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Comments on the Government’s infrastructure spending plans

In his first budget, Chancellor Rishi Sunak (who, let’s remember, has been in the job for less than a month) unveiled a series of exciting spending promises, designed to increase infrastructure spending to a level not seen for decades. Overall, the Chancellor’s plans involve investing a massive £640bn for capital spending on infrastructure by 2025 – a generational change in the level of spending on public infrastructure.

The announcements raise the stakes on the previous Chancellor’s promise to deliver an “infrastructure revolution”, which was a prominent feature of the Conservative Party’s election campaign last year. The Budget was full of bold spending promises, by a Government that seems hell-bent on doing things differently and “getting it done”. “Getting it done” was the Chancellor’s rallying call for his first Budget and the headline-grabbing spending plans certainly suggest that we have a Government that is serious about doing just that.

Under Theresa May, previous Chancellor Philip Hammond had planned to spend £600bn on public and private infrastructure over a 10-year period, so the latest plans not only involve spending more money overall, but also spending it more quickly than the previous Government had planned to.

While much of the important detail has yet to be confirmed, and the publication of the long-awaited national infrastructure strategy has been delayed, the Chancellor’s spending announcements are likely to be well received by business, especially those in the community of infrastructure developers and investors. After Prime Minister Boris Johnson’s announcement last month that the controversial HS2 high-speed rail link will go ahead, the Budget is a further positive sign that this Government is prepared to make use of historically low interest rates to end the tendency of previous Governments to talk a lot about infrastructure investment, but to deliver very little.

The current Chancellor seems to be of the view that the very low interest rates that we have seen since the financial crisis will continue for some time, so has rejected assertions that his aggressive borrowing plans are irresponsible. His argument is that while overall Government borrowing may be higher than it has been in previous times, the cost of servicing the Government debt is actually lower.

While some in the industry will remain sceptical about how real, or new, some of the announcements are likely to be in practice, others will see the latest plans as being just what the industry has been waiting for.

As expected, many of the plans unveiled in the Budget are measures designed to rebalance opportunities in all parts of the UK and to lay the foundations for what the Chancellor has promised to be “a decade of growth for everybody”. The massive boost in infrastructure spending apparently includes:

  • £27 billion of strategic investment in roads and motorways;
  • £5 billion for new gigabit-capable broadband in the hardest to reach parts of the country;
  • £800 million for new carbon capture and storage clusters in the English regions and Scotland;
  • £500 million for the deployment of rapid charging hubs for electric vehicles; and
  • £12 billion of extra funding for building affordable homes.

Looking at these plans from a broader policy perspective, it is undoubtedly the case that infrastructure spending by Government serves many policy objectives (such as increasing prosperity, delivering visual regional investment, enabling other sectors), but for this Government right now, it can also be seen as supporting the investment case in global Britain and showing that Britain is thriving post-Brexit. The timing of this is obvious, but with pressure on infrastructure in the South East and a shortage of new mega projects that are already in development, it seems that the Government is keen to show the strength of UK engineering and innovation to the world, as well as to bulking up the engineering sector for activation by inward investors.

A question that has been raised by a number of industry-insiders is how the Government actually plans to deliver and fund the huge expansion in infrastructure spending that it has announced. The Chancellor made no mention of the potential use of private infrastructure finance models, so there is a concern among many that private sector investors may have a limited role in delivering the pipeline of new work.

Further concerns have been raised about the lack of specific measures designed to deliver on the Governments commitments to reduce carbon emissions and to reach net zero greenhouse gas emissions by 2050. The UK was the first major economy to legislate for net zero greenhouse gas emissions by this date and has since launched a Net Zero Review to help determine how the UK can maximise economic growth opportunities as it transforms into a green economy. Perhaps understandably at this stage (when you consider the other critical issues that the Government has to deal with at the moment), there was almost nothing in the Budget to indicate how real that commitment is and how the Government intends to achieve it.

We’re looking forward to learning more about precisely how the Chancellor’s spending promises will be delivered, and what other projects the Government plans to prioritise, when the national infrastructure strategy is published later in the spring.

