Chancellor Rishi Sunak warns of 'tough choices' to address public finances - as it happened

Graeme Wearden

from on 2020-07-15 16:16 (#55QK6)

Rolling coverage of the latest economic and financial news

5.16pm BST

Time for a recap.

Chancellor Rishi Sunak has warned that there are tough choices ahead to address the increase in borrowing caused by the pandemic.

This is the second once in a generation' shock we had in 10 years, and that therefore makes you think, you know, (that) what you do with public finances in good' times may need to be a bit different."

Quite an admission from the Chancellor. Public finances are not on a sustainable path are they, asks @SteveBakerHW? Sunak: No, they are not. It's important they are put on a sustainable footing in the medium term" #TSC

Sunak opens up a little on tax to Tory MP Steve Baker, after batting away earlier questions. He says: "Fundamentally we don't tax our way to prosperity" - BUT he wants a "conversation in the round" to confront "tough choices" about how services are funded.

I'm not completely persuaded of the scale of the problem at the moment.

The simple reason is that we know corporate debt levels in the UK were in a relatively healthy place coming into this crisis,"

It's not something I think governments should get into the business or habit of doing.

It's not my money, it's taxpayers' money."

4.40pm BST

Finally, Mel Stride MP asks Rishi Sunak what his realtime data' is showing, about how people are reengaging with the country.

It's sadly too early to tell, the chancellor replies.

Without confidence, we don't have that consumption.

4.35pm BST

Steve Baker MP now challenges Rishi Sunak over yesterday's fiscal sustainability report from the Office for Budget Responsibility. It predicted Britain's budget deficit will hit a peacetime record this financial year (someway north of 300bn).

Q: The public finances are not on a sustainable trajectory, are they?

Sunak confirms for the first time that he will either have to cut spending or raise taxes to keep public finances under control: Decisions on spending and taxes are for the future, but there are tough choices ahead, that is clear. There are some tough choice to come" #TSC

Sunak says he won't be drawn on future tax/spending plans, but adds: There are tough choices ahead. That is clear. We've been through this once in a lifetime episode, it's had an enormous impact on economy and public finances. That means there are some tough choices to come."

Fundamentally we don't tax our way into prosperity. We want people to share more of their own money.

But we also have a lot of demands on public services, and they need to be funded.

4.18pm BST

Labour MP Siobhain McDonagh then challenges Rishi Sunak over his earlier comment that he couldn't mention childcare support for women specifically during his Summer Statement.

McDonagh says she bridled" when the chancellor suggested he didn't have time to mention women in your 22 minute statement"

We are 51% of the population. We are more likely to lose our jobs, and to not do the hours we normally do.

4.08pm BST

Conservative MP Julie Marson challenges Rishi Sunak about rising debt levels among UK firms due to the pandemic.

Q: Are you comfortable with the idea of bailouts, and picking winners?

It's not something I think the government should get into the habit of. It's not my money, it's the taxpayer's money.

Sunak says there should be a very high bar for equity bailouts of struggling companies. He says the govt remains there as the "last resort" for firms.

Any bailout would need to be of strategic importance, and company investors need to share in the burden, so they don't get a "free ride on the taxpayer," he adds.

3.51pm BST

Q: Is the 30bn package announced last week enough to protect jobs, or should you have done something more ambitious given the risks, especially to younger workers?

Rishi Sunak replies that he's particularly worried about youth unemployment. There's a great risk of scarring - losing contact with jobs market at a young age can cause damage for many years.

3.47pm BST

Labour's Rushanara Ali now challenges Rishi Sunak about the untargeted nature of his 1,000 job retention bonus.

Won't this mean that companies will lay off some staff who may have risked their lives during the pandemic, so they can bring other, furloughed workers back to get the bonus?

3.42pm BST

Q: Last week's summer statement showed the government is spending 15bn on PPE equipment - will we get value for money?

The chancellor says the Treasury knows it must be prudent with taxpayers money", even as the government acts with pace to address the crisis.

3.37pm BST

Rishi Sunak is then asked about fiscal sustainability -- and his views on the deficit.

The chancellor cites a famous paper from Carmen Reinhart and Kenneth Rogoff which argued that running a national debt over 90% of GDP is risky.

3.32pm BST

SNP MP Alison Thewliss is challenging the chancellor about the people who are excluded from his various measures to support the economy.

Sunak agrees that he's not been able to help everyone, but he's now looking forward" and putting his energy into protecting jobs and supporting the economy.

