Good morning from Liverpool. Rachel Reeves delivered her speech yesterday, grinning like someone who had been shown internal polling showing that the government had overdone its “it’s midnight in the United Kingdom” positioning. More importantly, she has opened the possibility of tweaking her fiscal rules so they do not constrain capital spending.

These are my fiscal rules. If you don’t like them, I have others

Rachel Reeves said two things worth noting in her conference speech yesterday. Here’s the first.

Because I know how much damage has been done in those 14 years, let me say one thing straight up: there will be no return to austerity.  

Conservative austerity was a destructive choice for our public services — and for investment and growth too.   

Now, “austerity” is one of those words with an incredibly clear dictionary definition whose political definition has been stretched to breaking. The “austerity” in Clement Attlee’s Labour government referred to the very tough costs that households were asked to bear when it came to their own consumption, thanks to the continuation and expansion of rationing. As chancellors, Geoffrey Howe largely did it by raising taxes while George Osborne largely did it by cutting spending.

But Reeves is not stupid, and she knows that if she were to turn around and go “aha! Well, yes, I might be cutting spending but I am not introducing rationing, so it is not really austerity” it would not go well for her. So I think we should read this as referring to “a return” to the most recent form of austerity, ie spending cuts. Reeves also made another significant statement later in her speech (the key sections are bolded):

My budget will keep our manifesto commitments.

Every choice we make will be within a framework of economic and fiscal stability. You’d expect nothing less.

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We said we would not increase taxes on working people, which is why we will not increase the basic, higher or additional rates of income tax, national insurance, or VAT.  

And we will cap corporation tax at its current level for the duration of this parliament.   

This is even more explicit: the self-denying ordinances that Labour made on tax in opposition are here to stay.

Reeves used her speech to open up the flexibility for more borrowing on capital spending and infrastructure such as roads and hospitals (Sam Fleming examines her options for rethinking the government’s fiscal framework here). Now, as I have said before and will say again, the UK’s fiscal rules are very badly designed. One requires overall public debt, including investment, to fall between the fourth and fifth year of the official forecast. A consequence of that is they allow the chancellor to claim that their plans add up as long as they can have something that is theoretically deliverable in the last year of the parliament.

I use the word “theoretically” quite deliberately — there was never any prospect of the former government, led by Rishi Sunak and Jeremy Hunt, delivering their proposals alongside their commitment to shrinking the state in the ways required for them to stick within their spending limits. But those plans did, at least, pass muster with the Office for Budget Responsibility.

Reeves told us that investors who had bought UK government debt in the expectation of making a profit were almost certainly right. The chancellor also signalled that more borrowing on infrastructure and capital spending was coming, and that tweaks to the UK’s fiscal rules to enable this would be a big part of the Budget. Depending on what the OBR believes will be the impact of greater spending on infrastructure on the public finances, she may yet be able to avoid some of the lose-lose decisions on tax-and-spend that have spooked voters and investors.

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I had a lovely dinner at Mowgli last night — a snug spot with locations across the UK.

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France’s borrowing costs have converged with Spain’s as investors worry about Paris’s ability to close its yawning budget deficit.

France’s 10-year bond yields are trading at the same level Spain’s for the first time since the 2008 financial crisis, at 2.98 per cent, amid investor concerns about rising political and economic risk in France, even as its southern neighbour focuses more on fiscal consolidation.

Meanwhile, the gap between French and German 10-year borrowing costs — seen as a barometer for the risk of holding France’s debt — has reached its highest level in seven weeks. On Tuesday it was 0.79 percentage points, up from 0.71 percentage points at the start of September.

The rising premium to hold French debt came as Prime Minister Michel Barnier’s new government on Monday asked the European Commission for another delay in submitting its plans for compliance with the EU’s fiscal rules.

“French spreads are under pressure as it becomes apparent that the Barnier government faces a difficult future at best, and risk of collapse at worse,” said Mark Dowding, chief investment officer at RBC BlueBay.

Investors are becoming increasingly sceptical that France will implement the budget cuts demanded by the EU, particularly as the rise of populist parties in France and Germany potentially weakens the bloc’s political power to make countries comply with its debt rules.

The European Commission wants to bring public deficits below 3 per cent and public debt below 60 per cent of GDP. France’s debt was 111 per cent of GDP at the end of March this year, while its budget deficit is expected to rise to at least 5.6 per cent in 2024.

“It will be tough for Europe to enforce this . . . where does that leave us? It leaves investors having to force some austerity on the French markets. That’s the worry,” said Kevin Thozet, an investment committee member at French fund manager Carmignac.