It remains to be seen as to whether the Chancellor, and the Government, will deliver on its promises to “get it done” and deliver an “infrastructure revolution”, but this Budget certainly shows ambition.

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Boris Johnson moves to mend relationship with UK business

Prime Minister Boris Johnson has moved to rebuild his relationship with the business community by hiring Sky executive Andrew Griffiths as part of his Number 10 team.

A source close to Griffiths said Johnson’s appointment of the Sky veteran – who most recently served as the broadcasting giant’s chief operating officer – was “a clear sign of intent” that the former mayor of London wants to build fresh links with the City and businesses across the UK.

Advisory Excellence understands that Griffiths, who joins the new government as Johnson’s top business adviser, first discussed the position with the incoming PM to weeks ago and felt that the new Tory leader “was the real deal.”

One source said Griffiths is “an operator, not a policy wonk” and he “will want to get things done.” Sources in Johnson’s camp have told Advisory Excellence that there will be a “beefing-up” of the Downing Street business team but it’s understood that Theresa May’s business adviser, Jimmy McLoughlin, will be staying on to assist with the transition.

Johnson ruptured his business-friendly reputation following the EU referendum when he was caught saying “f*** business” in reaction to corporate groups lobbying for a softer Brexit.

However, the relationship may already be thawing with most business groups giving a cautious welcome to the incoming resident of Number 10 yesterday.

TheCityUK congratulated Johnson on his convincing win but warned against a no-deal outcome with Brussels.“He becomes Prime Minister at a pivotal time in our country’s history.

He must now move swiftly to set out his plans for the road ahead. Ongoing Brexit uncertainty is depressing business activity, but the financial and related professional services industry remains very clear that a no-deal Brexit is still the worst of all outcomes,” it said..

The British Chamber of Commerce was also quick to send its regards, but again warned about the consequences of crashing out of the bloc. The message to Boris Johnson from business communities around the UK couldn’t be simpler: the time for campaigning is over — and we need you to get down to business.

Companies need to know, in concrete terms, what your government will do to avoid a messy, disorderly Brexit on 31 October – which would bring pain to communities across the UK and disruption to our trade around the world.

Business lobby group the CBI echoed other calls for a pro-business Brexit deal, but also on support for infrastructure projects to boost businesses across the country.

Johnson has previously voiced opposition two of the country’s most ambitious infrastructure projects: Heathrow airport expansion and the High Speed 2 (HS2) rail project.

An HS2 Ltd Spokesperson said: “We look forward to working with the new Prime Minister to ensure that HS2 will transform the British economy and is value for money for the taxpayer”.

Meanwhile, Heathrow boss John Holland-Kaye said the airport’s third runway, which Johnson opposed, will be “a critical part of any new prime minister’s agenda”.

“As we leave the EU we’re going to need to have the trading links that only Heathrow can bring and that is why we are cracking on with it.”

The pound dropped to $1.247, after the membership ballot result naming Johnson as leader was announced. As Michael Brown, senior analyst at Caxton FX explains, this was largely due to the fact that the likelihood of Johnson victory had already been priced in.

“With such an outcome having been largely expected, sterling’s immediate reaction has been muted as the news was already priced in,” he said. “However, focus will quickly switch to the next steps – namely, Cabinet appointments and the Brexit plan. The latter will be of more importance for markets, with sterling set to remain under pressure should Boris continue his ‘do or die’ Halloween Brexit stance.”

In the run-up to the announcement a number of businesses had been nervous about the prospect of a Johnson premiership, due to the former London mayor’s insistence that he would take the UK out of the EU with or without a deal by the 31 October.

No-deal vote boosts pound sterling

British Pound exchange rates remain under pressure with Brexit uncertainty continuing to loom large. However, against the US Dollar, Sterling found something of a reprieve yesterday after disappointing house building statistics were published across the Atlantic. With Theresa May now in her last week of office, concern over the potential for political chaos under her successor is likely to keep a lid on any upside for the Pound. The Australian Dollar also performed notably well overnight, gaining ground over Sterling (AUD/GBP) after Australian employment data suggested the Reserve Bank of Australia (RBA) may have done enough for now in terms of interest rate cuts.

