MNI INTERVIEW: UK Gov't Likely To Avoid Big Tax Hikes - IfG

A worsening inflationary outlook should allow the UK government to delay substantial tax raises in areas such as capital gains in its Oct 28 budget, but this will in turn make next year’s spending review all the more crucial, Institute for Government Chief Economist Thomas Pope told MNI.

"I would not be surprised if they postpone [an increase to capital gains tax], particularly if it turns out the forecast deterioration isn't so bad. Maybe partly because inflation increases ... provide a decent uplift to receipts. Of course, that actually makes the spending challenge more difficult. But they think they can defer that to next year," Pope said in an interview. 

"This is the kind of area of taxation where constant tinkering is really damaging, and we have had consecutive budgets making changes to capital gains tax," Pope said.

Markets will focus on the outlook for spending, he said.

"Meeting the fiscal rules on their own is definitely not sufficient for market credibility, and I think that's partly … because they're relatively loose." 

With speculation mounting that the government’s next spending review allocating money between departments could be pushed back to tie in with the 2027 autumn Budget, Pope questioned the wisdom of such a move. (See MNI INTERVIEW: UK Needs BOE Hike, Fiscal Squeeze Now - Chadha)

A spending review alongside a budget would need to constantly "[hit] a moving target," he said, as "the changing forecast you're getting from [fiscal watchdog the Office for Budget Responsibility] directly feeds into the envelope that you are delivering for the spending review." 

Without a "credible envelope for total spending ... the expectation baked in will be ‘well, there's going to have to be more action next year at the Spending Review to raise more tax or find other savings somewhere else to deliver that,’ and there'll be a, I think, reasonable scepticism that the government is able to is going to be able to deliver," Pope said, noting both the effect of inflation in eroding the real value of departmental budgets as well as pressure to raise defence spending.

TRIPLE LOCK

Pope suggested that Prime Minister Andy Burnham should legislate soon to act on his promise to end the so-called triple lock, which guarantees that the state pension rises by the highest of 2.5%, inflation or earnings growth, after 2030.

"Keeping the markets onside requires making the fiscal decisions that show that you can actually be unpopular and make hard decisions now, and not just promise to cut spending or have tight spending increases in some unspecified way in the future," he said.

However, with the main opposition parties promising to keep the triple lock and with elections due by 2029, Pope noted that political debate on its cost is likely to be skewed given that forecasts tend to underpredict its cost, which ratchets up in times of volatility.

"I do worry a little bit about how easy it will be for other parties to commit to reintroducing the triple lock because it just won't look that expensive on their scorecards, even though it will actually turn out to be more expensive than that."

RPT-MNI INTERVIEW: US Bigger Canada Auto Threat Than China

(Repeats story first published on Oct 9)

Canadian Senator Yuen Pau Woo told MNI U.S. automakers pose a bigger threat to Canada's industry than their Chinese counterparts, and officials are hasty in dismissing potential for the Asian nation to manufacture electric vehicles in Canada.

“We may be talking about the annihilation of an industry or the substantial diminution of the auto industry, because of what the Americans are already doing, not because of what they might do if we were to invite a few Chinese vehicles in,” he said in an interview Thursday. 

“It’s in the interest of the incumbents in the industry to avoid that situation," he said. "But at the same time, we need to allow space for other parts of the economy, other industry players to explore new ways of doing things, new directions for the auto industry that are more in line with the future rather than the past.”   

After a hearing Thursday where representatives from North American auto and parts makers said China's goal is accessing Canada's market without any assembly lines or jobs beyond car kits, Senator Woo suggested China may at some point look at full-scale production.

CHINESE OVERCAPACITY AND TESLA

“I know people who want that to happen, and who are open to that possibility, are actively in discussions with Chinese manufacturers,” he later told MNI without identifying any specific actors. “That should be an approach we’re taking, rather than assume that it would never happen.”

Prime Minister Mark Carney during a January meeting with Chinese President Xi Jinping allowed 49,000 electric vehicles a year from China or less than 3% of the market. President Donald Trump warned afterwards deeper ties with China would escalate the Canada-U.S. trade war that already includes 50% tariffs on aluminum, steel and autos. Since then Trump hosted a friendly visit with President Xi that avoided new penalties. (See: MNI INTERVIEW:Paused Talks Help Canada In US Trade War-Verheul)

Brian Kingston, head of the Canadian Vehicle Manufacturers' Association that represents Ford, GM and Stellantis, responded to another Senator's question at the hearing by saying China will never build the assembly plants his members have. “I’m deeply skeptical of China being an investor in Canada for numerous reasons, but the first is they have massive overcapacity at home, that is why they are exporting and dumping vehicles around the world,” he said. 

