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World

India hikes spending, shuns ‘outright populism’ in last pre-election budget

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  • Capex to rise 33% to 10 trillion rupees in 2023/24
  • Govt targets gross borrowing of 15.43 trillion rupees
  • Eyes fiscal deficit of 5.9% in 2023/24, 4.5% by 2025/26

NEW DELHI, Feb 1 (Reuters) – India announced on Wednesday one of its biggest ever increases in capital spending for the next fiscal year to create jobs but targeted a narrower fiscal deficit in its last full budget ahead of a parliamentary election due in 2024.

Prime Minister Narendra Modi’s party has been under pressure to create jobs in the populous country where many have struggled to find employment, although the economy is now one of the world’s fastest-growing.

“After a subdued period of the pandemic, private investments are growing again,” Finance Minister Nirmala Sitharaman said as she presented the 2023/24 budget in parliament.

“The budget makes the need once again to ramp up the virtuous cycle of investment and job creation. Capital investment is being increased steeply for the third year in a row by 33% to 10 trillion rupees.”

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The capital spending increase to about $122.3 billion, which would amount to 3.3% of gross domestic product (GDP), will be the biggest such jump after an increase of more than 37% between 2020/21 and 2021/22.

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Total spending will rise 7.5% to 45.03 trillion rupees ($549.51 billion) in the next fiscal year starting on April 1.

Sitharaman said the government would target a fiscal deficit of 5.9% of GDP for 2023/24 compared with 6.4% for the current fiscal year and slightly lower than a Reuters poll of 6%. The aim is to lower the deficit to 4.5% by 2025/26.

Reuters Graphics

STEADY ‘MACRO BOAT’

Brokerage Nomura said the budget “prudently pushes for growth, without rocking the macro boat”.

“In the event, the government has presented a good budget. It has pushed for growth via public capex and continued on the path towards fiscal consolidation, without offering much in terms of outright populism.”

Capital Economics said the “absence of a fiscal blowout”, a recent drop in inflation and signs of moderating growth could convince India’s central bank to slow the pace of rate hikes next week.

It said there was still a chance of fiscal slippage as campaigning kicks off for the election, in which Modi is widely projected to win a third straight term.

The finance ministry’s annual Economic Survey, released on Tuesday, forecast the economy could grow 6% to 6.8% next fiscal year, down from 7% projected for the current year, while warning about the impact of cooling global demand on exports.

Sitharaman said India’s economy was “on the right track, and despite a time of challenges, heading towards a bright future”.

India’s real GDP is forecast to grow in the range of 6-6.8% in FY24

Her deficit plan will be aided by a 28% cut in subsidies on food, fertiliser and petroleum for the next fiscal year at 3.75 trillion rupees. The government cut spending on a key rural jobs guarantee programme to 600 billion rupees – the smallest in more than five years – from 894 billion rupees for this fiscal year.

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The government’s gross market borrowing is estimated to rise about 9% to 15.43 trillion rupees next fiscal year.

Reuters Graphics Reuters Graphics

CONSTRAINTS

Moody’s Investors Service said the narrower fiscal deficit projection pointed to the government’s commitment to longer-term fiscal sustainability, but that a “high debt burden and weak debt affordability remain key constraints that offset India’s fundamental strengths”.

Among other moves to stimulate consumption, the surcharge on annual income above 50 million rupees was cut to 25% from 37%.

Indian shares reversed earlier gains to close lower on Wednesday, led by a fall in insurance companies after the budget proposed to limit tax exemptions for insurance proceeds, while Adani Group shares tumbled again as it struggles to repel concerns raised by a U.S. short seller.

Since taking office in 2014, Modi has ramped up capital spending including on roads and energy, while wooing investors through lower tax rates and labour reforms, and offering subsidies to poor households to clinch their political support.

A lack of jobs for young people, and meagre wages for those who do find work, has been one of the main criticisms of Modi.

Sitharaman also said the government was allocating 350 billion rupees for energy transition, as Modi focuses on green hydrogen and other cleaner fuels to meet India’s climate goals.

($1 = 81.7725 Indian rupees)

Reporting by Shubham Batra, Nikunj Ohri, Shivangi Acharya, Sarita Singh, Nigam Prusty, Manoj Kumar, Rupam Jain and Indian bureaux; Writing by Krishna N. Das; Editing by Kim Coghill, Jacqueline Wong and Gareth Jones

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US

House Speaker says Democrats should cap spending to avoid U.S. debt default

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WASHINGTON, Jan 15 (Reuters) – House of Representatives Speaker Kevin McCarthy said on Sunday he believes Democrats would agree to cap government spending to avoid a U.S. debt default and he wants to discuss the idea with President Joe Biden.

Republicans now in control of the House have threatened to use the debt ceiling as leverage to demand spending cuts from Biden’s Democrats, who control the U.S. Senate.

This has raised concerns in Washington and on Wall Street about a bruising fight that could be at least as disruptive as the protracted battle of 2011, which prompted a brief downgrade of the U.S. credit rating and years of forced domestic and military spending cuts.

