Hunt Rejects Claims Fiscal Squeeze Targets Middle Earners
Jeremy Hunt pushed back on Friday against criticism that his £55bn fiscal squeeze unfairly targets middle earners, as new data indicated that UK workers will endure the longest period of wage stagnation for almost two centuries.
Hunt’s Autumn Statement on Thursday included £30bn of spending cuts and £25bn of tax rises in a bid to restore Britain’s credibility and fight soaring inflation. As a leading think-tank said the country had entered a new era of higher taxation and public sector austerity, the UK chancellor argued the challenge could not be just met by raising revenue from the wealthy.
“It is not possible to raise £25bn of taxes just focusing on a very small group of very rich people and I am being very open about that,” he told the BBC.
But the scale of the problems facing the country as a whole was indicated by data from the Resolution Foundation think-tank, which said on Friday that British workers were “living through a two-decade wage stagnation”. The Office for Budget Responsibility forecast on Thursday that average real wages will not regain 2008 levels until 2027.
Such a prolonged stagnation in real wages has not been experienced in the country since the 1820s, according to figures calculated by the Financial Times based on long run estimates of UK economic statistics.
The Resolution Foundation calculated that if wages, adjusted for inflation, had grown at the pre-financial crisis rate of roughly 2 per cent a year since 2008, average real earnings would be £15,000 a year more in 2027 than the OBR now expects.
It added that “stealth” tax increases announced by the chancellor, freezing many tax thresholds and allowances across the system, would lower the typical income of households by 3.7 per cent. This would be spread relatively evenly across families on different incomes from the middle to the top of the income scale. Poorer households would be compensated with inflation-adjusted benefits and pensions.
Real disposable incomes are set to fall 7.1 per cent over the next two years, the biggest fall for six decades, according to the OBR’s estimates.
But Ben Nabarro, chief UK economist at Citi, said Hunt’s tax increases and spending cuts were “the bare minimum” necessary to restore credibility to the UK’s public finances and not enough to prevent the Bank of England from raising interest rates higher.
The investment bank raised its forecast of interest rates after the Autumn Statement, saying that fiscal policy on the “never, never” would require the BoE to be more aggressive and raise interest rates from the current 3 per cent rate to 4.25 per cent.
Nabarro added that the UK government’s unwillingness to take more decisive action to lower government borrowing suggested “the UK seems decidedly short of not just fiscal, but political space”.
Opposition parties have accused the Conservatives of unnecessarily squeezing middle earners. Speaking on Friday to ITV, Labour’s shadow chancellor Rachel Reeves said ordinary working people “saw their pockets picked” due to the implementation of a “whole range of stealth taxes and council tax increases”.
Liberal Democrat treasury spokesperson Sarah Olney warned that “the already squeezed middle” were being “pushed to the brink” by the government’s policies.
Conservative-backing newspapers have also attacked the government, with the Daily Telegraph accusing Hunt of “clobber[ing] workers with tax rises” and the Daily Mail splashing “Tories soak the strivers” on its front page.
James Smith, research director at the Resolution Foundation, said there was no avoiding “Britain is getting poorer” in an energy shock and the chancellor had to decide who paid the price.
“[Hunt] has decided that households will do so with higher energy bills, higher taxes, and worse public services than previously expected. Whether or not making the choices was tough, the reality of living through the next few years will be,” he said
Paul Johnson, director of the Institute for Fiscal Studies, another leading think-tank, said higher taxes were almost certainly “here to stay”.
As the IFS marked what it said was a “new era” of high taxes and austerity, it said the tax burden would settled “at its highest sustained level in history relative to national income”. According to its calculations, the burden will be at least four percentage points of GDP higher than it has been for most of the last 70 years — the equivalent of £100bn.
“We are . . . reaping the costs of a long-term failure to grow the economy, the effects of population ageing, and high levels of past borrowing,” Johnson said. “The truth is, we just got a lot poorer. We are in for a long, hard, unpleasant journey.”
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First Republic Shares Continue to Slide Despite $30bn Lifeline
Shares in First Republic Bank tumbled yet again on Friday after a financial lifeline from large US banks that deposited $30bn into its accounts failed to calm investor fears.
First Republic shares were trading down more than 20 per cent in the first session after 11 of the largest US banks, spearheaded by JPMorgan Chase, said they would deposit $30bn with the California-based lender in an effort to shore up its finances.
However, a person who had been briefed on First Republic’s liabilities by federal officials said that as of noon in New York, deposit outflows on Friday were negligible. “I can say with 99 per cent certainty that the share price is diverging from deposit outflows,” the person said.
First Republic’s stock has fallen about 75 per cent since worries emerged last week about depositors pulling cash from several midsized US lenders, sparked by the sudden collapse of Silicon Valley Bank.
First Republic said on Thursday that daily deposit outflows had “slowed considerably” but that it was suspending its dividend and had increased borrowing from the Federal Reserve and the Federal Home Loan Bank, seen as the two lenders of last resort to US banks.