The day after Elon Musk said Quebec and Alberta should separate from Canada, Kingston pointed out Tesla is the biggest winner from the new Chinese EV quota. “The government has just given free access to Chinese manufacturers that don’t employ people here, and who’s taking advantage of that quota right now? It is largely Tesla.”

CHINA SHUNS UNION WORKERS?

Senator Woo later in the hearing pressed Kingston about Chinese investment in Canada. The independent British Columbia lawmaker was appointed to the Senate in 2016, and before that led the Asia Pacific Foundation of Canada. Some of his past commentary on China has drawn criticism from human rights groups.

“They want market access, they don’t want to build here,” Kingston told Woo at the hearing, pointing to Europe where China has mostly done kit assembly and not full-scale production. “They aren’t going to come here and build a plant with Unifor unionized labor.”

Flavio Volpe, who advises the government in his role leading the Automotive Parts Manufacturers' Association, backed Kingston's view. It’s better for Canada to create its own market for batteries as the industry shifts to EV rather than relying on imports, he said.

“The domestic market in China this year collapsed by six million," Volpe said. "The objective of Chinese automakers is to find a consumer for their product.”

MNI INTERVIEW: UK Needs BOE Hike, Fiscal Squeeze Now - Chadha

The Bank of England must hike rates to rebuild credibility eroded by its muddled messaging following the Iran War shock, former National Institute of Economic Research head and senior BOE economist Jagjit Chadha told MNI, adding that the government should also use its Oct 28 budget to launch a multi-year fiscal tightening.

The Iran War energy price spike followed previous inflation target overshoots also linked to supply side shocks, damaging the Monetary Policy Committee’s reputation and restricting its current policy options, said Chadha, now an economics professor at Cambridge University.

"Having been lax and perceived to be slow in increasing interest rates .. the strategic problem you face with another inflation shock is very different from a world in which you have credibility, and you can't look through it in exactly the same way," he said in an interview.

The actual monetary policy considerations in deciding whether to hike Bank Rate from 3.75% after the BOE’s next meeting on Nov 5 are “almost beside the point,” Chadha said.

“Nobody can tell exactly what would happen as a result of a 25-basis-point rise, but if you're in a world in which you've lost some reputation, if you're in a world in which there've been second-round effects and your credibility has been undermined … you have to work a bit harder and show people you're actually working a bit harder," he said.

"That would mean not only being prepared to raise interest rates, [but also] to make clear statements that interest rates will go wherever they need to go in order to meet the inflation target and will remain there in order to bring inflation down to target.” (See MNI POLICY: BOE's Focus On Energy Supply As It Swings To Hikes)

MUDDLED MESSAGING

The MPC is widely expected to hike in November, but its messaging since the start of the crisis has not been easy to decipher, he noted.

"Whether the MPC's process of bringing together minds has meant there's not enough exchange of views to find the central case, I wonder, because what we're seeing, I think, is a fragmentation of views, leading to some confusion," Chadha said.

He regards the sharp increase in sterling rates futures, which now imply almost three hikes in Bank Rate by next March, as reflecting rate normalisation and justifying monetary as well as fiscal action.

"The rule of thumb for policy rates is, in normal times … they should be around the growth rate of GDP per head plus the inflation target, which gets you to something like four to four-and-a-half percent in advanced economies," he said.

The Bank has not gone far enough in implementing reforms suggested by former Fed head Ben Bernanke in his review of the BOE’s forecasting and communications, Chadha said. Bernanke criticised the BOE's over-reliance on its quarterly central economic projection and the probabilities around it.

"Models are frankly not good enough. We need to deal with this as a strategy, which involves communication, statements as to what we'll do in the future, and to trigger a change of tack with an increase in interest rates," he said.

FISCAL ADJUSTMENT

The government also needs to start a fiscal adjustment immediately in its upcoming budget, rather than, as is widely expected, to try to placate markets by forecasting it will meet fiscal rules based on projected outcomes three years in the future, according to Chadha, expressing agreement with the views of International Monetary Fund chief Kristalina Georgieva. (See MNI INTERVIEW: UK Needs To Slash Spending Share Of GDP- Chadha)

"We are running deficits to the end of this decade, right? Total managed expenditure is 44% of GDP. Debt is going to be around 100% of GDP. That's far too high. We absolutely need, and I use the language from my friends at the IMF, a multi-year fiscal consolidation programme that can only be credible if, in the first step, we do something today. The fiscal framework doesn't work because we're committing to adjustment two, three years down the line," he said.