“I want to sit down with him now so there is no problem,” McCarthy said in an interview with Fox News, referring to Biden. “I’m sure he knows there’s places that we can change that put America on a trajectory that we save these entitlements instead of putting it into bankruptcy the way they have been spending.”

McCarthy pointed to the Trump-era agreement by U.S. lawmakers’ in 2019 to suspend the statutory debt limit on Treasury Department borrowing until a later date as evidence that such compromise is possible.

“I believe we can sit down with anybody who wants to work together. I believe this president could be that person,” he said.

House Oversight Committee Chairman James Comer said on Sunday he hoped debt default could be avoided but put the onus on Democrats to agree to spending cuts.

“Republicans were elected with a mandate from the American people in the midterm elections. We campaigned on the fact that we were going to be serious about spending cuts,” Comer said in an interview with CNN’s “State of the Union.”

“So the Senate is going to have to recognize the fact that we’re not going to budge until we see meaningful reform with respect to spending.”

U.S. Treasury Secretary Janet Yellen said on Friday the United States will likely hit the $31.4 trillion statutory debt limit on Jan. 19, forcing the Treasury to start extraordinary cash management measures that can likely prevent default until early June.

Congress created the debt ceiling in 1917 to give the government greater borrowing flexibility, and must approve each increase to ensure that the United States meets its debt obligations and avoids a catastrophic default.

Reporting by Doina Chiacu and Katharine Jackson; Editing by Lisa Shumaker and Grant McCool

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World

Ghana to default on most external debt as economic crisis worsens

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  • Ghana suspends payments on Eurobonds, commercial loans
  • Announcement a week after IMF staff-level agreement
  • Eurobonds sink up to 3 cents in dollar

ACCRA, Dec 19 (Reuters) – Ghana on Monday suspended payments on most of its external debt, effectively defaulting as the country struggles to plug its cavernous balance of payments deficit.

Its finance ministry said it will not service debts including its Eurobonds, commercial loans and most bilateral loans, calling the decision an “interim emergency measure”, while some bondholders criticised a lack of clarity in the decision.

The government “stands ready to engage in discussions with all of its external creditors to make Ghana’s debt sustainable”, the finance ministry said.

The suspension of debt payments reflects the parlous state of the economy, which had led the government last week to reach a $3-billion staff-level agreement with the International Monetary Fund (IMF).

Ghana had already announced a domestic debt exchange programme and said that an external restructuring was being negotiated with creditors. The IMF has said a comprehensive debt restructuring is a condition of its support.

The country has been struggling to refinance its debt since the start of the year after downgrades by multiple credit ratings agencies on concerns it would not be able to issue new Eurobonds.

That has sent Ghana’s debt further into the distressed territory. Its public debt stood at 467.4 billion Ghanaian cedis ($55 billion as per Refinitiv Eikon data) in September, of which 42% was domestic.

Ghana external debt by holder type, 2022 Q3, $ billion

It had a balance of payments deficit of more than $3.4 billion in September, down from a surplus of $1.6 billion at the same time last year.

While 70% to 100% of the government revenue currently goes toward servicing the debt, the country’s inflation has shot up to as much as 50% in November.

Ghana has been experiencing what some say is its worst economic crisis in a generation. Last month, more than 1,000 protesters marched through the capital Accra, calling for the resignation of the president and denouncing deals with the IMF as fuel and food costs spiralled.

Its gross international reserves stood at around $6.6 billion at the end of September, equating to less than three months of imports cover. That is down from around $9.7 billion at the end of last year.

The government said the suspension will not include the payments towards multilateral debt, new debts taken after Dec. 19 or debts related to certain short-term trade facilities.

‘NOT COMING OUT OF THE BLUE’

Holders of Ghana’s international bonds confirmed in an emailed statement late on Monday the formal launch of a creditor committee aimed at facilitating the “orderly and comprehensive resolution” of the country’s debt challenges.

Any good faith negotiations, the creditor committee said, would need to avoid unilateral actions and require the timely exchange of detailed economic and financial information between international bondholders, the government and the IMF.

The steering committee was made up of Abrdn, Amundi, BlackRock, Greylock and Ninety One, the group said in its statement.

Kathryn Exum, who co-leads Gramercy’s Sovereign Research department, was hopeful about debt restructuring, noting that it should prove easier for creditors than other recent emerging market restructurings.

“It is more straight forward than the likes of Sri Lanka and Zambia, in the respect that there is not a lot of China debt,” Exum said on Friday in comments anticipating the external restructuring.

One bondholder who requested anonymity said the lack of detail in the announcement could be cause for concern for investors.

Ghana’s external bonds, which are trading at a deeply distressed level of 29-41 cents in the dollar, dropped with the 2034 bond losing more than 3 cents, Tradeweb data showed.

Reuters Graphics Reuters Graphics

Nonetheless, some investors said the suspension of external debt payment was expected.

