In a mess

2024 will see two critically important elections - in the US, where polls suggest that neither Donald Trump (currently the Republican front-runner) nor Joe Biden (the Democrats' chosen candidate so far) are favored as the next President, and in the UK, where commercial betting currently backs the idea of a Labour government displacing the current Conservative administration. Both contests will be very messy and may significantly impact how individuals feel about their economic prospects.

In the UK the former Labour Prime Minister Tony Blair, who is thought to have some influence over the current Labour Party leader, Sir Keir Starmer, has said the country "is in a mess" and that if Labour wins the next general election it will not be able to "tax and spend" its way out of financial trouble, as it tried to do in previous Labour governments. In the US President Biden has laid out plans for his 2024 Budget which stipulates higher taxes, putting the top marginal rate of income tax to 39.6% from the current 37%; but even those higher tax rates won't keep pace with higher spending.

In both countries the government's financial future looks rocky, largely because they want to (or need to, to keep voters happy) spend more than they have. The US will this fiscal year have a deficit of about $2 trillion, double that of the previous year. In the UK the Office for Budget Responsibility, created by the government to give an independent analysis of public finances, estimates the UK will have a deficit (and thus need to borrow or cut spending) of £132 billion. Higher spending, lower tax revenues, soaring interest rate costs and a rapid growth in debts (US federal debt is now $33 trillion) combine to make a veritable witches' brew for London and Washington D.C. The US economy is today much healthier than when President Biden came into office, but Americans don't feel better off. As for the UK, the country is stuck in stagflation - gross domestic product (GDP) fell by 0.5% in July, while inflation that month went up by an annualized 6.9%, unchanged from June.

Squeezed in all directions

In the US housing affordability is at its lowest point in decades; when Biden entered the White House mortgage rates were at 2.65%, a record low. They have now climbed to 7%. In the UK the picture is similar - outstanding mortgage debt is now almost £17 billion, the highest since 2016. Rent prices have been rising fast. In the US the national median rent prices is now above $2,000/month, in the UK the average monthly rent is more than £1,200, a rise of more than 10% year-on-year - London is even more expensive, at an average £2,145, almost 13% higher than last year. The cost of living crisis, with prices for almost everything much higher than a year ago, is making having a roof over one's head a political issue. People are being squeezed from just about every direction.

Inflation seems to be slowing - in the UK the Consumer Prices Index (CPI) for housing, water, electricity, gas and other fuels rose by an annualized 6.8% in July, down from a peak of 26.7% in January 2023 and 12% in June this year. In the US CPI inflation in August actually rose in August, to 3.7%, the first rise since June 2022, again on rising energy costs, which went up by 10.5%. Central banks on both sides of the Atlantic are finding it difficult to get inflation back down to their 2%/year target.

The Basel-based Financial Stability Board, the world's most powerful financial watchdog, has warned that there could be "further challenges and shocks" for the global economy in the coming months. The global economic recovery "is losing momentum and the effects of the rise in interest rates in major economies are increasingly being felt" it said last week.

China's troubled real estate sector, the continuing (and expensive) war in Ukraine, the higher expenditures on defense as a consequence of that war, the drive towards global de-carbonisation, the aging Baby Boomer generation and its requirement for greater health spending...these intractable problems spell greater spending at a rate that will continue to, outstrip the ability of government to fund it. Governments with eyes bigger than their stomachs - who want to take on greater bills without having a way to pay - have only two choices: borrow if they are able, or print money. Either way, it's a mess.