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Sensemaker: Budget blues

Sensemaker: Budget blues

What just happened

Long stories short

  • Nancy Pelosi announced she was stepping down as Democrat leader in the US House of Representatives. 
  • Italy’s Catholic church released its first inquiry into sexual abuse, but only going back two years.  
  • UN chief Antonio Guterres welcomed an extension of the Ukraine grain deal for another 120 days. 

Budget blues

Twelve years ago the UK’s outgoing Treasury secretary told his successor: there is no money. Twelve years on the Conservatives have to admit the same is true. There is no (new) money. Only new tax hikes and spending cuts. They will hope that changes by the time they call the next election, but for now, hope is all they’ve got.

Yesterday, in his still-new role as Red Adair of UK plc, Jeremy Hunt presented the spectacle of a Conservative government forced to 

  • raise taxes by ÂŁ25 billion;
  • cut spending by ÂŁ30 billion;
  • raise the overall tax burden to its highest level since 1948; and
  • level with an electorate coping with a 7 per cent fall in real wages in three years. 

It’s going to be challenging, he said this morning. It is indeed, and it’s unclear if Conservative MPs will wear it, never mind voters.

MPs loyal to the Liz Truss low-tax agenda announced two short months ago are already firing warning shots. Former minister Esther McVey has said she won’t support Hunt’s tax rises unless spending stops on the £100 billion HS2 rail project. To note:

  • McVey is friendly with Jake Berry, a former minister who has been making life difficult for Rishi Sunak since he was turfed out of government. 
  • The pair are senior members of the Northern Research Group, which has aspirations to be as powerful as the eurosceptic ERG. 

The new faultlines of Conservative factionalism are appearing less than a month after Sunak came to power with a plea for unity. Others include:

Fuel tax. Hunt made no mention of fuel duty, but the independent Office for Budget Responsibility assumed a 12p a litre rise in its forecast, which would raise £5.7 billion. That would put him on a collision course with a broad caucus of Tory backbenchers. 

Pensions. While many Tory MPs cheered the chancellor’s decision to protect the pension “triple lock”, not everyone is happy at the prospect of raising pension payouts while giving nothing to younger workers. Charles Walker, the outgoing MP, called it “featherbedding the retired at the expense of the young”. 

Hunt delayed some of the more painful “stealth” rises in taxes and public spending cuts until after an expected election in 2024. This is ostensibly to avoid exacerbating the recession, but it is also politically astute, forcing Labour either to campaign on raising taxes to fund spending or to back Austerity 2.0.

Poor unhappy people. But the biggest problem Sunak faces is timing. The likely date for the next general election may coincide with an improving economy, but only after a sustained period in the doldrums: 

  • The UK is already in recession, with higher energy prices explaining most of the revision in growth forecasts.
  • Living standards are expected to fall 4.3 per cent in the current financial year – the biggest drop since ONS records began in 1956-57.
  • That will be followed by a 2.8 per cent fall in 2023-24, effectively wiping out the previous eight years’ wage growth.
  • House prices are forecast to fall by 9 per cent between now and autumn 2024.
  • The cost of government debt is soaring: spending on the interest alone is 4.8 per cent of GDP for 2022-23, the highest since at least 1948.  

The B-word. Sunak and Hunt insist that Britain’s current economic problems are caused by global headwinds: a “recession made in Russia”. Translation: it’s not Brexit. In reality, it’s both, but neither main party is willing to say so. Rachel Reeves, the shadow chancellor, made just one reference to “fixing the holes in the government’s Brexit deal” before moving swiftly on to Tory cronyism. The independent Office for Budget Responsibility says Brexit will result in the UK’s trade intensity being 15 per cent lower than if the UK had remained in the EU.

That needs translating too. It means the grand decoupling experiment sold as a booster rocket for Britain as a global trading powerhouse is achieving, so far, the reverse.


