Aurelia Butler

Growth in the UK is projected to be lower than its peers in the coming years, and inflation is expected to be higher and more persistent. But I think it is worth looking at an underpriced risk: that a muddled government response might accidentally set the already-ruined British state ablaze because ministers lack a clear sense of macroeconomic structure.Last month, Boris Johnson, still the prime minister, told reporters that railway workers were expecting too much when they asked for a pay rise of 7 per cent — this is less than the current inflation rate of 9.4 per cent. “Too high demands on pay will make it incredibly difficult to bring to an end the current challenges facing families around the world with rising costs of living,” he said.These sentiments have been echoed by ministers since — and seem to be something they say in private, too. Andrew Bailey, the governor of the Bank of England, has called for pay restraint all around. But using the public sector pay frameworks (which recommend how pay should be set for public employees) and public budgets (which allow those pay levels to be delivered) as a tool for helping to steer the price level would be a huge change to the UK’s policy norms. Britain uses monetary policy to target inflation; it has been decades since we had a so-called incomes policy to fight inflation. Indeed, the pay review bodies, panels that advise ministers on public pay levels, are only asked to consider how best to run the services. For example, the review panel for teachers has a mandate “to promote recruitment and retention, within the bounds of affordability across the school system as a whole”. It is not asked to think about other wage-setters. ​It’s not unreasonable to think that public sector pay settlements could be used as benchmarks for other employers. But if you try to use the single public sector pay instrument to target both public sector retention and inflation, you will end up missing at least one of them. And, right now, it is almost certainly going to be retention that suffers. After 12 years of squeezing, Britain simply has no room to use public sector budgets as anti-inflationary ballast. Take the NHS, where 6.6mn people in England are on a waiting list. That’s well over 10 per cent of the country. My colleague John Burn-Murdoch has already written that it is possible that NHS performance means a large number of people are struggling to return to work after the pandemic. There is a crisis brewing here. The kindest word I can think of to describe the government’s plans to attack the waiting list is “flaky”; parts of the hospital system have not yet recovered to even their pre-pandemic levels of performance, let alone to a pace where they can start burning off the care backlog. Things are likely to get worse — and become a political problem, too. Take this much-watched measure, once the key target of NHS performance, of how many patients are dealt with within four hours of arriving at an emergency department. Things are already dismal — and will get worse as the weather turns. In addition to a short-term problem, there is a long-term one. NHS pay (and the training pipeline) is already well out of line with what is needed to fill jobs: nurses’ pay has dropped by about 10 per cent over the past decade. The Nuffield Trust, a think-tank, reckons England is short of 12,000 hospital doctors and 50,000 nurses. A recent parliamentary committee report noted that there are 200,000 vacancies across the health and social care system. It is hard to see how the existing headcount can cope with the ever-rising demand for healthcare. Most of the low-hanging efficiencies that can be wrung out of the English NHS without upfront spending have been exploited. For example, according to the Health Foundation, the average time in hospital for admitted patients is down by 22 per cent since 2010. But that is done. There is no more slack to give. From here on, squeezes in budgets are going to turn into poorer services.A similar story can be told about much of the state. Schoolteachers, too, are hard to find; I have spotted one local school near my home in south London dipping below the legal minimum number of 190 days a year open. Local government, which offers services from bin collection to social care, is crippled. There are parts of the state which are now falling over, and which cannot absorb new real-terms cuts.So what do you do, facing this, if you are worried about inflation and growth? Well, go back to first principles: Set pay to fill jobs Set service budgets to buy what you need within your fiscal rulesSet taxes to get the fiscal position roughly in balance over the medium termSet benefit rates to shield lower-income households from the horrific increase in pricesSet monetary policy into gear to control inflationThis is a classical macroeconomic framework — the sort of thing that might have been proposed by Jan Tinbergen, the late, great Dutch economist. Work out what your targets are and then make sure you have at least one instrument aimed at each of them. These instruments pull against one another: I am outlining a proposal to borrow a chunk of cash, spend it, raise wages and then let the Bank of England lean harder into demand with tighter monetary policy. This could well lead to a longer period of higher-than-comfortable inflation. But this is an orderly macroeconomic structure — one that will hold together. You know how the parts will shuffle and move as the facts change. By contrast, trying to take a tough line on inflation using public services as a counter-inflationary weapon runs the risk that ministers end up losing control anyway, then folding wastefully into bailing out public services and energy-shocked families in a panic a few months hence. Indeed, a “stand tough” framework is one that will struggle more if inflation surprises to the upside. It is likely to disintegrate under political pressure as real household incomes, hospital performance and school hours sink. The shift in the terms of trade since the war in Ukraine started has made the UK poorer, and Britain needs to allocate the losses. But squeezing public budgets means asking the same public workers who have taken the hit since 2010 to take it again. And, given the lack of slack in the state and goodwill among those staff, that certainly means cutting services too. At root, this truly is one of the oddest of macroeconomic ideas: using hospital admissions and the length of the school day as an instrument to target the inflation rate. Martin Sandbu is away. Claire Jones will be back next week.Related readingAdam Tooze on international power dynamics in inflation.Some evidence of the UK high street losing control of inflation expectations — at Greggs and McDonald’s.The Health Foundation has published a report on the NHS workforce gap. Do not read before bedtime if you are a UK taxpayer.Sally Gainsbury (formerly of the FT) has written for the Nuffield Trust on the smoking ruin that stands where the NHS budget used to be. Other readablesRicardo Reis at the LSE has an interesting paper on whether the recent high inflation is the fault of central banks.Matthew Klein’s The Overshoot on whether the two-quarter decline in US GDP was all it seemed. Duncan Weldon on what a new prime minister means for UK economics. The Resolution Foundation has looked at the Conservative party leadership contenders’ tax plans.Alan Beattie on “friendshoring”.Numbers newsEuropean imports of Russian diesel leapt by one-fifth in July. More