"We need to start now, and that means considering pension liabilities, raising income taxes in the middle incomes a little bit as well. That would raise a lot, potentially broadening VAT [and] at the same time, thinking about welfare payments that can be cut, certainly immediately getting rid of the (pension) triple lock.”

MNI INTERVIEW: US Bigger Canada Auto Threat Than China-Senator

Canadian Senator Yuen Pau Woo told MNI U.S. automakers pose a bigger threat to Canada's industry than their Chinese counterparts, and officials are hasty in dismissing potential for the Asian nation to manufacture electric vehicles in Canada.

“We may be talking about the annihilation of an industry or the substantial diminution of the auto industry, because of what the Americans are already doing, not because of what they might do if we were to invite a few Chinese vehicles in,” he said in an interview Thursday. 

“It’s in the interest of the incumbents in the industry to avoid that situation," he said. "But at the same time, we need to allow space for other parts of the economy, other industry players to explore new ways of doing things, new directions for the auto industry that are more in line with the future rather than the past.”   

After a hearing Thursday where representatives from North American auto and parts makers said China's goal is accessing Canada's market without any assembly lines or jobs beyond car kits, Senator Woo suggested China may at some point look at full-scale production.

CHINESE OVERCAPACITY AND TESLA

“I know people who want that to happen, and who are open to that possibility, are actively in discussions with Chinese manufacturers,” he later told MNI without identifying any specific actors. “That should be an approach we’re taking, rather than assume that it would never happen.”

Prime Minister Mark Carney during a January meeting with Chinese President Xi Jinping allowed 49,000 electric vehicles a year from China or less than 3% of the market. President Donald Trump warned afterwards deeper ties with China would escalate the Canada-U.S. trade war that already includes 50% tariffs on aluminum, steel and autos. Since then Trump hosted a friendly visit with President Xi that avoided new penalties. (See: MNI INTERVIEW:Paused Talks Help Canada In US Trade War-Verheul)

Brian Kingston, head of the Canadian Vehicle Manufacturers' Association that represents Ford, GM and Stellantis, responded to another Senator's question at the hearing by saying China will never build the assembly plants his members have. “I’m deeply skeptical of China being an investor in Canada for numerous reasons, but the first is they have massive overcapacity at home, that is why they are exporting and dumping vehicles around the world,” he said. 

The day after Elon Musk said Quebec and Alberta should separate from Canada, Kingston pointed out Tesla is the biggest winner from the new Chinese EV quota. “The government has just given free access to Chinese manufacturers that don’t employ people here, and who’s taking advantage of that quota right now? It is largely Tesla.”

CHINA SHUNS UNION WORKERS?

Senator Woo later in the hearing pressed Kingston about Chinese investment in Canada. The independent British Columbia lawmaker was appointed to the Senate in 2016, and before that led the Asia Pacific Foundation of Canada. Some of his past commentary on China has drawn criticism from human rights groups.

“They want market access, they don’t want to build here,” Kingston told Woo at the hearing, pointing to Europe where China has mostly done kit assembly and not full-scale production. “They aren’t going to come here and build a plant with Unifor unionized labor.”

Flavio Volpe, who advises the government in his role leading the Automotive Parts Manufacturers' Association, backed Kingston's view. It’s better for Canada to create its own market for batteries as the industry shifts to EV rather than relying on imports, he said.

“The domestic market in China this year collapsed by six million," Volpe said. "The objective of Chinese automakers is to find a consumer for their product.”

MNI INTERVIEW: Ex-ECB Official Sets Out Bond-Buy Options

One of the main architects of the European Central Bank’s first bond-buying programmes has told MNI the first likely step for the ECB in addressing the selloff in sovereign debt would be to stop running down its own bond portfolio under its quantitative tightening programme, but that market conditions are still not bad enough to prompt action.

Francesco Papadia said the ECB should deploy an escalation ladder of options. While it should be prepared to scale the ladder if necessary, potentially as far as active bond purchases, it should start with the easiest.

“Stopping QT in a neutral way. You just don’t let the portfolio go down and buy what is maturing without any tilt toward any one country or another,” Papadia, director general for market operations at the ECB until 2012 and now a senior fellow at the Bruegel think tank. (See MNI INTERVIEW: ECB Should Halt QT - Bini Smaghi)

If that failed to address the situation, the ECB could then consider “rebalancing” its purchases of maturing debt towards the most affected country – effectively [France],” he said. “They did that in the past and they did not always follow the same proportions exactly.”