“It is in line with Ghana getting into talks about restructuring with various debt holders, so not coming out of the blue,” Rob Drijkoningen, co-head of emerging market debt at Neuberger Berman, which holds some Ghanaian Eurobonds.

Ghana did pay a Dec. 16 coupon due on a 2049 Eurobond, according to a person familiar with the matter.

It was not immediately clear if the debt service suspension would include a $1 billion 2030 bond that has a $400 million World Bank guarantee .

“We will not be commenting on the specifics of any particular bond or debt owed at this time, but… we are fully engaging all stakeholders,” a finance ministry spokesperson told Reuters.

($1 = 8.5000 Ghanaian cedi)

Reporting by Christian Akorlie and Cooper Inveen; Additional reporting by Rachel Savage, Marc Jones and Jorgelina do Rosario; Writing by Rachel Savage and Cooper Inveen; Editing by Karin Strohecker, Ed Osmond, Arun Koyyur and Aurora Ellis

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World

Saudi Arabia ‘maturer guys’ in spat with U.S., energy minister says

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  • OPEC+ oil output cut led to U.S., Saudi spat
  • Saudi Arabia and U.S. “solid allies” – minister
  • Big Wall St turnout at flagship Saudi investment summit

RIYADH, Oct 25 (Reuters) – Saudi Arabia decided to be the “maturer guys” in a spat with the United States over oil supplies, the kingdom’s energy minister Prince Abdulaziz bin Salman said on Tuesday.

The decision by the OPEC+ oil producer group led by Saudi Arabia this month to cut oil output targets unleashed a war of words between the White House and Riyadh ahead of the kingdom’s Future Investment Initiative (FII) forum, which drew top U.S. business executives.

The two traditional allies’ relationship had already been strained by the Joe Biden administration’s stance on the 2018 murder of Saudi journalist Jamal Khashoggi and the Yemen war, as well as Riyadh’s growing ties with China and Russia.

When asked at the FII forum how the energy relationship with the United States could be put back on track after the cuts and with the Dec. 5 deadline for the expected price-cap on Russian oil, the Saudi energy minister said: “I think we as Saudi Arabia decided to be the maturer guys and let the dice fall”.

“We keep hearing you ‘are with us or against us’, is there any room for ‘we are with the people of Saudi Arabia’?”

Saudi Investment Minister Khalid al-Falih said earlier that Riyadh and Washington will get over their “unwarranted” spat, highlighting long-standing corporate and institutional ties.

“If you look at the relationship with the people side, the corporate side, the education system, you look at our institutions working together we are very close and we will get over this recent spat that I think was unwarranted,” he said.

While noting that Saudi Arabia and the United States were “solid allies” in the long term, he highlighted the kingdom was “very strong” with Asian partners including China, which is the biggest importer of Saudi hydrocarbons.

The OPEC+ cut has raised concerns in Washington about the possibility of higher gasoline prices ahead of the November U.S. midterm elections, with the Democrats trying to retain their control of the House of Representatives and the Senate.

Biden pledged that “there will be consequences” for U.S. relations with Saudi Arabia after the OPEC+ move.

Princess Reema bint Bandar Al Saud, the kingdom’s ambassador to Washington, said in a CNN interview that Saudi Arabia was not siding with Russia and engages with “everybody across the board”.

[1/3] Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman Al-Saud speaks at the Future Investment Initiative conference, in Riyadh, Saudi Arabia, October 25, 2022. REUTERS/ Ahmed Yosri

“And by the way, it’s okay to disagree. We’ve disagreed in the past, and we’ve agreed in the past, but the important thing is recognizing the value of this relationship,” she said.

She added that “a lot of people talk about reforming or reviewing the relationship” and said that was “a positive thing” as Saudi Arabia “is not the kingdom it was five years ago.”

FULL ATTENDENCE AT FII

Like previous years, the FII three-day forum that opened on Tuesday saw a big turnout from Wall Street, as well as other industries with strategic interests in Saudi Arabia, the world’s top oil exporter.

JPMorgan Chase & Co Chief Executive Jamie Dimon, speaking at the gathering, voiced confidence that Saudi Arabia and the United States would safeguard their 75-year-old alliance.

“I can’t imagine any allies agreeing on everything and not having problems – they’ll work it through,” Dimon said. “I’m comfortable that folks on both sides are working through and that these countries will remain allies going forward, and hopefully help the world develop and grow properly.”

The FII is a showcase for the Saudi crown prince’s Vision 2030 development plan to wean the economy off oil by creating new industries that also generate jobs for millions of Saudis, and to lure foreign capital and talent.

No Biden administration officials were visible at the forum on Tuesday. Jared Kushner, a former senior aide to then-President Donald Trump who enjoyed good ties with Prince Mohammed, was featured as a front-row speaker.

The Saudi government invested $2 billion with a firm incorporated by Kushner after Trump left office.

FII organisers said this year’s edition attracted 7,000 delegates compared with 4,000 last year.

