Big debt and little budget

SNEAK PEEK

— Government should measure debt management better, MPs say.

— Budget latest as Hunt looks to play it safe.

— Banks try to solve Companies House mystery.

Good morning readers! Budget day beckons … are you excited? Today we’ve got a damning report from MPs, budget goss, and depressing mortgage stats. Just another day in Britain’s financial services sector.

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DRIVING THE DAY

GOVERNMENT NEEDS TO IMPROVE MEASUREMENTS FOR MANAGING DEBT: The government cannot properly measure whether it is getting value for money from its borrowing, MPs said today in a scathing report. The Public Accounts Committee said the Treasury has “no directly measurable success criteria to assess” how it is meeting its debt management objective.

What objective? It basically means the Government has to keep borrowing costs down and consistent with monetary policy aims. Not a fun job at the moment, MFS U.K. reckons. And not knowing how well things are going — at a time of unprecedented levels of government debt — isn’t entirely reassuring. 

How’s the debt doing? It’s pretty damn big. The Debt Management Office (DMO) borrowing portfolio rose from £300 billion in 2003 to £2.5 trillion in 2023. 

Criteria not found: The Committee recommends the Treasury — along with the DMO and National Savings & Investments (NS&I) — should find some suitable metrics to measure the debt management objective, because they don’t really have any that work. 

Bad bond market: The Government isn’t doing enough to spot unlawful activity — like the manipulation of Government bond auctions. In 2009 and 2013, for example, sensitive information was shared between five major banks, potentially impacting the DMO’s gilt auctions. And it’s only going to get more confusing, as when the BoE unwinds its QE policy, the government and the central will be selling bonds at the same. The PAC recommends that the DMO should put measures in place to monitor harmful behavior.

Debt so far away: The MPs also want the Treasury to have a think about the risk posed by having so much U.K. debt held overseas: There’s limited information and it relates to 25 percent of U.K. debt — the second highest figure in the G7. The Treasury should assess the risk this creates in the U.K. government bond market. 

Not a great assessment: “We are not convinced that the Treasury, DMO and NS&I have adequately captured the lessons learned during the financial crisis and pandemic to prepare them to deal with the challenges to come,” MPs said. 

WHAT’S ON

The Bank of England publishes figures on U.K. International Reserves, 9:30 a.m.

The Economic Affairs Committee hears evidence on how sustainable national debt is — including the thoughts of Columbia economics superstar and chief-despiser of trickle-down economics, Professor Joseph Stiglitz, 3 p.m.

TheCityUK and the Financial Services Skills Commission host an event focused on the talent challenges and opportunities facing U.K.-based financial and related professional services.

**A message from Nationwide: Unlike the banks, Nationwide Building Society is owned by its members, not shareholders. That’s anyone who banks, saves or has a mortgage with us. Which means we can always focus on what’s best for them. It’s our fundamental difference and what makes us a good way to bank.**

BUDGET CORNER

PLAYING IT SAFE: It’s looking likely that the chancellor will slash the rate of National Insurance again by 1p or 2p at Wednesday’s spring budget in a bid to earn some popularity. But there are two problems: the polls have gotten worse since November when he announced the first cut, and so-called “fiscal drag” is going to negate most of the savings for households. 

Hunt can…cut taxes by a few pennies but unless he up-rates the tax-free personal allowance and high-rate threshold, which he froze until 2027/28, millions more people are going to be dragged into paying more tax as a result because of a heady mix of wage growth and inflation. 

Stealth tax: According to research commissioned by the Liberal Democrats, the average household in England will see an £880 hit in 2024/25 due to frozen income tax thresholds, which is double the £440 saving per household from the NI cut in January. The analysis also showed that by 2026/27 fiscal drag will leave the average household in England £750 poorer.

Lib Dem MP Sarah Olney said: “These figures show the reality of Jeremy Hunt’s unfair tax hikes which are set to clobber families for years to come. When people hear him talk about cutting taxes they know it’s an outrageous attempt to deceive the British public.”

TELL SID THE BAD NEWS: Although Jeremy Hunt announced the plan in November, he is set to roll out the sale of NatWest shares to the public, and possibly institutional investors, at Wednesday’s budget — with the sale of the Treasury’s 38 percent stake in the bank probably beginning in June. 

Tell me more: The move is part of Hunt’s strategy to get more of the public investing in U.K. companies, and will be sold in a similar way as the 1986 “Tell Sid” campaign to sell off British Gas. However, the last time a government tried this was only ten years ago when it botched the privatization of Royal Mail. So convincing retail investors to part with their cash — especially on a company that hasn’t performed well recently — is a big ask.