ROME (Reuters) – Italy plans to approve on Thursday a new aid package worth around 14.3 billion euros ($14.5 billion) to help shield firms and families from surging energy costs and consumer prices, government officials said.The scheme, one of the last major acts of outgoing Prime Minister Mario Draghi before a national election next month, comes on top of some 33 billion euros budgeted since January to soften the impact of sky-high electricity, gas and petrol costs.A draft decree seen by Reuters showed that Rome planned to extend to the fourth-quarter of this year existing measures aimed at cutting electricity and gas bills for low-income families as well as reducing so-called “system-cost” levies.Designed to help finance initiatives ranging from solar power subsidies to nuclear decommissioning, the levies typically accounted for more than 20% of Italian energy bills before the government started to act.Among a raft of measures, the government will extend a 200 euro bonus paid in July to low and middle-income Italians to workers who did not previously receive it.A cut in excise duties on fuel at the pump scheduled to expire on Aug. 21 is set to be extended to Sept. 20. Rome is also considering preventing energy companies from making unilateral changes to electricity and gas supply contracts for households until October, according to the draft.With tax revenues doing better than forecast, funding for the package will not drive up the public deficit target, which Rome last week confirmed at 5.6% of national output this year.Some 1.6 billion euros will go to reducing in the second half of this year the so-called tax wedge, the difference between the salary an employer pays and what a worker takes home, with the benefit going to employees with an annual income worth less than 35,000 euros.The Organisation for Economic Cooperation and Development (OECD) estimated that in 2021 the average single worker in Italy lost 46.5% of his gross salary in taxes and social contributions, the fifth-highest ratio out of a group of 38 advanced nations.To support purchasing power of elderly people, the government will bring forward to the fourth quarter of 2022 a 2% revaluation of pensions scheduled for 2023, at a cost for state coffers of around 2.4 billion euros.($1 = 0.9835 euros) More