After its inaugural launch in 2017, the forum was marred by a Western boycott over Khashoggi’s killing by Saudi agents. It recovered the next year, attracting leaders and businesses with strategic interests in Saudi Arabia, after which the pandemic hit the world.

Reporting by Aziz El Yaakoubi, Hadeel Al Sayegh and Rachna Uppal in Riyadh and Nadine Awadalla, Maha El Dahan and Yousef Saba in Dubai; Writing by Ghaida Ghantous and Michael Geory; Editing by Louise Heavens, Mark Potter, Vinay Dwivedi, William Maclean

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World

New PM Rishi Sunak pledges to lead Britain out of economic crisis

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  • Sunak meets King Charles on Tuesday morning
  • Vows to rebuild trust in the country
  • Expected to start forming a cabinet
  • Sunak faces huge challenge to rebuild stability

LONDON, Oct 25 (Reuters) – Rishi Sunak became Britain’s third prime minister in two months on Tuesday and pledged to lead the country out of a profound economic crisis and rebuild trust in politics.

Sunak quickly reappointed Jeremy Hunt as his finance minister in a move designed to calm markets that had balked at his predecessor’s debt-fuelled economic plans.

The former hedge fund boss said he would unite the country and was expected to name a cabinet drawn from all wings of the party to end infighting and abrupt policy changes that have horrified investors and alarmed international allies.

Speaking outside his official Downing Street residence, Sunak praised the ambition of his predecessor Liz Truss to reignite economic growth but acknowledged mistakes had been made.

“I have been elected as leader of my party and your prime minister, in part to fix them,” said Sunak, who broke with the tradition of standing beside his family and cheering political supporters.

“I understand, too, that I have work to do to restore trust, after all that has happened. All I can say is that I am not daunted. I know the high office I have accepted and I hope to live up to its demands.”

Sunak said difficult decisions lay ahead as he looks to cut public spending. Hunt, who Truss appointed to calm markets roiled by her dash for growth, has been preparing a new budget alongside borrowing and growth forecasts due out on Monday, and repeated his warning on Tuesday that “it is going to be tough”.

The new prime minister also restored Dominic Raab to the post of deputy prime minister, a role he lost in Truss’s 44 days in office, but reappointed James Cleverly as foreign minister and Ben Wallace at defence.

Penny Mordaunt, who ended her bid to win a leadership contest against Sunak on Monday, also retained her position as leader of the House of Commons, a role that organises the government’s business in the lower house of parliament.

Sources had said she wanted to become foreign minister.

With his new appointments, Sunak was seen to be drawing ministers from across the Conservative Party while leaving others in post – a move that should ease concerns that Sunak might appoint loyalists rather than try to unify the party.

TOUGH DECISIONS

Sunak, one of the richest men in parliament, is expected to slash spending to plug an estimated 40 billion pound ($45 billion) hole in the public finances created by an economic slowdown, higher borrowing costs and an energy support scheme.

He will now need to review all spending, including on politically sensitive areas such as health, education, defence, welfare and pensions. But with his party’s popularity in freefall, he will face growing calls for an election if he ditches too many of the promises that the Conservatives win election in 2019.

Economists and investors have welcomed Sunak’s appointment – Ryanair boss Michael O’Leary said the adults had taken charge again – but they warn he has few options to fix the country’s finances when millions are battling a cost of living crunch.

[1/8] King Charles III welcomes Rishi Sunak during an audience at Buckingham Palace, London, where he invited the newly elected leader of the Conservative Party to become Prime Minister and form a new government. Picture date: Tuesday October 25, 2022. Photo credit should read: Aaron Chown/PA Wire Aaron Chown/Pool via REUTERS

Sunak, who ran the Treasury during the COVID-19 pandemic, promised to put economic stability and confidence at the heart of the agenda. “This will mean difficult decisions to come,” he said, shortly after he accepted King Charles’s request to form a government.

Sunak also vowed to put the public’s need above politics, in recognition of the growing anger at Britain’s political class and the ideological battles that have raged ever since the historic 2016 vote to leave the European Union.

Workers heading towards London’s financial district said Sunak, at 42 Britain’s youngest prime minister for more than 200 years and its first leader of colour, appeared to be the best of a bad bunch.

“I think he was competent, and that’s really what we should hope for at the moment,” said management consultant, James Eastbook, 43.

With two prime ministers appointed in two months without a popular vote, some called for a general election now but others hoped Sunak would stay until the next scheduled election, due by January 2025.

POLITICAL MACHINATIONS

Sunak, a Goldman Sachs analyst who only entered parliament in 2015, faces a challenge ending the factional infighting that has brought his party low. Many Conservatives remain angry with him for quitting as finance minister in July and triggering a wider rebellion that ended Boris Johnson’s premiership.

Others question how a multi millionaire can lead the country when millions of people are struggling with surging food and energy bills.

“I think this decision sinks us as a party for the next election,” one Conservative lawmaker told Reuters.

Historian and political biographer Anthony Seldon said Sunak would also be constrained by the mistakes of his immediate predecessor.