The Chancellor said that he sympathises with those who have missed out on support.@alisonthewliss asks if the Chancellor will meet with the #ExcludedUK APPG.

The Chancellor said the Government is looking forward and not looking to introduce new support. pic.twitter.com/0ikLA4ovkI

Chair @MelJStride asks about the gaps in support in the Government's response to #coronavirus.@RishiSunak said it's obviously the case that not everyone feels they would've been helped how they would've liked.

He added that we need to look forward.#ForgottenLtd #ExcludedUK pic.twitter.com/uKYWju5duy

@FelicityBuchan asks the Chancellor about his thinking behind asking the Office for Tax Simplification to look at Capital Gains Tax.

The Chancellor said it's reasonably normal practice to ask the OTS to look at various taxes. pic.twitter.com/T9OXvaQJRY

3.21pm BST

Felicity Buchan MP then asks Rishi Sunak why he's launched a review of Capital Gains Tax.

The chancellor plays an extremely straight bat (hopefully England's cricketers are watching).

Capital gains tax is about the only one they've not looked at over the last few years.

3.16pm BST

Q: Your VAT cut on hospitality ends in January -- isn't that exactly when we'll want people to be eating out?

Sunak says the hospitality sector needs help now, adding that several other countries have launched similar plans.

3.13pm BST

Conservative MP Felicity Buchan speaks next, asking Rishi Sunak if he's missed a trick by not reforming stamp duty last week.

The chancellor replies that he is trying to move at pace' to stimulate the housing market by bringing in a temporary stamp duty holiday (on houses under 500,000).

3.02pm BST

Q: Why was there no mention of childcare in your summer statement, given women have been badly affected by the lockdown?

Sunak says many sectors didn't get a mention in his 22 minute statement.

2.54pm BST

Labour MP Angela Eagle asks Rishi Sunak about concerns that his jobs retention scheme, and the eat out to help out' offer, are badly targeted - and was challenged by the head of HMRC as being bad value.

Rishi Sunak replies that he firmly believes the 1,000 bonus for taking back furloughed staff will make a difference, particularly for lower-paid workers.

Sunak says "there's not a lot the government can do" to protect the aviation industry given the global drop in air travel.

2.47pm BST

Q: What's the chancellor's plan to help the hundreds of thousands of small firms who will be indebted once the Covid-19 crisis has ended?

Rishi Sunak argues that this isn't a desperate debt crisis - as corporate debt levels were low by historic standards as we entered the crisis.

2.40pm BST

The Chancellor of the Exchequer, Rishi Sunak, is appearing before parliament's Treasury committee now.

You should be able to see a live feed at the top of his blog.

Treasury committee chair Mel Stride questions Rishi Sunak about Conservative party manifesto commitments not to raise tax. Sunak refuses to be drawn. But is Tory manifesto the most important question to ask following last week's summer economic update and in light of Covid?

2.28pm BST

Just in: US industrial output has jumped as America's factories got back to work last month.

Industrial production across the States rose by 5.4% month-on-month in June, more than expected. That's up from a 1.4% gain in May, as the lockdown eased.

WASHINGTON (AP) - US industrial production surges 5.4% in June, second straight monthly gain; factory output up 7.2%.

BREAKING! US Industrial production rose 5.4% in June, more than expected. pic.twitter.com/0XN4suwBFT

1.59pm BST

Online grocery group Ocado is one of the top risers in London, up 6%.

It's done well in the lockdown, with sales surging 40% in May. It now has a waiting list of one million customers (!), suggesting the pandemic has significantly accelerated the move towards web deliveries.

1.40pm BST

President Trump has tweeted that there's great news' on the vaccine front.

He's not specified which medical trials have caught his eye, but I imagine it's last night's update from Moderna.

Great News on Vaccines!

1.09pm BST

Goldman Sachs is also putting aside an extra $1.59bn to cover credit losses, as it anticipates an increase in bad debts during the pandemic.

That's up from $937m in the January-March, and $214m in Q2 2019, lifting Goldman's total allowance for credit losses was $4.39 billion.

The increase compared with the second quarter of 2019 was primarily due to significantly higher provisions related to wholesale loans and, to a lesser extent, consumer loans, reflecting revisions to forecasts of expected deterioration in the broader economic environment.

GOLDMAN SACHS - QTRLY PROVISION FOR CREDIT LOSSES $1.59 BLN, UP 70% VS Q1 2020

12.42pm BST

Just in: Goldman Sachs has just beaten market forecasts by reporting that earnings rose in the last quarter despite the pandemic.