Investors are also concerned that Barnier might not be able to stave off a no-confidence vote in parliament in the coming months.

The gap between French and German borrowing costs has almost doubled since the beginning of June, before President Emmanuel Macron called snap parliamentary election, triggering months of political instability as the country grapples with deteriorating public finances. 

The European Commission has put France in what it calls its excessive deficit procedure, which places extra scrutiny on the spending plans of Barnier and his new government. 

Over the weekend Barnier appointed two ministers reporting directly to him to help craft the budget for 2025 and outline cuts to bring down the spiralling public deficit.

“The debt, economy and political situation in France all justify significant compensation to own French government bonds,” said James Athey, fund manager at investment firm Marlborough. 

The latest instability in French markets adds to the blurring of the traditional dividing lines between the bloc’s riskier and safer bond markets. 

The spread of the Spanish government’s benchmark borrowing costs over France’s has fallen to around zero from almost half a percentage point six months ago.

“Countries in the periphery, like Spain, continue to perform much better than France,” said Tomasz Wieladek, chief European economist at T Rowe Price. “For now the Spanish political situation is much more stable . . . the economy is also clearly growing.” 

Portugal, which was bailed out during the Eurozone crisis, has had lower benchmark bond yields than France’s since June.

Meanwhile, the risk premium on Italy’s debt over France’s has fallen from 1.3 percentage points to close to 0.6 percentage points over the past year.

“If France is unable to address structural issues, it will join Italy in the Eurozone periphery, with the country’s status as a semi-core credit now in doubt,” said Dowding.

Additional reporting by Rafe Uddin in London

BBC

‘People are angry’

New tariff trial

‘Pioneering’

Good morning and welcome to your Morning Briefing for Tuesday 24 September 2024. To get this in your inbox every morning click here.

Annuity comparison quotes hit new highs in 2024

Pensions technology provider iPipeline has reported a significant rise in demand for annuities among financial advisers.

In the first half of 2024, annuity quotes increased by 12% compared to the same period in 2023, marking the highest demand since iPipeline began tracking in 2013.

This follows a record 60% year-on-year rise in adviser annuity comparisons on its platform in 2023.

Transact adopts electronic Cash ISA transfer service

Transact has become the first intermediary platform to adopt an electronic Cash Isa transfer service via Pay.UK (BACS) and Equisoft.

This simplifies the transfer process by enabling seamless information exchanges between Transact, banks and building societies, removing the need for paper-based transfers.

Previously, transferring a Cash Isa required sending paper instructions to banks, locating processing teams and manually completing the steps.

Financial Adviser 2B: Questions to ask prospective employers in a job interview

There is often a point during job interviews where the candidate is asked if they have any questions to put to the employer.

This part of an interview can be overlooked during preparations — but asking the right questions can help a prospective employee decide if the role is a good fit for them, while showing the employer that the candidate genuinely wants a career in advice.

So, what are the best questions to ask?

Quote Of The Day

She left the conference in no doubt that painful decisions are coming – although the country remains in the dark on where exactly the axe will fall

– Tom Selby, director of public policy at AJ Bell, comments on Chancellor Rachel Reeves’ conference speech ahead of the 30 October Budget

In Other News

Unbiased, the UK’s top platform for finding financial advisers, has announced a new integration with intelliflo.

This upgrade automatically transfers accepted leads to an adviser’s intelliflo account, improving efficiency by reducing manual tasks.

The feature is available to firms on Standard, Enhanced, Premium and Enterprise plans.

Iain Thomson, chief product officer of Unbiased, said: “We are dedicated to enhancing our platform so that we can offer the best possible experience to our customers.

“This integration with intelliflo is a demonstration of our ongoing efforts and investment in improving our offering and supporting growth in the industry.

“The API will help make converting leads into clients even easier with faster contact rates and improved cadence.”

China unveils raft of measures to boost economy (BBC News)

Growth softens across UK businesses in September, PMI shows (Reuters)

‘Get a grip’: why has the UK’s Labour government been so bad at politics? (Financial Times)

Did You See?

The Platforms Association launched yesterday (23 September) to represent and provide a voice to the £1trn investment platform sector.

The launch marks a step change in how the platform industry will engage with regulators and policymakers.

It aims to bring a united voice to co-ordinate and promote industry interests.

Several high-profile investment platforms, including Abrdn, Aegon, Fidelity, Quilter, Seccl and SS&C, are represented on the board and leadership council

Membership will be open to UK and European regulated firms whose primary activities are the settlement, custody and safe keeping of retail investor assets.

It will also be open to regulated sub-custodian firms providing dealing and safe-keeping services to organisations acting on behalf of retail investors.

Read the full story here.