Stopping interest rate hikes would be the third step. After that would come making bond purchases under its Transmission Protection Instrument, and finally bond purchases under its Outright Monetary Transactions programme, though this last would be the most difficult, given the requirement for the affected country to be in a fiscal-adjustment programme with the European Commission. (See MNI SOURCES: ECB Likely To Wait Till December Before Next Hike)

FOCUS ON SPREADS, FOR NOW

Papadia says that a further “deepening and broadening” of the current bond market sell-off would be required before the ECB would even take the first step.

“A deepening in France and a broadening to other countries in a worrying way,” he said, adding that “a 20 basis-point spread increase in two weeks is different from 20bp in two days.”

Given that the ECB’s justification for deploying TPI would have to be a disruption of monetary transmission, spreads between the bonds of troubled sovereigns such as France and benchmark bunds would be the first focus, though eventually rises in yields themselves could force action anyway, Papadia said.

"For the time being I would think that the conversation would mostly be about the spread,” he said.

Once the ECB starts on the ladder, it must be ready to escalate, Papadia said.

“When they enter the first phase they would need to be aware that they must be ready to go for the next step if the first one doesn’t work.”

MNI POLICY: AI Buildout Emerges As Top Inflation Risk For Fed

The AI investment boom has unexpectedly emerged as the predominant inflation risk for the Federal Reserve by fueling massive demand for resources that could last years before productivity gains expand supply, raising the prospect of rates staying higher for longer.

The Fed has already embarked on a tightening path amid resilient growth, above-target underlying inflation and a stable labor market. High oil prices and tariffs pose inflation risks, but limited second-round effects so far suggest those pressures are likely to be short-lived, giving officials flexibility on the pace of hikes. (See: MNI POLICY: Fed In No Hurry But Committed To Taming Inflation)

However, aggressive spending by mega-cap tech companies to build data centers and secure compute capacity could mean monetary policy has to stay tighter for a more extended period, which could eventually weaken the labor market. 

A recent paper by Columbia University economist Stijn Van Nieuwerburgh estimated AI infrastructure investment will exceed USD10 trillion from 2025 to 2032, more than 3.6% of GDP and far eclipsing the capex booms associated with railroads and telecom.

NEUTRAL RISING

Strong investment demand pushes up the short-term neutral rate of interest, making current monetary policy relatively more accommodative and forcing the Fed to raise rates simply to maintain a restrictive stance and keep inflation in check.

If markets begin expecting a permanently higher rate of productivity growth, the longer-run neutral rate also rises. The Fed would then need to hold rates higher over the long term rather than rely on productivity as a disinflationary tailwind.

Better-than-expected growth has seen policymakers revising higher their estimates of the longer-term neutral rate, and demand for investment capital has likely lifted the short-term rate even higher, Minneapolis Fed President Neel Kashkari said last week.

"I look at the fact that so much massive investment is going into the data center buildout -- power, water, and all of the infrastructure that goes with it. That's a new demand for investment capital," he said. "If there's a lot more demand for investment capital, all else equal, that's going to push up the neutral rate." 

WILL AI BE DISINFLATIONARY? 

Fed officials are optimistic that AI could improve productivity over the medium term, and Chairman Kevin Warsh has further argued that the technology will be a significant disinflationary force. But not all of his colleagues are convinced, and even Warsh sees this as having no immediate bearing on policy. (See MNI POLICY: AI Boom Complicates Fed's Path To Lower Rates) 

Implementation may be a bumpier, slower road than expected, and there's a risk that AI may not be nearly as transformative as hoped. The diffusion of earlier general-purpose technologies from electricity to the personal computer is hard to discern in productivity, employment or wage data, and the late-1990s surge lasted only four or five years before growth reverted to its usual pace. 

A short discussion in the minutes of the September FOMC meeting stated that officials “generally judged that AI-related investments would likely contribute to stronger gains in productivity and potential output in the coming years but they noted that there was substantial uncertainty over the magnitude or timing of the effects."

The boom carries downside risks as well. For one, rising political opposition to data centers could slow the buildout, independent of the technology's promise. And a number of major central banks have warned a sharp fall in the asset valuations that have underpinned the investment boom could trigger market volatility and a sudden drop in consumption -- all of which could pose significant risks to the U.S. economy and beyond. 

MNI INVITE: Connect Livestream VC CBO's Phillip Swagel Oct 22

You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office, Phillip Swagel.

Details below:

• Speaker: Phillip Swagel, Director of the Congressional Budget Office.
• Topic of discussion: ‘The U.S. Budget and Economic Outlook’
• Date: Thursday, 22nd October 2026, 10 am to 11:30 am ET / 3 pm to 4:30 pm London time.
• This event will be run as a Zoom Webinar and is a public, on-the-record event.

To register please go to: MNI Webcast Registration