CAPITAL ECONOMY, BUSINESS AND FINANCE

Welsh chips

A small factory in Wales would not usually be the focus of a national security row. But this factory is Newport Wafer Fab and it is Britain’s biggest microchip plant. This week the UK government decided to block its sale to Chinese-owned Nexperia, more than a year after the deal closed as the wrangling passed through three successive business ministers. Nexperia, which is owned by China’s Wingtech Technology, became the second biggest shareholder in Newport Wafer Fab in 2019 and launched a takeover two years later when the company was struggling to pay its debts. The sale of a UK industrial asset to China drew immediate criticism, as countries around the world bid to secure their chip supply chains. Germany also vetoed a Chinese chip factory takeover this month.


TECHNOLOGY AI, SCIENCE AND NEW THINGS

Goodbye blue bird?

On Thursday, Elon Musk issued an ultimatum to the already depleted Twitter team: sign on to a “hardcore” culture of “long hours at high intensity” to build Twitter 2.0, or leave. Hundreds of the remaining 2,900 employees decided they weren’t “hardcore” and left, according to Verge. Last night, an internal email informed those who remained that the offices were closed until Monday and employee access badges would be disabled – without listing a reason why. This morning, #RIPTwitter was trending as top users and company accounts posted links to alternative social sites, while Musk posted memes joking about its “death”. To note: since Twitter launched in 2006, there have been billions of posts on the app. If it does go belly up, the sheer volume of content will prove tricky for web archivists to save. 


Our planet CLIMATE AND geopolitics

MH17 ruling

Two Russians and one Ukrainian have been found guilty of the murder of 298 people onboard flight MH17, a Malaysian Airlines’ plane shot down over Ukraine in 2014. A Dutch court handed life sentences to Igor Girkin, Sergey Dubinskiy and Ukrainian Leonid Kharchenko, also ordering them to pay at least €16 million in compensation to the victims’ families. A third Russian man was acquitted due to lack of evidence about his role in firing the missile. None of the accused appeared in court and it is still unclear if they will ever serve their sentences. But Piet Ploeg, who lost a brother, sister-in-law and nephew in the crash, said it was important that the truth had been established. Ukrainian president Volodymyr Zelensky said: “Punishment for all [Russia’s] atrocities then & now is inevitable.”


The 100-year life health, education AND GOVERNMENT

Diabetes gamechanger

When someone has type 1 diabetes, their immune system will mistakenly attack the cells in the pancreas needed to produce insulin, essential to managing blood sugar levels. It typically appears in children and, if caught late, can be fatal. But a new drug approved for use in the US could delay the onset of type 1 diabetes by up to three years. Teplizumab is the first immunotherapy treatment approved for diabetes and works by partially blocking the immune system from targeting the pancreas, delaying the condition. Why it matters: current treatments, although continually innovating, treat the symptoms, not the root cause. Treating the cause reduces the impact of the condition on children’s health and potentially paves the way to treatments that could prolong its onset even further. Teplizumab is currently being reviewed for approval in the UK and Europe. 


CULTURE soCIETY, IDENTITY AND BELONGING

Iraq’s tax heist

Iraq has set up a high commission to investigate “major cases of corruption”, after a government investigation found that $2.5 billion in government tax revenue was stolen between September 2021 and August 2022. The money was transported in armoured vehicles from tax departments to five private companies, the FT reports, which then used some of the cash to buy US dollars. Sajad Jiyad, a Baghdad-based fellow with The Century Foundation, said the theft went “all the way to the top” involving high-level players in government and business. Travel bans have been issued against nine named suspects, including senior civil servants at the tax authority and finance ministry. One was detained trying to leave Baghdad on a private jet. In a system packed with corruption, the investigation will likely be slow. 

Thanks for reading. Please share this round, send us ideas and tell us what you think. Email sensemaker@tortoisemedia.com.

Catherine Neilan
@CatNeilan

Additional reporting by Jessica Winch, Sebastian Hervas-Jones and Phoebe Davis.

Photographs Getty Images. Jessica Taylor/UK Parliament


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