*GOLDMAN SACHS SHARES JUMP 4% AFTER SECOND QUARTER EARNINGS, REVENUE BLOW PAST EXPECTATIONS$GS pic.twitter.com/FLs6bcKYiq

Our strong financial performance across our client franchises demonstrates the inherent benefits of our diversified business model. The turbulence we have seen in recent months only reinforces our commitment to the strategy we outlined earlier this year to investors.

While the economic outlook remains uncertain, I am confident that we will continue to be the firm of choice for clients around the world who are looking to reshape their businesses and rebuild a more resilient economy."

12.20pm BST

The FTSE 100 is pushing higher, now up 112 points or 1.8% today at 6292 (the highest in seven sessions).

All but 14 of the one hundred blue-chip companies on the index are up today, lifted by ITV's report of vaccine progress in Oxford, and by Moderna's encouraging trial results last night.

12.05pm BST

A working Covid-19 vaccine would allow economies around the world to rebound, and take advantage of the stimulus programmes announced since the pandemic began.

As Fawad Razaqzada, market analyst at ThinkMarkets, puts it:

Investors are hopeful that we are getting closer and closer to finding effective treatments for coronavirus and an end to the pandemic, which could then clear the way for a big rebound in economic activity with so much stimulus money already in place by governments and central banks.

11.57am BST

Wall Street is also on track to rally in a few hours.

The Dow Jones industrial average expected to open 1.2% higher (up around 320 points at 26,970).

Stock markets have been given another lift this morning by another promising vaccine trial, this time from Moderna, as the race to be the first to market intensifies.

It goes without saying that a vaccine will be the gamechanger in the pandemic, the thing that will allow life to return to normal and businesses and households to thrive once again. So it's hardly surprising that investors get a little excited when the results of these trials emerge, even those in the early stages.

11.39am BST

European stock markets are pushing higher today, lifted by hopes that a Covid-19 vaccine will be successfully developed.

Industrial stocks, healthcare firms, miners and consumer goods and service providers are leading the rally, pushing the EU-wide Stoxx 600 index up by 1.2%.

I am hearing there will be positive news soon (perhaps tomorrow) on initial trials of the Oxford Covid-19 vaccine that is backed by AstraZeneca and supported by tens of millions of pounds of government money.

The first data is due be published in the Lancet.

Positive news is coming on Oxford Covid-19 vaccine. The vaccine is generating the kind of antibody and T-cell (killer cell) response that the researchers would hope to see, I understand. Details soon in @TheLancet https://t.co/7guw9TIbX9

After two vaccinations, the vaccine elicited a robust" immune response in all participants in all dose cohorts, Moderna said. The company said the levels of neutralizing antibodies in patients in the high dose group were fourfold higher than in recovered Covid-19 patients.

11.25am BST

Over in Brussels, Apple has won a landmark court battle with the European Union over whether or not it owed Ireland 13bn of unpaid taxes.

It's a win for the tech giant, and also for the Republic - which had vigorously defended its tax treatment of Apple (even though 13bn would be awfully useful right now...)

The European commission has been dealt a major blow in its battle to stop EU member states granting sweetheart tax deals to multinational corporations after the bloc's general court ruled that Apple does not need to pay back 13bn in back taxes to the Irish government.

The Luxembourg-based court found the EU's executive body had failed to prove that the iPhone maker benefitted from an illegal arrangement with the Irish authorities, in a decision with wide repercussions for the bloc's plans to stamp down on tax avoidance.

10.59am BST

Bond market action!

The UK has just sold a three-year government bond at the lowest ever interest rate, with investors paying more than the value of the debt.

UK three-year gilt sells at auction at a record negative average yield of -0.069%, a day after two-year yields traded at a record low of -0.13% pic.twitter.com/FtV0fz3yMV

10.27am BST

More highlights from Silvana Tenreyro's speech, from Reuters' Andy Bruce:

Good question for Tenreyro from ex-BoE deputy governor Minouche Shafik:

"Is an interrupted V really a U?"

Tenreyro says the "V" is likely to really flatten out after Q4

Tenreyro isn't worried about having overdone QE, she says it can easily be reversed.

On negative rates, she doesn't have personal view but thinks they have been a positive overall in other countries.

10.13am BST

Silvana Tenreyro has also cited evidence that pandemics lead to lower inflation.