The Pound has continued to climb against the Euro and US Dollar in Thursday’s trading session. MPs backed an amendment that could prevent Conservative Party frontrunner Boris Johnson from shutting down Parliament to pass a no-deal Brexit in October.

Moving into Friday morning’s trading, the Pound is in a relatively tight range, trending slightly lower against the US Dollar, Euro, and Australian Dollar. UK Public Finances data will be out later in the session, along with the University of Michigan US Consumer Sentiment stat.

Weak US Housing Data Offers Cable (GBP/USD) Some Temporary Respite

The Pound to US Dollar exchange rate (GBP/USD) found a little respite yesterday following the release of some significantly worse-than-expected US Building Permits data. Despite falling mortgage rates across the Atlantic, applications to build new houses fell for a second straight month to the lowest level in two years. Land and labour shortages are said to be behind the move, so this may prove sufficient deflect some concern away from the reading which has previously been seen as an indicator of recession. However, the news was sufficient to help drag Cable back from its test of two-year lows, at least for now.

UK Political Uncertainty Keeps Pound Exchange Rate in Check

Markets may have priced in Brexit uncertainty, but it seems as if the impending political chaos starting next week, once a new Conservative Party leader is announced and new Prime Minister appointed, may still need to be priced in. Parliament is, however, strengthening its resolve to ensure it cannot be suspended to allow a no-deal Brexit to be forced through. The House of Lords voted yesterday to provide further safeguards here and the bill will return to the House of Commons today for a second reading. The Pound to Euro exchange rate (GBP/EUR) remains close to six-week lows, but anything that points towards another general election being necessary in the Autumn has the scope to see further selling here.

Why Did it Move? Pound to Australian Dollar (GBP/AUD) Exchange Rate

The Pound to Australian Dollar exchange rate (GBP/AUD) fell last night despite a decidedly mixed employment report from Canberra. However, upward revisions to May’s data and solid growth in terms of full-time jobs appear to have been sufficient to convince markets that the Reserve Bank of Australia (RBA) doesn’t need to jump in with another rate cut just yet. Having traded as high as 1.7760 yesterday, the cross now sits almost a cent lower at 1.7670.

Small businesses struggling to expand due to Brexit uncertainty

More than seven in 10 firms in a survey by the Federation of Small Business (FSB) said they did not expect to raise capital spending in the next quarter, the highest figure in two years.

The FSB says the current standstill over Britain’s path to Brexit has left small firms “hamstrung” and struggling to expand, hire and increase productivity.

The FSB survey also suggests growing caution among lenders as signs stack up of a slowdown in the UK economy.

More than four in 10 of its member firms said new credit was “unaffordable,” the highest in more than four years.

Lending to consumers also increased at its smallest annual rate in more than five years in May, according to separate data from the Bank of England.

In the manufacturing sector, a key index of UK performance slid to a six-year low on Monday, as a survey highlighted sinking output and employment levels.

Mike Cherry, national chair of the FSB, said: “It’s impossible for small business owners to invest for the future when we don’t know what the future holds.

“Lifting productivity among the smaller firms that make-up 99% of our business community is a must. But until we have the political certainty that enables us to take risks and innovate, achieving that goal will remain elusive.”

He also took aim at Conservative leadership rivals Boris Johnson and Jeremy Hunt, who have talked up their willingness to lead Britain out of the EU without a deal.

“We urgently need to see both prime ministerial candidates spell out their plans for supporting small firms and securing a pro-business Brexit – one that encompasses a comprehensive deal and a substantial transition period,” he said.

“Fast and loose talk about accepting a chaotic no-deal Brexit in four months’ time is not helpful.”

He said it was “understandable” lenders were more cautious, suggesting they were continuing to offer credit but were upping premiums to cover perceived increases in risk.