The Consumer Expectations Survey, used by policymakers for input in their deliberations and published on Thursday for the first time, showed households were beginning to lose faith in the ECB’s ability to bring inflation back down to its 2% goal. The poll, carried out in June, showed the median consumer expected prices to grow by 5% over the following year and saw inflation at 2.8% in three years’ time.This compares to expectations for nominal income to grow by 0.9% and spending by 3.9%, implying a large dent in households’ ability to save.Consumers also expected the economy to contract by 1.3% in the coming 12 months. By comparison, the ECB expects inflation to average 6.8% in 2022 before falling to 3.5% in 2023 and 2.1% in 2024. It sees growth at 3.7% this year, 2.8% next year and 1.6% in 2024.The ECB raised interest rate by 50 basis points last month and guided for more hikes in the months ahead to fight record-high euro zone inflation, which hit 8.9% last month.It cited “anchoring…inflation expectations” as one of the reasons for the move.For the survey, the ECB interviews around 14,000 adults each month from Belgium, Germany, Spain, France, Italy and the Netherlands. These countries represent 85% of the euro area’s GDP and 83.8% of its population. More

Commonwealth Bank of Australia (OTC:CMWAY), Australia and New Zealand Banking Group, National Australia Bank (OTC:NABZY) and Westpac Banking (NYSE:WBK) Corp increased their mortgage rates to match the hike announced by the central bank https://www.reuters.com/markets/rates-bonds/australias-central-bank-raises-rates-50bp-185-2022-08-02.The new rates for CBA and ANZ customers will take effect from Aug. 12, while Westpac’s rates will apply from Aug. 18.The banks also raised rates on some of their products for customers with savings accounts and deposits.Reserve Bank of Australia lifted its cash rate by 50 basis points to 1.85%, marking an eye-watering 175 basis points of hikes since May in the most drastic tightening since the early 1990s.The country’s lenders expect to improve their margins and reap benefits from a rising interest rate environment.CBA is due to report its full-year results next week, while NAB, ANZ and Westpac are all set to issue quarterly updates. More

Most parents send their children to private school because they believe it will help give them the greatest possible start in life — to be happy, to develop their talents and social skills and achieve the best exam results they can.When A-level results arrive this month, many parents who set their children on that journey 14 years ago will find out if the investment has paid off — at least in terms of exam results.But what of those at the beginning of the road, contemplating the costs and sacrifices of a private education? You need to know what you are letting yourselves in for before handing the school bursar that first cheque.How much do you need?Taking historical data from the Independent Schools Council (ISC), we have calculated what it cost to educate one child — let’s call her Lucy — waiting anxiously on this year’s A-level results. Lucy began private education as a day pupil in reception and stayed until the end of Year 13. The school charged average fees.By our calculations, Lucy’s 14 years of education cost her parents around £179,000. If her cousin Edward had boarded from the age of seven, his parents will have paid just over £365,000.Inflation has undoubtedly helped push up fees over the past 14 years. But our research also shows that, over this period, school fees jumped more than 1.6 times inflation in consumer prices. Had Lucy’s parents looked at fees in 2008, budgeting for them to rise in line with CPI inflation, they would have undershot by nearly £25,000. The parents of boarders would have found themselves almost £48,000 short. What might you expect if your child starts the journey this year? Based on this year’s fees and ignoring inflation and price rises, a private education might cost on average around £218,000 for a day pupil and £427,000 for a boarder.Factor in rising prices and the numbers shoot up dramatically, as our table shows. If fees rise 5 per cent a year, for example, the costs jump to £323,613 and £654,919 respectively. Tuition is not the only expense. I tell families to factor in at least another 10 per cent to cover additional costs, like uniform, sports equipment, music lessons and school trips.

Average cost of educating a student completing A-levels this yearCost if fees had risen in line with inflationActual costDifferencePercentage increaseBoarding£317,249£365,058£47,80915%Day school£154,088£178,863£24,77516%Cumulative fees over school years 2008/9 to 2021/22. Calculation based on average fees at ISC school and CPI inflation. Boarding school fees assume child is a day pupil until they start boarding from age 7-18. Source: Weatherbys Private Bank

Possible costs of educating a child starting UK private school this yearFee increases0%2%5%8%Boarding£427,116£505,955£654,919£850,961Day school£217,542£254,420£323,613£414,012Cumulative fees over school years 2022/23 to 2035/36. Current average fees taken from ISC 2022 census. Boarding school fees assume child is a day pupil until they start boarding from age 7-18. Source: Weatherbys Private Bank