“There is no leeway on him being anything other than extraordinarily conservative and cautious,” he told Reuters.

Many politicians and officials abroad, having watched as a country once seen as a pillar of economic and political stability descended into brutal infighting, welcomed Sunak’s appointment.

Sunak, a Hindu, also becomes Britain’s first prime minister of Indian origin.

U.S. President Joe Biden described it as a “groundbreaking milestone”, while leaders from India and elsewhere welcomed the news. Sunak’s billionaire father-in-law, N.R. Narayana Murthy, said he would serve the United Kingdom well.

“We are proud of him and we wish him success,” the founder of software giant Infosys said in a statement.

($1 = 0.8864 pounds)

Writing by by Kate Holton and Elizabeth Piper; Editing by Hugh Lawson and Jon Boyle

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US

U.S. 2022 budget deficit halves to $1.375 trillion despite student loan costs

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WASHINGTON, Oct 21 (Reuters) – The U.S. government on Friday reported that its fiscal 2022 budget deficit plunged by half from a year earlier to $1.375 trillion, due to fading COVID-19 relief spending and record revenues fueled by a hot economy, but student loan forgiveness costs limited the reduction.

The U.S. Treasury said the $1.400 trillion reduction in the deficit was still the largest-ever single-year improvement in the U.S. fiscal position as receipts hit a record $4.896 trillion, up $850 billion, or 21% from fiscal 2021.

President Joe Biden touted the deficit reductions in remarks at the White House and at Delaware State University, and said the deficit would shrink by another $250 billion over the next decade, given Medicare’s ability to negotiate lower drug prices.

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Biden chided Republicans for voting against the deficit reduction. While his administration lowered the deficit, it has boosted spending on infrastructure and expanded benefits for middle- and low-income Americans.

“You know, we’ve gone from an historically strong economic recovery to a steady and stable growth, while reducing the deficit,” Biden said.

Outlays for fiscal 2022, which ended Sept. 30, fell by a record $550 billion, or 8% from last year to $6.272 trillion. But the outlays for September, the fiscal year’s final month, included the recognition of $430 billion in costs from the Biden administration’s plan to forgive student debt of up to $20,000 for former college students now earning under $125,000 a year and under $250,000 for married couples.

The move brought the September budget deficit to $430 billion, more than six times the prior-year September deficit of $65 billion. In most years, September is a surplus month due to the payment of quarterly corporate and individual taxes.

The Congressional Budget Office estimated that the plan would cost about $400 billion. It also includes the extension of a COVID-19 moratorium on all student loan payments until the end of 2022, which added about $21 billion in budgetary costs.

Non-governmental budget analysts have estimated that the plan would wipe out a much-touted deficit reduction from Democrats’ recently enacted climate, healthcare and Internal Revenue Service funding bill.

‘RESPONSIBLE PATH’

U.S. Treasury Secretary Janet Yellen told reporters that the Biden administration was maintaining a “credible fiscal policy” despite the unfunded student debt relief that was a Biden campaign promise.

“I do see our debt as being on a responsible path,” she said, adding that net interest on the debt as a share of GDP was forecast to only rise to about 1%, a “low” historical level.

Revenue gains during September started to slow from prior months, growing only 6% from a year earlier to $488 billion.

And the CBO is projecting that with the economy slowing further amid higher Federal Reserve interest rates, revenues will slow further in future years. Rising interest costs also will start to consume a bigger share of the federal budget, the non-partisan fiscal referee agency predicts.

Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, a fiscal watchdog group, said the effect of recognizing the student loan forgiveness costs in fiscal 2022 will be to show a steadier decline in deficits from the pandemic – rather than a sharper narrowing to around $1 trillion, followed by an increase to around $1.4 trillion for fiscal 2023.

The CBO had forecast a fiscal 2023 deficit of about $984 billion, with deficits rising steadily thereafter to nearly $2 trillion by 2030.

“I think it’s more appropriate to recognize the costs as the debt is being canceled, and the bulk of that will happen in fiscal 2023. But the government has latitude here,” Goldwein said in a phone interview prior to the release.

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Reporting by David Lawder, Dan Burns and Nandita Bose; Editing by Andrea Ricci and Aurora Ellis

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World

As UK’s Truss fights for her job, new finance minister warns of tough decisions

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  • PM Truss sacked finance minister on Friday
  • New chancellor Hunt warns of tough decisions
  • Ruling Conservatives have slumped in polls
  • Some Conservative lawmakers say Truss will be ousted

LONDON, Oct 15 (Reuters) – Britain’s new finance minister Jeremy Hunt said on Saturday some taxes would go up and tough spending decisions were needed, signalling further reversals from Prime Minister Liz Truss as she battles to keep her job just over a month into her term.

In an attempt to appease financial markets that have been in turmoil for three weeks, Truss fired Kwasi Kwarteng as her chancellor of the exchequer on Friday and scrapped parts of their controversial economic package. read more

With opinion poll ratings dire for both the ruling Conservative Party and the prime minister personally, and many of her own lawmakers asking, not if, but how Truss should be removed, she has turned to Hunt to help salvage her premiership less than 40 days after taking office.

