Last Week In Review: A Financial Roundup
Monday
Markets Risk Similar Volatility to Carry Trade Unwind, BIS Warns
The Bank for International Settlements (BIS) has issued a warning about the financial system's susceptibility to volatility, similar to the disruptions seen this summer when a hedge fund strategy collapsed.?
As central banks globally withdraw liquidity, investors will need to reduce leverage and reassess their risk strategies. The BIS highlighted the unwinding of carry trades, where traders borrowed in low-yield currencies to invest in higher-yield assets, as a recent example of this transition's impact.?
The BIS plans to enhance tracking of carry trades to better assess market vulnerabilities, as current data on foreign-exchange derivatives lacks clarity on their specific purposes. The report indicates that carry trade strategies were heavily leveraged before recent market disruptions, urging policymakers to closely monitor emerging risks.
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Tuesday
Keir Starmer insists Budget will not contain measures that stifle growth
?Sir Keir Starmer has emphasised that the upcoming UK Budget will prioritise economic growth and avoid measures that could stifle it.?
Speaking in Rome, Starmer assured that Chancellor Rachel Reeves would focus on stabilising public finances while promoting growth, though concerns remain about how he is to address the ￡22 billion fiscal deficit. Starmer ruled out hikes in income tax, VAT, corporation tax, and employee national insurance, leading to speculation about increases in capital gains tax, employer national insurance contributions, and taxes on banks, private equity, and oil and gas companies.?
He stressed that economic stability is crucial for growth and that tough fiscal decisions will be made early in the government's term. Despite criticism, including concerns from economists about potential cuts to public investment, Starmer defended the need for strong fiscal rules.?
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Wednesday
Exodus from workforce costs UK ‘￡16bn a year’ in lost tax receipts
The UK is facing a significant workforce contraction, the largest since the 1980s, resulting in an annual loss of at least ￡16 billion in tax revenues, according to a study by the Institute for Employment Studies.
Since the pandemic, around 800,000 people have left the labour market, reducing the workforce participation rate by 1.5 percentage points. This decline contrasts with trends in other developed countries, where employment has generally increased. The report attributes the UK’s “participation crisis” to several factors, including stricter employment reforms, inadequate support for job seekers, and a growing number of young people who have never worked.
The report calls for a shift away from the punitive approach in job centres and recommends creating labour market partnerships to address local employment needs. The UK has dropped from the eighth-highest to the fifteenth-highest employment rate among developed nations, largely due to a rise in long-term economic inactivity.
Click the link below to read the full story https://www.theguardian.com/politics/2024/sep/18/exodus-uk-workforce-costs-16bn-a-year-lost-tax-receipts-covid
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Thursday
UK wins fight against EU tax order, in setback for EU's Vestager
Britain successfully challenged an EU order to recover millions from the London Stock Exchange, ITV, and other multinationals, marking a setback for EU regulators targeting specific tax schemes.?
The European Commission had deemed a British tax exemption illegal, arguing that the UK's Controlled Foreign Company (CFC) rules provided an unfair advantage by encouraging companies to establish headquarters in the UK and discouraging them from moving abroad. However, the Luxembourg-based Court of Justice of the European Union (CJEU) ruled in favour of Britain, stating that the Commission erred in its interpretation of the CFC rules. The court emphasized that the Commission must respect a member state's interpretation of its national laws unless it can demonstrate otherwise. This ruling is final and cannot be appealed.
This case contrasts with the recent CJEU decision upholding a record €13 billion tax order against Apple, underscoring the ongoing tension between the EU and member states regarding tax regulations.
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Friday
UK government borrowing overshoots in blow to Rachel Reeves
Britain's fiscal outlook worsened as public debt reached 100% of GDP, the highest since the 1960s.?
August borrowing figures, which significantly exceeded expectations, highlighted the challenges facing the government, with public sector borrowing at ￡13.7 billion, the highest for that month since 2021. Treasury officials argue this reflects an honest assessment of the economic situation, while some Labour MPs and business leaders caution that a pessimistic tone could deter foreign investment ahead of a global investment summit in London.
As the government grapples with a substantial deficit, concerns linger about its messaging, particularly when seeking to attract investment while simultaneously warning of fiscal challenges. Overall, the economic landscape suggests that difficult choices lie ahead in the Autumn Budget.?
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