How to reduce costsThere are a few ways to reduce costs. Find out if the children are eligible for bursaries or scholarships. Around one in three pupils receives help with their fees, often from the school itself. Bursaries tend to be means-tested and can be particularly generous. Nearly half of all pupils on means-tested bursaries have more than half of their fees remitted and around one in seven pays no fees.In addition, most independent secondary schools offer scholarships for pupils who are exceptional either academically or in music, sport, drama or art. These benefits — less likely to be means-tested — typically mean a fee reduction of between 5 and 10 per cent.Investigate possible sibling discounts if you are thinking of enrolling a second child at the same school.If you pre-pay a lump sum to cover all or part of your child’s education, the school might offer a discount or hold fees. But beware — the Financial Services Compensation Scheme does not cover prepaid school fees. Your money could be at risk if the school runs into financial difficulties. And before committing, ask what would happen if your child was unhappy and wanted to leave after a few weeks. I have known this happen. How much would you get back?Thinking aheadPrivate schooling is only affordable for many families with help from grandparents. I always remind clients that what they offer one grandchild they may feel obliged to offer all. And it might be some years before they know how many grandchildren they are to be blessed with. This can be a very expensive act of generosity.You may want to set aside the money up front. Grandparents may favour this approach, as it can help with inheritance tax (IHT) planning. If you have gifted a lump sum within three years of your death and your net estate exceeds the IHT allowances, HM Revenue & Customs may demand back 40 per cent of the gift in IHT. Die between three and seven years after the gift and the rate charged will taper downwards — dropping 8 per cent each year. Gifting a large sum early can get the seven-year IHT clock ticking.Smart investing of this money can offset some of the pain of inflation. Children cannot own shares, except through a Junior Isa, but they do have the same tax allowances as an adult, including a personal allowance of £12,570 and a capital gains tax allowance of £12,300. Giving the money to the child’s parents to look after may cause tax issues for them, as any income and gains will be counted against their own tax allowances.The simplest answer may be to set up a “bare trust”. Here the grandparent’s gift is registered through an account set up by the parents in their name but designated with the grandchild’s initials — essentially a “nominee account”. Any income or gains generated are treated as the grandchild’s for tax purposes. One potential drawback is that the grandchild takes control of any money left when they turn 18. The alternative is a discretionary trust. Here, trustees you appoint retain control when the grandchild becomes an adult. There are significant legal and tax implications to discretionary trusts.Whichever model you choose, once you make the gift you cannot demand the money back — even if you fall out with your grandchild or your own financial circumstances change. If you do not give everything up front but pay regular monthly or termly fees, consider whether this is out of “excess income”. Such gifts are exempt from IHT. Set up a regular standing order and keep a record of income and gift payments to demonstrate to HM Revenue & Customs that this truly is surplus income. Your standard of living must be maintained and you are not allowed to dip into your savings to pay fees. Let’s hope this year’s A-level results bring just reward to all those who sat the exams — and to the parents and grandparents who supported them to this point, both financially and emotionally.Shirley Coe is a senior private banker at Weatherbys Private Bank More