Tax time: Arguably the bigger issue for punters is cuts to the dividend allowance that Hunt has overseen, with the Capital Gains Tax allowance cut from £12,300 in 2023 to just £3,000 from this April, and the dividend allowance slashed from £2,000 to £500 over the same period. This has forced over a million investors into paying tax on investments for the first time.

The bill: According to broker AJ Bell, a £10,000 investment in NatWest will create a tax liability of between £1,385 for basic rate payers and £3,073 for a higher rate taxpayer if held for 10 years. So unless Hunt reverses locked-in allowance reductions, smaller retail investors will be hit hard by tax penalties on any NatWest shares they buy. Which is…an interesting strategy by the No.11 team. 

PENSION PAIN: Elsewhere, the Treasury plans to force defined contribution pensions schemes to declare how many of their members’ holdings are invested in U.K. companies, and underperforming schemes would risk being closed to new customers. 

One problem: The U.K. stock market has underperformed most of its rivals since the 2008 financial crash, which means forcing schemes to invest in underperforming domestic stocks would…leave them at risk of being closed to customers. Which, weirdly, cancels the home bias idea out and will probably leave investors worse off. The changes aren’t set to come in until 2027, too. 

Laura Myers, a partner at Lane Clark & Peacock, said: “Simply requiring pension schemes to list their investments in the U.K. will have little practical effect. There are big issues about what counts as domestic investment and just having to report something will not in itself change behaviors. Trustees will be looking for the best returns wherever they can get them, and publishing statistics on U.K. investments will not change that.”

BANKS

COMPANIES HOUSE KERFUFFLE: U.K. banks are desperately trying to get to the bottom of potentially fraudulent filings days before Companies House was given new powers to crack down on scammers misusing the register.

Urgent: Last week, UK Finance sent a letter to its members, warning them that 800 filings across 190 companies relating to the discharging of financial liabilities were submitted at Companies House last month. MFS U.K. has seen the missive, which was first reported by Sky News, and which notes that all submissions were electronic, claim to be by the same individual, and appear to be random and not confined to one borrower.

The issue: No one knows what’s going on. The banks aren’t sure yet whether it’s fraud (this post goes into some interesting detail on that) or whether it’s error, or an operational issue like hacking.

Bad timing: The mystery coincides with what the government hoped would be a positive announcement on Monday that Companies House now has greater powers to tackle fraud, including the ability to query information, request supporting evidence and prevent fraudsters from using fake addresses to register.

Not enough: Marit Rødevand, CEO of AML automation company Strise, said: “Abuse of the current system is rife and criminals continue to use it to their advantage. Companies House is in need of desperate reform if the U.K. is serious about addressing what is becoming an increasingly worrying and costly problem.”

RETAIL FINANCE

MORTGAGE LENDING AND SAVINGS DOWN: Affordability pressures have hit mortgages and savings, according to figures released yesterday by UK Finance. One in five first-time buyers selected a borrowing term of more than 35 years in order to improve their mortgage affordability in the face of soaring interest rates. The year before, the figure was less than 1 in 10. 

70s revival: There also aren’t many loans going around, with the number of loans to first-time buyers falling to the lowest level since 2013. Loans to home-movers were also at their lowest since 1974. As for savings, levels fell for every month of the year in 2023. That hasn’t happened for 25 years.

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FINTECH

BANKS SUCCESSFULLY FENDING OFF FINTECHS: The U.K. banking industry has invested large sums of money in digital services, helping them beat the FinTech competition, a report from S&P Global Ratings said. The U.K. financial services sector continues to be dominated by the six major banks: Barclays, HSBC, Lloyds, Nationwide Building Society, NatWest, and Santander UK, and it is “unlikely” that any new innovation will harm them “given their demonstrated ability to navigate and adapt as the industry changes,” S&P said in the report published yesterday. Their ability to fend off the competition is particularly essential as the U.K. attracted $5.1 billion of FinTech investment last year — more than the rest of Europe combined.

FINTECH COUNCIL FOR UNICORNS: Meanwhile, a council of U.K.-based FinTech unicorn founders has been set up by Innovate Finance, an industry body for U.K. FinTech. The council aims to accelerate the rise of startups in the FinTech sector, and will provide the government with policy recommendations to help the U.K. maintain its position as a FinTech leader, helping companies scale up and grow. A FinTech unicorn is a start-up valued at more than $1 billion.

WHAT WE’RE READING

A long-read on the radical changes coming for the US bond market, by the FT.

Bloomberg reports that the ever-optimistic followers of Bitcoin are betting the price will get to $80,000 by the end of March.

KPMG fined £1.4 million because of “serious failings” in its audit of M&C Saatchi, writes the Times.

Thanks to: Fiona Maxwell & Izabella Kaminska.

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