She tells her webinar with the London School of Economic that research going back to the Middle Ages shows that epidemics of infectious disease tend to push the cost of living down (as well as making life much more unpleasant, of course):

Jorda, Singh and Taylor (2020) use data from pandemics going back to the Black Death to estimate the average impact on equilibrium interest rates. They look at long-run impacts, which should be less susceptible to the impact of monetary policy, and find that pandemics tend to reduce r* or the equilibrium interest rate. If Covid-19 has the same effect, it would imply lower levels of interest rates than before would be consistent with meeting the inflation target.

Forthcoming work by Bank staff, using a similar method, uses historical inflation data from the UK (Chart 1) and seven other countries to estimate the response of inflation to pandemics (Bonciani and Braun, forthcoming). The results suggest that these episodes typically led to persistent declines in inflation (Chart 2).

9.59am BST

Rising unemployment is one of the biggest threats to the UK recovery, Silvana Tenreyro points out.

Another risk is that ongoing social distancing" continues to hurt retail and hospitality - either because of official rules, or because people are worried about Covid-19.

The key uncertainty is how much the V' will be interrupted by other factors weighing on demand and supply. Two near-term ones stand out. First, the possible feedback from higher unemployment, particularly in some badly affected sectors, to lower aggregate demand, and if persistent, to lead to greater scarring.

Second, effects of voluntary or mandated social distancing on demand and supply in social consumption sectors ...

BOE'S TENREYRO SAYS ON "V" SHAPE RECOVERY, AFTER Q4 WE ARE LIKELY TO SEE A MUCH SHALLOWER REBOUND

9.56am BST

Silvana Tenreyro has produced these charts to show why she doesn't expect the UK economy to snap back, even if growth does resume in the third-quarter of the year:

9.40am BST

Bank of England policymaker Silvana Tenreyro has just declared she's prepared to push for fresh stimulus to protect the UK economy from the Covid-19 pandemic.

Assuming prevalence gradually falls, my central case forecast is for GDP to follow an interrupted or incomplete V-shaped' trajectory, with the first quarterly step-up in Q3. We are already seeing indications of a sharp recovery in purchases that were restricted only because of mandated business closures.

But I think that this will be interrupted by continued risk aversion and voluntary social distancing in some sectors, remaining restrictions on activities in others, and in general, by higher unemployment.

At our June MPC meeting, I thought that on balance and absent additional policy stimulus, demand would remain weaker than supply for some time, generating continuing disinflationary pressures.

To counteract those pressures and bring inflation back up towards our 2 per cent target, I voted to loosen monetary policy by expanding the stock of asset purchases by 100 billion. As with the rest of the committee, I remain ready to vote for further action as necessary to support the economy and ensure inflation returns to target.

9.31am BST

Online fashion firm ASOS is having a good lockdown, with sales and customer numbers surging.

My colleague Mark Sweney has the details:

Asos expects profits to hit the top end of market expectations this year after the online fashion retailer's sales of casual and active wear surged during the coronavirus lockdown.

The company, which targets the 20-something" fashion market, reported a 10% year-on-year sales rise to just over 1bn in the year to the end of June. Asos said its customer base grew by 6% to 23 million during the lockdown, with particularly strong growth in new international customers.

Asos sales surge during lockdown thanks to casual and active wear https://t.co/pBieobzkJG

9.23am BST

The Covid-19 pandemic is forcing luxury goods maker Burberry to cut 500 jobs worldwide, including 150 in its UK head office, in a 55m cost-cutting push.

Burberry wielding the axe after suffering a slump in sales during the coronavirus pandemic.

Retail sales dived by 48% in the three months to the end of June, including a 75% fall in Europe and the Middle East, as countries closed shops and offices and severely limited travel to control the spread of Covid-19.

Burberry said it would keep its headquarters in the UK but would further streamline" head office roles, reduce office space and improve retail efficiency" outside the UK. The company said it wanted to reinvest the savings in marketing activities including pop-up stores, digital campaigns, events and improved store displays.

9.03am BST

TUC General Secretary Frances O'Grady reckons inflation is so low because people are too worried about their job prospects to spend:

It's no surprise that inflation is low when people are afraid to spend because their job doesn't feel safe.

The chancellor must go all out to push back the rising tide of job losses. Businesses in the hardest-hit sectors need greater government support to stop them going under.

June CPI inflation up marginally to 0.6% from 0.5%,

because of computer gaming and clothes.

Big picture is sharply reduced inflation (chart shows Jan to Jun) across most categories, with most notable exceptions in recreation & alcohol.