Argentina’s new economy minister has pledged to bring fiscal order to the country as the Peronist administration attempts to restore its crumbling credibility and regain market confidence by establishing a “super ministry” to tackle double-digit inflation.“I’m not a magician, or a saviour,” Sergio Massa, the third person to take charge of Argentina’s economy in barely a month, said on Wednesday. “The challenge is enormous.”In his first speech since being appointed last week, Massa, 50, announced a slate of measures including a vow to end money printing to fund the budget — financing it instead through deficit reduction or private-sector borrowing — along with building dollar reserves and “reworking” state subsidies in order to narrow the country’s large deficit and meet budget targets.The former speaker of Argentina’s lower house of congress faces the unenviable task of saving an economy wracked by galloping inflation, dwindling reserves and an ever-increasing pile of domestic debt, while navigating political infighting ahead of an election next year.Bond prices have rallied since Massa was selected by President Alberto Fernández to oversee a new department dedicated to economic, manufacturing and agricultural policy. Investors appear more optimistic about Massa’s ability to shepherd reforms to bring down inflation than his predecessor, Silvina Batakis, who lasted 24 days in the job.Batakis took over on July 4 from Martín Guzmán, who quit unexpectedly following months of squabbling inside the leftwing ruling coalition over the direction of economic policy. Guzmán, an ally of the president, had called for a reduction in spending to rein in the budget deficit and keep Argentina’s $44bn IMF debt restructuring deal on track.Sentiment has since deteriorated, leading to a run on the currency as savers fearful of a devaluation convert their pesos into more trustworthy holdings such as the US dollar — in turn driving inflation higher.Economists forecast inflation in Argentina to exceed 90 per cent this year. Sovereign bonds are trading in distressed territory. Poverty is high and the country is expected to enter a brief recession with a contraction in the third quarter of this year, according to a central bank survey.In an attempt to contain a full-blown economic crisis, Fernández decided to install Massa at the helm of rescuing the country’s finances, in the hope of giving reassurance to investors and the public.But Argentina’s vice-president, Cristina Fernández de Kirchner, has split with the president over how to fix the economy. She and her allies believe the Peronists should spend more to shield voters from rising inflation ahead of the presidential race.Analysts remain sceptical about the level of control Massa will actually wield over the energy ministry and other financial institutions. Economist Fernando Marull said that while a string of positions had been handed out as part of the reshuffle, “for now, there are no new faces” that signal a change in the direction of leadership at the finance ministry.“Today the economy is extremely vulnerable,” Marull said. “It needs a strong economic plan that involves bruising measures like a devaluation, higher interest rates . . . even though Massa has the political support, we’re still a way off from signs that there is a solid economic plan in place.”

To shore up credibility among investors, the new ministry “must put a credible brake” on the pesos being issued by the central bank, according to Nicolás Dujovne, a former finance minister for a previous centre-right administration. Without a reduction in money printing, “inflation will not come down”, he said.Under the terms of its debt restructuring deal with the IMF, Argentina is limited to printing 765bn pesos ($5.8bn) for the full year to fund its deficit. The central bank, under governor Miguel Pesce, has printed 630bn pesos this year, more than half of that since early June.In his new position, Massa will also oversee negotiations with the IMF. A spokesperson for the fund on Wednesday confirmed the team had “a productive meeting” with the minister to discuss the implementation of the programme ahead of a quarterly review in September.Massa will also meet the Paris Club of 22 nations in August to renegotiate more than $2bn owed. More

BUENOS AIRES (Reuters) -Argentina’s new economy minister, Sergio Massa, announced a list of measures on Wednesday aimed at healing the country’s ailing finances, including pledges to meet a key deficit target and stick with already agreed debt payments.The announcements mark the first actions taken by Massa, President Alberto Fernandez’s latest pick for economy minister, as the South American country’s economy suffers from a debilitating spending, debt and inflationary crisis that has stoked angry street protests.During his first news conference as minister, Massa took an especially hard line against surging consumer prices, seen rising at least 70% this year.”We have to confront inflation with determination because it’s the main poverty factory any country faces,” said Massa, who stressed “fiscal order” as a key confidence-building measure, especially a tighter lid on public spending.Massa, Fernandez’s third economy chief in just the past month, formally took the reins of his newly dubbed “superministry” on Wednesday.The South American country’s large fiscal deficit, exacerbated by years of overspending, high debt and a weak peso currency will all battle for the new minister’s attention.A former congressional leader and lawyer from the ruling Peronist coalition, Massa pledged to meet a 2.5% budget deficit goal as well as refrain from using advances from the treasury for the rest of this year. He also promised to keep in place a freeze on new government hires.Explicitly backing the government’s $44 billion debt deal with the International Monetary Fund, Massa told reporters he would continue with all agreed payments to the lender.The new “superminister,” with expanded power over economic policy, said the government will launch a voluntary exchange for peso-denominated debt maturities over the next three months.He also said the government is advancing with $1.2 billion in payments to international entities, without naming them, for ongoing programs as well as programs under consideration.The center-left governing coalition’s warring factions have united behind Massa, seen by many as perhaps Fernandez’s last chance to stanch economic bleeding that has hurt the government’s popularity ahead of next year’s presidential vote. In his new role, Massa oversees the agriculture, production and trade secretariats, with those officials reporting directly to him. His appointment follows the abrupt resignation of Economy Minister Martin Guzman in early July, after which Guzman’s successor, Silvina Batakis, only lasted a few weeks. More