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“We will have some very difficult decisions ahead,” Hunt said as he toured TV and radio studios to give a blunt assessment of the situation the country faced, saying Truss and Kwarteng had made mistakes.

“The thing that people want, the markets want, the country needs now, is stability,” Hunt said. “No chancellor can control the markets. But what I can do is show that we can pay for our tax and spending plans and that is going to need some very difficult decisions on both spending and tax.”

Truss won the leadership contest to replace Boris Johnson on a platform of big tax cuts to stimulate growth, which Kwarteng duly announced last month. But the absence of any details of how the cuts would be funded sent the markets into meltdown.

She has now ditched plans to cut tax for high earners, and said a levy on business would increase, abandoning her proposal to keep it at current levels. But it is not clear if that has gone far enough to satisfy investors. read more

Hunt is due to announce the government’s medium-term budget plans on Oct. 31, in what will be a key test of its ability to show it can restore its economic policy credibility. He said further changes to Truss’s plans were possible.

“Giving certainty over public finances, how we’re going to pay for every penny that we get through the tax and spending decisions we make, those are very, very important ways that I can give certainty and help create the stability,” he said.

He cautioned spending would not rise by as much as people would like and all government departments were going to have to find more efficiencies than they were planning.

“Some taxes will not be cut as quickly as people want, and some taxes will go up. So it’s going to be difficult,” he said, adding that he would sit down with Treasury officials on Saturday before meeting Truss on Sunday to go through the plans.

‘MISTAKES MADE’

Kwarteng’s Sept. 23 fiscal statement prompted a backlash in financial markets that was so ferocious the Bank of England (BoE) had to intervene to prevent pension funds being caught up in the chaos as borrowing costs surged.

Hunt, an experienced minister and viewed by many in his party as a safe pair of hands, said he agreed with Truss’s fundamental strategy of kickstarting economic growth, adding that their approach had not worked.

“There were some mistakes made in the last few weeks. That’s why I’m sitting here. It was a mistake to cut the top rate of tax at a period when we’re asking everyone to make sacrifices,” he said.

It was also a mistake, Hunt said, to “fly blind” and produce the tax plans without allowing the independent fiscal watchdog, the Office for Budget Responsibility, to check the figures.

The fact that Hunt is Britain’s fourth finance minister in four months is testament to a political crisis that has gripped Britain since Johnson was ousted following a series of scandals.

Hunt said Truss should be judged at an election and on her performance over the next 18 months – not the last 18 days.

However, she might not get that chance. During the leadership contest, Truss won support from less than a third of Conservative lawmakers and has appointed her backers since taking office – alienating those who support her rivals.

The appointment of Hunt, who ran to be leader himself and then backed her main rival ex-finance minister Rishi Sunak, has been seen as a sign of her reaching out, but the move did little to placate some of her party critics.

“It’s over for her,” one such Conservative lawmakers told Reuters after Friday’s events.

The next key test will come on Monday, when the British government bond market functions for the first time without the emergency buying support provided by the BoE since Sept. 28. Gilt prices plunged late on Friday after Truss’s announcement.

Newspapers said Truss’s position was in jeopardy, but with no appetite in the party or country for another leadership election, it was unclear how she could be replaced. read more

“Even Liz Truss’s most loyal allies, viewing the matter through the most rose-tinted glasses available, must now wonder how she can survive,” the Daily Mail tabloid, which had previously given Truss strong support, said in its editorial.

“Yet what is the alternative?”

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Reporting by Michael Holden, Alistair Smout and William Schomberg
Editing by Emelia Sithole-Matarise and Helen Popper

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World

UK’s Truss thinking of new tax policy U-turn, media reports say

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  • New PM Truss under pressure over economic proposals
  • Unfunded tax cuts plan trigger bond market turmoil
  • Reports there could be a U-turn on corporation tax
  • Government’s poll ratings have slumped

LONDON, Oct 13 (Reuters) – British Prime Minister Liz Truss is considering reversing more of her government’s controversial “mini-budget”, some media reported on Thursday, setting off a rally for the battered pound and British government bonds.

Discussions were under way in Downing Street over whether to scrap elements of the plan which caused turmoil in financial markets the moment it was announced by finance minister Kwasi Kwarteng three weeks ago, Sky News said, citing sources.

The Sun newspaper said Truss was considering allowing a rise in corporation tax to take place next April, something she promised to halt in her bid to be prime minister, in which she vowed to sweep away the “orthodoxy” of economic policy.

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Finance minister Kwasi Kwarteng, asked repeatedly in an interview with BBC television whether the reports of a change of policy on corporation tax were accurate, said that he was focused on his growth plan.

“Our position hasn’t changed. I will come up with the medium-term fiscal plan on the 31st of October, as I said earlier in the week, and there will be more detail then,” he said on the sidelines of International Monetary Fund meetings.