Interestingly food inflation down. pic.twitter.com/ODY8GQ0bRK

8.56am BST

The government's temporary discount on meals at restaurants, pubs and cafes will also pull inflation lower this summer, Capital Economics predicts:

The small rise in UK CPI inflation from +0.5% in May to +0.6% in June probably won't be sustained for long as the effects of the Chancellor's VAT cut and the Eat Out to Help Out" scheme will probably drag inflation just below zero in the coming months. https://t.co/WKDNGkCJ7v pic.twitter.com/dszChOGheT

8.35am BST

Although inflation picked up in June, it's still close to its lowest level in four years.

The Financial Times suspects weak consumer demand will pull prices down again:

Rising prices for clothes, footwear and in recreational and culture activities such as computer games drove up the rate of inflation, but it was offset by falling costs of food, hotels and restaurants.

The nationwide shutdown imposed to prevent the spread of coronavirus has sent inflation plummeting, from 1.5 per cent in March to 0.8 per cent in April. The Bank of England's target is 2 per cent.

8.19am BST

Ed Monk, associate director for Personal Investing at Fidelity International, explains how computer games prices nudged inflation up last month:

All those extra hours at home in lockdown have fed through to the inflation data, with higher demand for computer and console gaming helping to edge the headline rate higher in June. CPI now stands at 0.6%, up from 0.5% in May and halting the trend of falling inflation this year.

'Recreation and culture' was the category that added most to the overall rate last month, including computer game and console prices which rose 1.8% annually. This time a year ago the price of gaming was falling by 4.7%.

8.09am BST

UK fuel costs also remained low last month... although millions of people under lockdown won't have really benefited.

Average petrol prices stood at 106.5 pence per litre in June 2020, slightly higher than May's four-year low. Average diesel prices were 112.7 pence per litre in June, the lowest since August 2016, the Office for National Statistics reports.

8.00am BST

Despite the pick-up in consumer prices in June, City economists don't expect inflation to keep rising.

Paul Dales of Capital Economics predicts that inflation could fall below zero this summer, as retailers try to lure anxious consumers to spend.

Inflation in all major core categories except restaurants and hotels fell, with the increase in clothing inflation (from -3.1% in May to -2.2% in June) and the rise in recreation and culture inflation (from +2.0% to +2.6%) making the largest contributions. We are not convinced either will be sustained.

We suspect that after the initial release of pent up demand once non-essential retailers opened in mid-June, retailers will have to use heavier discounts to get people through the doors. And a large part of the rise in recreation and culture was due to a jump in games, toys and hobbies inflation from +1.0% to +7.9%, which bounces around at the best of times.

The small rise in CPI inflation in June is nothing to worry about. It was driven by the volatile computer games component. We still expect the headline rate to fall a bit further in Q3. The data won't stand in the way of the MPC doing more to stimulate the economy later this year pic.twitter.com/rQG1PFTkot

Muted inflation paves the way for further action from the Bank of England as economic activity remains anaemic

UK inflation remained well below target in June, despite the slight uptick due to a rise in the price of popular computer games and the more spread-out sales of clothing since the lockdown. https://t.co/fUacbm3QMq

7.48am BST

This chart shows which items pushed the UK inflation rate up last month (mainly clothes and games) and which pulled it down (mainly food).

7.41am BST

Vegetables became a little cheaper last month.

Deliciously, that includes expensive crisps - meaning gamers can offset rising console prices by tucking in.

The effect comprised small movements from a variety of product groups, with the largest (of 0.03 percentage points) coming from vegetables. The largest individual downward contribution in this category came from premium potato crisps, reversing the upward contribution observed between April and May.

Inflation up slightly in June - CPI rose from 0.5% to 0.6%
Notable mentions by @ONS
Rising cost of computer games
Falling cost of potato crisps
What does that tell us about life in lockdown! #economy #inflation

7.36am BST

Jonathan Athow, deputy national statistician at the ONS, explains why UK inflation inched up last month:

The inflation rate has increased for the first time this year, but remains low by historical standards

Due to the impact of the coronavirus, clothing prices have not followed the usual seasonal pattern this year, with the normal falls due to the start of the summer sales failing to materialise.

7.19am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Inflation across the UK has risen for the first time since the Covid-19 pandemic began, as the lockdown pushed up the cost of computer games and forced clothes retailers to delay the usual summer sales season.

Price movements this year have not followed the normal seasonal pattern. In recent years, prices have generally risen between January and May before the summer sales season starts in June

It is possible that prices have been influenced by the coronavirus (COVID-19) lockdown changing the timing of demand and the availability of some items, particularly consoles. However, it is equally likely to be a result of the computer games in the bestseller charts.

Price movements for computer games can often be relatively large depending on the composition of these charts.

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