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SPI Management Newsletter 18.11

Updated: Nov 25, 2022

Largest tax increases and spending reductions in a decade announced by the UK

Following years of increased fiscal stimulus during the pandemic and subsequent energy subsidies, the U.K. government proposed significant tax rises and spending cuts on Thursday, making it the first major Western country to start drastically curtailing its spending growth.

After former British Prime Minister Liz Truss alarmed financial markets by promising to jump-start economy with tax cuts supported by additional borrowing, the proposals represent a second significant shift in U.K. economic policy in as few as a few months. In an effort to persuade investors that the U.K. is sincere about eventually reining in the soaring level of public debt, her successor, Rishi Sunak, is currently moving economic policy in the opposite way. His job will be to restore market confidence without seriously harming an economy that is anticipated to go into recession.

The biggest belt-tightening in a decade by the U.K. highlights the financial difficulties some Western countries are currently facing following a sharp increase in spending during the pandemic to protect their economies as well as new spending to help protect consumers and businesses from significantly higher energy prices as a result of the conflict in Ukraine. According to analysts, higher energy prices may persist in Europe's economy for some time, necessitating a decision on how to finance them by the respective governments.

Lagarde asserts that the ECB must employ greater measures to combat inflation

In order to combat record inflation, Christine Lagarde has stated that the European Central Bank will need to employ “other policy tools” in addition to rising borrowing costs. She has also committed to beginning the reduction of the €5 trillion bond portfolio next year.

The central bank committed to hiking rates once more and to consider the idea of reducing its bond holdings at its next policy meeting on December 15 while increasing its deposit rate from minus 0.5% in July to 1.5% last month.

But Lagarde went further on Friday, saying: “In the current environment, and acknowledging that interest rates remain the most effective tool for shaping our policy stance, it is appropriate that the balance sheet is normalised in a measured and predictable way.”

China's participation offers the real estate market some hope

More than a quarter of economic growth in China comes from the real estate sector, but it has been sluggish for more than a year due to development delays brought on by many developers running out of money. For individuals affected by its problems, a government help plan launched over the weekend has now offered a rare glimpse of hope.

The central bank and the primary banking regulator approved the 16 measures, which mandate that banks roll over their loans to the real estate industry to provide builders more time to finish incomplete projects. They also provide fundraising opportunities and exit strategies for vacant apartments. Banks are also urged to extend the period that homebuyers have to repay their mortgages.

Adapted from WSJ, CNBC, FT, Forbes, Reuters

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