First Republic borrowings from the Fed varied from $20bn to $109bn from last Friday to Wednesday at an overnight rate of 4.75 per cent, and since last Thursday the lender has increased short-term borrowings from the FHLB by $10bn at a rate of 5.09 per cent.
“The significance of the changes in FRC’s balance sheet in just one week are staggering, in our view, and along with the suspension of the common stock dividend, paints a very dire outlook for the company and shareholder,” wrote KBW analysts, referring to the bank’s ticker on the New York Stock Exchange.
In a research note on Friday, Wedbush analysts downgraded First Republic’s stock to “neutral” from “outperform” based on the anticipation of higher interest rate costs from borrowing to shore up its liquidity position.
Wedbush also warned that there would be “minimal, if any” residual value to common equity holders if the bank ended up being sold given that the value of its loan and securities would likely need to be marked down in a sale.
“We believe a sale of FRC to [a] larger entity should be beneficial for the banking system as a whole, and should help ease contagion fears,” Wedbush wrote.
“However, given the fair value marks embedded in both its loan and securities portfolios, we find it difficult to come up with a realistic scenario where there’s residual value for FRC common equity holders.”
Shares in other regional US banks also fell on Friday, including a 13 per cent decline for Western Alliance Bancorp, a 7 per cent fall for Comerica, an 8 per cent slide in KeyCorp, and a 6 per cent drop in Zions.
Shares in the largest banks such as JPMorgan and Bank of America, which investors view as being less susceptible to large-scale deposit withdrawals, were also trading lower.
One industry observer said some shareholders may be selling First Republic shares because the big banks would rank ahead of them in the case of a bankruptcy proceeding.
Original Source: ft.com
Global Banks Shed $500bn in Market Rout As Goldman Loses on Rate Swing
Investors have wiped nearly half a trillion dollars from the value of bank shares around the world in the worst rout for the financial sector since the onset of the Covid-19 pandemic.
Financial stocks dived this week as the fallout from the collapse of Silicon Valley Bank spread through global markets. Banks in the US, Europe and Japan have collectively lost $459bn in market value so far this month — the 16 per cent fall is the sharpest slump since March 2020.
The heaviest losses came in the US, where the KBW Bank index has lost 18 per cent in March. Europe’s Stoxx 600 banks index has fallen 15 per cent, while Japan’s Topix banking sector index is down 9 per cent.
Efforts to stabilise the financial system and head off broader panic have been only partly successful. Shares in troubled Californian bank First Republic fell more than a quarter in afternoon trading on Friday despite a $30bn cash infusion from Wall Street banks including JPMorgan Chase and Goldman Sachs.
Credit Suisse shares fell 8 per cent even after Thursday’s provision of a SFr50bn ($54bn) emergency credit line from the Swiss central bank. The Zurich-based lender’s credit default swaps and bonds were trading at distressed levels.
The volatile markets have hurt even banks that are seen as stronger, with some affected by the yield on the two-year Treasury note falling at its fastest pace since 1987. Goldman lost about $200mn at its trading desk that deals in interest rate products, according to people familiar with the matter. Goldman declined to comment.
Global regulators held talks on Friday evening to discuss how to calm fears about the health of the financial system, with some focusing on options to stabilise Credit Suisse and its international subsidiaries.
Executives and board members at the Swiss lender are also debating the future of the 167-year-old bank, which for years has lurched from one crisis to another.
“Clearly we have to review the strategic plan,” said one person involved in emergency talks. “It has been a week of madness. We’re looking at everything possible that could be done. There is nothing that is taboo. But whatever happens the bank will survive.”
Another senior figure at the lender said they had to “reflect on the various contingency options that we have”. “We have a good strategy, but there is a question now whether market conditions and investor support will allow it the time to work.”
Options under consideration include breaking up the bank and raising funds via a public offering of its ringfenced Swiss division, with the wealth and asset management units being sold, the two people said. This would most likely be to rival UBS because the government and regulators would prefer them to stay under Swiss control.
Adding pressure on management, one of the bank’s largest shareholders is now publicly calling for a separation of the domestic unit to protect depositors, mortgages and small businesses.
“Drastic action is needed. There needs to be a full spin-off of the Swiss branch. We need to isolate that now because contagion is spreading to it,” said Vincent Kaufmann, chief executive of Ethos Foundation, which represents Swiss pension funds and institutions holding up to 5 per cent of the stock.
Credit Suisse’s ringfenced domestic bank is worth as much as double the group’s entire market capitalisation, according to analyst estimates.
“The SNB [Swiss National Bank] needs to step in,” Kaufmann added. “I had some calls from Swiss pension funds who are very worried about their exposure and they have been reducing it.”
Other proposals to be examined over the weekend include speeding up cuts at the investment bank, or even closing it entirely, the people added.
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