Boris Johnson said he believes a trade deal is now unlikely.

The prime minister said the U.K. will now get ready to leave the bloc’s single market and customs union at the end of the year without a new agreement in place.

He blamed the bloc for refusing to “negotiate seriously” in recent months, but kept the door open for further talks. He said he would always be willing to hear from the EU side if it came back with “a fundamental change of approach.”

Last month, the British leader set a deadline of Oct. 15 for an agreement to be struck — or clearly within sight — saying there would be no point continuing talks beyond this week without adequate progress.

Read more: The Canada, Australia Models for Post-Brexit Trade: QuickTake

Key Developments:

  • Chief negotiators David Frost and Michel Barnier to hold talks on Friday
  • EU’s von der Leyen says team will go to London next week to intensify talks
  • The pound fluctuated between gains and losses before trading little-changed at $1.2912 as of 1:09 p.m. in London

U.K. Hasn’t Agreed To Talks, Yet (1:10 p.m.)

The EU assumes that talks will continue in London on Monday as planned. But the U.K. side hasn’t agreed to that yet, or discussed it with the bloc — and it will only happen if the bloc’s negotiators are prepared to start working on a legal text and make some compromises, according to a person familiar with the U.K. government’s position.

U.K. Food Lobby Says U.K. in “Dangerous Territory” (1:07 p.m.)

“The Prime Minister’s statement signals that we are heading into very dangerous territory,” Ian Wright, chief executive of the Food and Drink Federation, a U.K. lobby group, said in a statement. “We need leaders on both sides to find a way past the current impasse in order to progress talks.”

Without a trade deal, food and drink imported from the bloc would face tariffs averaging 18%, which will spur higher prices, Wright said.

EU’s Von der Leyen Says Team to Go to London (12:42 p.m.)

Negotiators from the bloc will travel to London next week to “intensify” their discussions with the U.K., European Commission President Ursula von der Leyen says in a tweet.

@vonderleyen

talks: the EU continues to work for a deal, but not at any price.
As planned, our negotiation team will go to London next week to intensify these negotiations.
1:40 PM · Oct 16, 2020

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What Would an Australian-Style Deal Mean? (12:34 p.m.)

An Australian Brexit is essentially a re-branded “no deal” Brexit. Firms would trade on terms set by the World Trade Organization in most areas, with tariffs on goods and an agreement on the processes to reduce some regulatory barriers.

The imposition of tariffs means U.K. exporters lose competitiveness in their biggest market — with the EU accounting for more than 40% of foreign sales — and U.K. consumers face higher prices in stores. That inflationary hit could be compounded if investors take fright and sell the pound, putting additional upward pressure on import costs.

In an analysis published earlier this week, Bloomberg Economics, forecast that the absence of a deal could deliver a near-term shock of around 1.5% of gross domestic product — about 300 billion pounds ($388 billion) to the U.K. economy. It would also have a long-term effect, permanently putting a brake on potential growth.

Chief Negotiators to Hold Talks on Friday (12:27 p.m.)

U.K. chief negotiator David Frost and his EU counterpart Michel Barnier are set to hold further discussions on Friday afternoon, according to a European official with knowledge of the matter.

Johnson Tells EU: ‘Come to Us’ (12:10 p.m.)

Prime Minister Boris Johnson said the U.K. will now get ready to split from the EU’s single market and customs union without a new trade agreement, while leaving the door open to more talks. The EU is not serious about giving Britain the kind of deal it wants, “unless there is some fundamental change of approach” from the bloc’s negotiators, Johnson told a television crew.

Asked to clarify if he was calling time on negotiations on a trade deal, Johnson said: “We’re saying to them: come to us.”

“Since we have only ten weeks until the end of the transition period on January 1, I have to make a judgment about the likely outcome and to get us all ready,” Johnson said.

“And given that they have refused to negotiate seriously for much of the last few months, and given that this summit appears explicitly to rule out a Canada-style deal, I have concluded that we should get ready for January 1 with arrangements that are more like Australia’s based on simple principles of global free trade.”

U.K.’s Raab Says Deal Depends on EU (Earlier)

Foreign Secretary Dominic Raab said the U.K. is “disappointed and surprised” that the EU had watered down its commitment to intensifying the trade talks. A deal, he said, “depends on the other side.”

“We have been told that it must be the U.K. that makes all of the compromises in the days ahead,” Raab told Sky News on Friday. “That can’t be right in a negotiation so we are surprised by that, but the prime minister will be saying more on this later today.”

Still, the two sides are “close” to a deal, he said, with only “only two issues — fisheries and the so-called level playing field” left to resolve. “With goodwill on both sides we can get there,” Raab said.

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World News

A 650 Million-Euro Rounding Error Could Derail a Brexit Deal

A trade deal between Britain and the European Union, one of the biggest such accords the world has ever seen, could be derailed by what amounts to a rounding error.

With the deadline for an accord fast approaching, negotiators from the two sides are still at loggerheads over what rights EU boats will have to fish in British waters after the Brexit transition period ends on Dec. 31, a senior diplomat from the bloc said on Friday.

The bloc has made an agreement on the issue a precondition for any wider trade deal. Failure to reach one wouldn’t just leave businesses grappling with tariffs and quotas, but it could also sour relations between the EU and its closest ally in foreign and security policy and have knock on effects in areas ranging from aviation to finance and scientific research.

At just 650 million euros ($767 million), the value of the fish caught by EU vessels in British waters annually is tiny relative to the half a trillion dollars of goods traded between the bloc and the U.K. each year, according to the diplomat. For their part, British boats get about 150 million euros of fish from EU waters, the diplomat said.

But the sector, which represents a tiny fraction of the EU and U.K.’s respective economies, is politically important for several member states, including France, Belgium, the Netherlands, and Denmark, the diplomat added, asking not to be named, in line with policy. Asked how such a small constituency can have such large leverage in the negotiations, another EU diplomat said that you can’t ask a cat to give up mice from its diet.

Negotiators from the two sides will meet in Brussels on Monday. EU leaders will take stock of progress when they meet later in the week, though the diplomat insisted the summit isn’t seen by the bloc as a deadline for reaching an agreement. That could come at the end of the month given that member states need time to ratify any accord by the end of the transition period, they noted.

In addition to fishing, negotiators are struggling to bridge their disagreement over the so-called level-playing competitive field — provisions that would ensure the U.K. won’t undercut the bloc’s standards in areas such as state subsidies or environmental and employment policy. But even there, the key to unlock a deal is fish, according to the diplomat, who said the bloc sees the U.K.’s hard stance on quotas as an attempt extract concessions from the EU on what state aid rules the country will have to follow in future.

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