Tafter last week’s budget, there was a warning that Rishi Sunak’s recovery plans could be deflected by an increase in inflation of such magnitude that it would force central banks to raise interest rates. A modest increase of just 1% in interest paid on government debt would add between £ 20 billion and £ 25 billion to the cost of financing the UK’s debt and undermine all of Sunak’s hopes of balancing daily income and spending by 2026 .
Sunak said this in his budget speech, using the prospect of higher interest accounts as a reason to raise taxes on households and businesses in the second half of parliament.
The government’s economic forecaster, the Office of Budgetary Responsibility, repeated the warning, giving him an almost ecclesiastical imprimatur. The Institute of Tax Studies has devoted much of its budget analysis to the subject.
When these prominent bodies temper their budget verdict with near-hysterical warnings of lava-like costs waiting to roll over from the financial volcano, it is reasonable to ask three questions. Is inflation likely to increase? Would central banks react by raising interest rates? And why, after all the lessons learned during the 2008 financial crisis, did the UK become so vulnerable to a rate hike?
The answer to the last question is the purchase of government debt by the Bank of England through its quantitative easing program. With more than a third of government debt in its books, the central bank has become a major mortgage lender for the UK government, and that debt is no longer in terms of a fixed rate for 10 or 20 years, but has been refinanced during the night with the international money markets.
At the moment, this means better business for the government, reducing a 2% burden on debt markets to the Bank’s more favorable 0.1% base rate. The other side of this benefit arises when the Bank, faced with spiraling inflation, raises the base rate and raises the cost of servicing the UK’s debt.
At the moment, there are contradictory messages from the global economy about the outlook for inflation. The vaccination program is doing well in the United States and there is strong pressure on individual states to relax restrictions to the point that even demands for people to wear masks in stores and indoor facilities will be abandoned.
Many experts in the feverish world of investment in the stock market have bet that an increase in demand from American consumers will cause prices to rise. Premier Li Keqiang’s economic forecast last week in Beijing, when he said China’s growth this year would be 6%, has increased the number of inflation hawks.
Maritime traffic is increasing as trade increases and commodity prices soar. Copper reached its highest peak in nine years, while oil prices returned to pre-pandemic levels. In the first block, the barrel of Brent oil fell from more than $ 60 to less than $ 20. Last week, it jumped back to $ 68.
All signs indicate that inflation will rise. However, there is likely to be no more than a temporary mismatch between supply and demand. It happened in 2011, when inflation in the UK skyrocketed above 5%, before dropping quickly to less than 2%.
For this reason, central banks will seek more fundamental and long-term pressures on inflation. Mostly, this means waiting for high levels of employment, coupled with wage increases persistently above 4%. Is this possible when Brexit is still hampering exports and the costs of the pandemic are likely to persist for several years?
In his last speech, Jerome Powell, president of the US Federal Reserve, said that a prolonged recovery would be needed before interest rates went up. The European Central Bank thinks the same. There is no reason why the Bank of England should take a different view.
Tidal may leave Dorsey holding an unsatisfactory package when the music stops
The streaming boom brought another success, as Jay-Z and his circle of superstar partners struck a $ 297 million (£ 214 million) deal to sell a majority stake in his music service, Tidal. The sale is undoubtedly a blow to the rapper and his fellow artist-owners, including Beyoncé, Madonna and Rihanna, who acquired Tidal for $ 56 million in 2015. However, it is unclear whether its new owner – the Square, the mobile payments company run by Jack Dorsey, co-founder of Twitter – closed a deal at the top of the charts.
Tidal, which originally distinguished itself from other services for offering high-fidelity audio and video quality at premium prices, suffered pre-tax losses that increased significantly from $ 37.6 million to $ 56.3 million between 2018 and 2019 , according to the most recent financial report.
The company has had a difficult journey in its short life, including a dispute with artist-owner Kanye West, who broke through his ranks and ended his exclusive contract with Tidal in 2017, and remains involved in an investigation by Norwegian authorities over allegations of that she inflated the number of album streams, including Beyoncé Lemonade and West Pablo’s life. Tidal has repeatedly denied any wrongdoing.
The company is going in the right direction, with revenue growing 13% to $ 166.9 million in 2019, and said it enjoyed “steady demand” during the pandemic. However, it remains a goldfish, with the latest figures released publicly putting subscribers at 3 million in 2018, while music research firm Midia estimates it had around one million at the start of the pandemic. Spotify has 155 million paying subscribers, with 345 million worldwide, and together with Amazon Music is targeting Tidal’s unique selling point, launching high-fidelity subscription levels. Join Apple Music and there will be three formidable top three to fight.
Four years ago, Tidal found a lifeline for the cashier at the mobile phone company Sprint (now T-Mobile), which acquired a 33% stake for $ 200 million, which Jay-Z recently bought back and sold as part of Square’s business. Now it’s Jack Dorsey’s turn to see if he can keep the music going.
A budget more notable for omissions than action on emissions
Less than a month after the Treasury published a historical study on the need for economic policy to keep the green agenda at its center, the chancellor delivered a budget that failed to do just that.
The 600-page review, conducted by Prof Sir Partha Dasgupta, an economist at the University of Cambridge, was commissioned by the Treasury to assess the economic importance of nature. It was published last month amid a growing chorus of voices calling on governments to galvanize green policies to rekindle the world’s struggling economies after Covid. But any sign that the chancellor hoped to spur a green economic recovery in the UK was missing from last week’s budget.
Sunak’s course of return to economic growth involves protecting jobs, leveling the regions and attracting new investments to Britain. The green issue is not in the Chancellor’s tripartite plan, but he apparently fails to recognize that putting climate policy at the center of the UK’s economic recovery would reach all three, while laying the groundwork for a more sustainable economy.
Instead, policies aimed at supporting the country’s green economy were blocked in a two-minute portion of Sunak’s half-hour budget speech. It included green savings bonds for investors, green savings bonds for the public and a greener mandate for the Bank of England.
But there were notable omissions: no mention of a scheme to deal with the UK’s weak housing stock following the collapse of the Green Homes Grant; no plans to deploy rapid charging of electric vehicles across the country; and no new ideas for dealing directly with emissions from aviation and shipping.
All of these policies would help the United Kingdom achieve its net zero carbon emissions target by 2050, but, crucially, they would stimulate investment and create green collar jobs in all regions, starting today. The Treasury plans to respond to Dasgupta’s review in due course, but based on its post-Covid budget, it is clear that the message has not yet reached its target.