Kwarteng is due to announce his medium-term budget plans on Oct. 31, alongside independent fiscal forecasts.

Truss is under huge pressure within her Conservative Party to change her push for 43 billion pounds ($48.8 billion) of unfunded tax cuts as polls show her support has collapsed and investors have balked at the potential impact on the public finances.

Some lawmakers have pondered whether she should be removed from the job only a month after becoming Britain’s fourth prime minister in just six years since the Brexit referendum.

The pound, which has fallen sharply since Truss emerged as the front-runner to enter Downing Street in August, leapt on the reports and was up almost 2.5% against the U.S. dollar shortly after 5pm (1600 GMT) on Thursday.

British government bond prices also recovered some of the steep losses incurred since Kwarteng’s “mini-budget” announcement on Sept. 23.

Kwarteng, asked by the BBC about any discussions going on back in London to tear up his package, said: “I speak to the prime minister all the time, and we are totally focused on delivering the growth plan.”

He and Truss bowed to pressure earlier this month and ditched part of the mini-budget which would have eliminated the top rate of income tax, something they had said would help spur Britain’s sluggish economic growth rate. The IMF has said it would worsen inequality.

The government has repeatedly said it will stick to the rest of the tax cut plans while also protecting public spending, but economists and critics say something has to give.

In a sign of how far Britain’s reputation for sound economic management and institutional stability has fallen, the head of the IMF, Kristalina Georgieva, said on Thursday she had told Kwarteng of the importance of “policy coherence and communicating clearly”.

“I do believe that it is correct to be led by evidence. If the evidence is that there has to be a recalibration, it is right for governments to do so,” she told reporters. read more

Pedestrians leave and enter the London Stock Exchange in London, Britain August 15, 2017. REUTERS/Neil Hall//File Photo

LEADERSHIP

Truss has quickly run into deep opposition to her leadership even among some Conservative lawmakers, many of whom who never wanted her to replace Boris Johnson as leader.

“If I was Liz Truss I wouldn’t wait to be thrown out of office by my party. I hope I’d resign,” Tim Montgomerie, founder of the influential ConservativeHome website, said on Twitter.

Former finance minister George Osborne was critical too.

“Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable U-turn on the mini budget,” he said on Twitter.

Asked if he and Truss would still be in their jobs next month, Kwarteng replied: “Absolutely, 100%. I’m not going anywhere.”

Earlier, Foreign minister James Cleverly had warned that a change of leader would be “a disastrously bad idea, not just politically but also economically”.

Under current rules, lawmakers can only write letters to call for a no-confidence vote when the leader has been in place for a year. But that convention might not hold after a fire-sale in the government bond market drove up borrowing costs and mortgage rates and forced the Bank of England to intervene to protect pension funds caught up in the market chaos.

REALLY ILL PATIENT

The BoE’s emergency bond purchases are due to end on Friday. Many analysts have said it might have to maintain some kind of support given the fragility of the bond market.

“A central bank is like a doctor: if the patient is really ill, and even if the patient has misbehaved, it is very difficult for a doctor to walk away,” said Mohamed El Erian, chief economic adviser at Allianz.

But Larry Fink, chief executive of U.S. investment behemoth BlackRock, said British government bond prices suggested that a great part of so-called liability-driven investment funds at the centre of the chaos had been “reconstructed”.

There are signs however that the rise in borrowing costs is feeding through into the real economy.

The Royal Institution of Chartered Surveyors said on Thursday that house prices showed the weakest growth in September since early in the coronavirus crisis and they look set to fall with mortgage rates recently jumping further.

The country’s largest homebuilder, Barratt (BDEV.L), has flagged a plunge in reservations in recent months, causing it to issue a profit warning after what has been a robust few years for the sector. read more

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Additional reporting by Alistair Smout and Elizabeth Piper in London, and David Lawder, Davide Barbuscia, Manya Saini and Leika Kihara in Washington; writing by Kate Holton, Michael Holden and William Schomberg; editing by Toby Chopra and Hugh Lawson

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World

UK’s Truss tries to reassure on economic plan

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  • Defends economic plan, saying it is right
  • Also tries to reassure
  • Says Kwarteng made decision on high tax rate

BIRMINGHAM, England, Oct 2 (Reuters) – British Prime Minister Liz Truss tried to reassure her party and the public on Sunday by saying she should have done more to “lay the ground” for an economic plan that saw the pound fall to record lows and government borrowing costs soar.

On the first day of her governing Conservative Party’s annual conference, Truss, in office for less than a month, adopted a softer tone by saying she would support the public during a difficult winter and beyond.

She defended her “growth plan”, a package of tax-cutting measures that investors and many economists have criticised for setting out billions of pounds of spending while offering few details on how it would be paid for in the short term.

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Truss said it was the right direction, suggesting critics did not realise the depth of Britain’s problems and that she should have done more to explain them — an argument that market traders and investors have dismissed as a reason for the falls in the pound and the increase in borrowing costs last week.

