Haldane's Warning on Fiscal Fragility
Andy Haldane, who served on the Bank of England's Monetary Policy Committee until 2021, told CNBC that the U.K. is skating on thin ice in fiscal terms ahead of the Autumn Budget scheduled for Oct. 28. He said there is a risk the ice could crack, and the single most effective way to prevent that would be for the government to appease financial markets by demonstrating it is able and willing to cut public spending. Haldane described this as the Achilles' heel of the current government, warning that without action, Prime Minister Andy Burnham will remain in hock to the bond market.[S1][S2]
Haldane noted that international bond markets have created a hostile environment for all government borrowers, but the U.K. is particularly exposed because it is a leveraged bet on the world economy. He pointed out that U.K. inflation is higher and stickier, growth is lower and stickier, and the country has not balanced its books this century. These factors, he said, explain why the ice is thin. The U.K. now has the highest government borrowing costs in the G7, with gilt yields surging amid domestic and global instability.[S1]
Budget Pressures and Political Challenges
This Autumn Budget marks the first one delivered under Burnham's leadership, and finance minister John Healey has been given the job of reining in both public spending and borrowing. Healey has spoken of wanting to build a fiscal cushion against unpredictable conditions. At the same time, Burnham and Healey have made cheaper living costs, shifting political authority to local councils, and higher defense outlays key priorities. Although certain savings have been earmarked for defense, the government has not detailed the remaining savings or tax changes required to satisfy its fiscal rules. Burnham has declined to exclude tax increases, and press reports indicate bank windfall levies could be on the table.[S1]
Haldane cautioned against targeting companies in the budget, arguing that few would dispute the private sector's role as the main driver of growth. He pointed to a widespread feeling among businesses that they are already over-taxed, and that the state borrows excessively rather than too modestly. He voiced optimism that this understanding is starting to be accepted within government. He further argued the current administration lacks substantial economic and financial know-how. U.K. lenders have pushed back on the planned windfall taxes, and JP Morgan chief Jamie Dimon met with Burnham and Healey in London during the previous month.[S1]