BENGALURU (Reuters) – The dollar’s strength has yet to peak, according to a majority of currency strategists polled by Reuters who were however divided on when the currency’s advance would come to an end.The greenback slipped from a decade high in mid-July but quickly snapped back when three Fed officials made it clear the central bank was “completely united” on increasing rates to a level that would put a dent in the highest U.S. inflation since the 1980s.With the Fed expected to stay ahead of its peers in the tightening cycle by some measure, and the global economy expected to slow significantly, a path for the dollar to weaken meaningfully or for most other currencies to stage a comeback is difficult to forge.In the Aug. 1-3 poll, a strong majority of more than 70% of strategists, or 40 of 56, who answered an additional question said the dollar’s strength hasn’t yet peaked.Asked when it would peak, 14 said within three months, 19 said within six months, another six said within a year and one said within two years. Only 16 said it already had.”For the USD to weaken, the Fed has to be more concerned about growth than about inflation, and we are not there yet,” said Michalis Rousakis, G10 FX strategist at Bank of America (NYSE:BAC) Securities. Reuters Poll – U.S. dollar outlook – https://fingfx.thomsonreuters.com/gfx/polling/klvykwkzzvg/Reuters%20Poll%20-%20U.S.%20dollar%20outlook.PNG The dollar – already up around 11% in 2022 – was expected to give up some of its gains over the coming 12 months. But few of the major currencies were forecast to regain all of their year-to-date losses over that period.”In the very long run, let’s say two or three or four years from now, the dollar will probably be considerably weaker. But in the 12-month timeframe we’re looking at relatively small moves,” said Brian Rose, senior economist at UBS Global Wealth Management.DETERIORATING OUTLOOK The euro touched parity with the dollar last month, hitting a near two-decade low, and is down more than 10% in 2022. It was forecast to gain over 6% from current levels by next July and was expected to trade around $1.02, $1.05 and $1.08 in the next three, six and 12 months respectively.Those median forecasts, the lowest in a Reuters FX poll since 2017, showed a deteriorating outlook for the common currency.While only a handful of analysts expected the euro to trade at or below parity versus the dollar over the forecast horizon in a July poll, about one-third of the over 60 strategists now forecast it to revisit those levels in the next three months.”In the short term we’re looking for the dollar to maintain its strength, especially against the euro. So we think there’s a chance the euro will drop below parity,” Rose said.Despite its recent rally when U.S. Treasury yields tumbled, the safe-haven Japanese yen is down about 14% for the year, making it the biggest loser among its major peers.The carry trade currency was expected to claw back some of those losses and gain about 5% to trade around 127 per dollar in a year.”I think the most relevant question with respect to the dollar is if you’re going to sell the dollar, what else do you buy … you’re not going to buy shed loads of yen relative to the U.S. dollar when you’re getting much higher yield in dollars,” said Jane Foley, head of FX strategy at Rabobank.The yield advantage which dollar assets carry was also likely to hurt emerging market currencies, offering no respite to an already battered bunch.While China’s tightly-controlled yuan and the Korean won were predicted to be range-bound over the next three to six months, the Indian rupee, South African rand, Russian rouble and Turkey’s lira were expected to fall.Phoenix Kalen, head of emerging markets research at Societe Generale (OTC:SCGLY), gave a laundry list of worries for those currencies. “For EM FX, we are less heartened by the pull-back in the market’s pricing of FOMC rate hikes, and more focused on the underlying context of deteriorating global growth, tightening financial conditions, worsening geopolitics, continuing EM portfolio outflows, still-elevated inflation, and the potential for downside China surprises,” Kalen said.(For other stories from the August Reuters foreign exchange poll:) More