But in what some Conservative lawmakers worry will hurt their prospects at an election due in 2024, she did not deny that the plan would require spending cuts for public services and refused to commit to increasing welfare benefits in line with inflation while endorsing a tax cut for the wealthiest.

“I understand their worries about what has happened this week,” she told the BBC in the central English city of Birmingham.

“I do stand by the package we announced, and I stand by the fact that we announced it quickly because we had to act, but I do accept that we should have laid the ground better.”

Jake Berry, chairman of the Conservative Party, suggested the markets may have overreacted, while admitting he was not an economist. “So let’s see where the markets are in six months time,” he told Sky News.

TROUBLE AHEAD?

Truss took office on Sept. 6, but Queen Elizabeth died two days later and so the first days of the new prime minister’s term were largely taken up with the national mourning period, when politics was all but paused.

She launched her plan two weeks after taking office, with her team feeling she had signalled her plans during a leadership campaign against rival Rishi Sunak, who had argued against immediate tax cuts.

But the scale of the plan spooked markets. After a large sell-off, the pound has since recovered after Britain’s central bank, the Bank of England stepped in, but government borrowing costs remain markedly higher. Investors say the government will have to work hard to restore confidence.

Beyond the market reaction, Truss’s economic plan also raised alarm in the Conservative Party, particularly over the scrapping of the highest 45% level of income tax.

Some in the party fear they are at risk of being seen as “the nasty party”, cutting taxes for the wealthiest, while doing little to improve the lives of the most vulnerable.

One former minister, Michael Gove, who was long at the heart of government, hinted he would not vote for the abolition of the top tax when the economic plan comes before parliament and Andy Street, the Conservative mayor of Birmingham, said he would not have made that policy.

Truss said she supported the simplification of the tax system but added the decision on the top tax was taken by her finance minister, Kwasi Kwarteng.

When asked whether all of her cabinet of top ministers had been told in advance, Truss said: “No, we didn’t, this was a decision that the chancellor made.”

She also suggested that politicians spent too much time worrying about how their policies were received by the public, saying she was focused on driving growth. Truss has often said she is not scared of making unpopular decisions.

“I do think there has been too much focus in politics on the optics or how things look,” she said.

But she struggled when pressed to answer whether scrapping some taxes would have to be paid for with cuts to public services. Rather than denying this, she said she wanted the best possible services, which offer taxpayers value for money.

“I am going to make sure we get value for money for the taxpayer, but I am very, very committed to making sure we have excellent frontline public services.”

Further reading:

How the Bank of England threw markets a lifeline

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Reporting by Elizabeth Piper and Andrew MacAskill
Editing by Gareth Jones and Frances Kerry

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Business

S&P cuts UK rating outlook after tax cut plan

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LONDON, Sept 30 (Reuters) – Ratings agency Standard & Poor’s cut the outlook for its AA credit rating for British sovereign debt on Friday to “negative” from “stable” as it judged Prime Minister Liz Truss’s tax cut plans would cause debt to keep rising.

Finance minister Kwasi Kwarteng announced around 45 billion pounds ($50 billion) of permanent, unfunded tax cuts on Sept. 23 as well as costly temporary subsidies to household and business energy bills, sending sterling and bond markets into a tailspin.

While sterling has since recovered, the Bank of England was forced to launch an emergency bond purchase programme on Wednesday to stabilise markets and has warned it would probably need to raise interest rates significantly in November.

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S&P – which ranks British government debt one notch higher than rivals Moody’s and Fitch – said it saw British public debt on an upward trajectory, in contrast to a previous forecast that it would fall as a share of gross domestic product from 2023.

“Our updated fiscal forecast is subject to additional risks, for instance, if the UK’s economic growth turns out weaker due to further deterioration of the economic environment, or if the government’s borrowing costs increase more than expected, driven by market forces and monetary policy tightening,” it added.

S&P forecast Britain would enter a technical recession in the coming quarters and its GDP would shrink by 0.5% in 2023.

Truss and Kwarteng met top officials from Britain’s Office for Budget Responsibility on Friday, but have so far rejected calls from some investors and political rivals that they ask the independent OBR to publish new forecasts sooner than Nov. 23, when Kwarteng intends to set out a debt-reduction plan.

Moody’s said on Wednesday that Kwarteng’s tax cuts were “credit negative”, and has flagged Oct. 21 as the most likely next date for a more formal review.

Britain’s government has said that tax cuts and longer-term structural reforms to areas such as immigration and planning permits should boost growth, but S&P said the benefit was likely to be modest, especially in the short term.

“For now it is unclear whether the government plans to ultimately introduce fiscal consolidation measures to bring debt back on a downward path and we assume that the package will be funded by debt,” it said.

Britain’s public borrowing was likely to average 5.5% of GDP a year from 2023 to 2025, compared with a previous forecast of 3%, while general government debt would rise to 97% of GDP by 2025, S&P forecast.

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Reporting by David Milliken; Editing by Leslie Adler, Daniel Wallis and David Gregorio

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