UK national debt grew this month to its highest level as a share of the economy since 1961, according to figures released on Friday, adding to the financial issues that the new administration will face when it takes office following a general election in two weeks.

The UK national debt, excluding state-controlled banks, hit 2.742 trillion pounds ($3.47 trillion), or 99.8% of annual GDP, in May, up from 96.1% the previous year, according to the Office for National Statistics.

The increase came despite somewhat lower-than-expected government borrowing in May, which was 15.0 billion pounds, compared to experts’ median projection of 15.7 billion pounds in a Reuters survey.

Following an election on July 4, Britain appears to be on the verge of a change of government, with Keir Starmer’s Labour Party leading Prime Minister Rishi Sunak’s Conservatives in surveys.

During the COVID-19 epidemic, state debt in Britain skyrocketed, and the public finances have been hampered by poor growth and a 16-year high in Bank of England interest rates.

Western Nations Debt

Most other Western countries had significant rises in debt during the same period, although British debt levels are lower than those of the United States, France, and Italy.

A person enters the Treasury government building in London, Britain, on March 5, 2024. REUTERS/Toby Melville/File Purchase Licensing Rights opens a new tab.

Borrowing in the UK totaled 33.5 billion pounds in the first two months of the fiscal year, 0.4 billion more than the same period in 2023 but 1.5 billion pounds less than government budget estimates expected in March.

Capital Economics consultants warned that the lower-than-expected borrowing figures represented less public investment and would provide little comfort to Britain’s future finance minister.

“They do little to reduce the scale of the fiscal challenge that awaits them, in part because of the upward pressure on the debt interest bill from higher interest rates,” said Alex Kerr, an assistant economist at Capital Economics.

Labour and the Conservatives want to keep to existing budget rules that require official estimates – most recently updated in March – to indicate that debt as a proportion of GDP is dropping in the fifth year of the forecast.

Higher interest rates than projected in March’s budget left Britain’s next chancellor with only 8.5 billion pounds of freedom to meet these standards, down from the historically low 8.9 billion in March, Kerr noted.

Both Labour and the Conservatives have committed not to raise income tax, value-added tax, or other major levies, but government budget predictions in March revealed that tax as a percentage of GDP was on track to hit its highest level since 1948.

Source: Reuters

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The Bank of England maintained its main interest rate at a 16-year high of 5.25% on Thursday, despite inflation falling to its target of 2%, with several policymakers warning that a premature decrease may spark another wave of price increases.

Seven of the nine members of the bank’s ruling Monetary Policy Committee voted against a rate drop for the second week in a row, while two supported one. Interest rates have been constant since August, following a series of rises.

The statement accompanying the vote made it plain that there was disagreement on the forecast for inflation, with some expressing concern about continued significant price increases in the services sector, the key driver of the British economy.

“It’s good news that inflation has returned to our 2% target,” said Bank of England Governor Andrew Bailey, who voted to maintain current policy. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”

The decision will likely dismay the ruling Conservative Party ahead of the United Kingdom’s general election in two weeks. Prime Minister Rishi Sunak would have seen a cut as good economic news, especially if it came with a drop in mortgage rates.

Upcoming UK Election

The panel maintained that the upcoming election, which the main opposition Labour Party, led by Keir Starmer, is generally expected to win, did not influence its conclusion. It stated that the decision was, as always, based on meeting the 2% inflation objective “sustainably in the medium term.”

Economists anticipate a rate decrease is on the way, either at the bank’s next policy making meeting in August or the one following in September. They expect clear evidence by then that inflation will remain close to the target for the next year or two.

“We continue to believe that the MPC will ease restrictive policy beginning in the summer and deliver two rate cuts this year,” said Sanjay Raja, Deutsche Bank’s senior U.K. economist.

The reduction in the primary inflation measure to a near three-year low of 2% in the year to May does not imply that prices are falling; rather, they are rising at a slower rate than they have in recent years during a cost-of-living crisis that has resulted in reduced living standards for millions in Britain.

Central banks worldwide dramatically increased borrowing costs from the lows seen during the coronavirus pandemic, when prices began to rise, first due to supply chain issues accumulated during the pandemic and then due to Russia’s invasion of Ukraine, which pushed up energy costs.

Bank of England unduly cautious

Higher interest rates, which cool the economy by making borrowing more expensive, have helped to reduce inflation, but they have also weighed on the British economy, which has hardly expanded since the pandemic’s recovery.

Critics of the Bank of England argue that it is unduly cautious about inflation and that keeping interest rates too high for too long will put undue strain on the economy. It is an accusation that has also been leveled at the United States Federal Reserve, which has held interest rates constant in recent months.

“Given that the U.K. has moved onto a milder inflationary trajectory, rate setters remain overly cautious about the likelihood of loosening policy, risking impeding the U.K.‘s growth prospects,” said Suren Thiru, economics director at The Institute of Chartered Accountants in England and Wales.

Some central banks, like the European Central Bank, have begun to decrease interest rates as inflationary pressures have subsided. On Thursday, the Swiss National Bank cut its main interest rate by a quarter of a percentage point to 1.25%.

Source: The Associated Press

Tesla shareholders approved CEO Elon Musk’s $56 billion pay package on Thursday, giving him a giant thumbs up and an incentive to stay focused on his primary source of income.

The approval shows Musk’s popularity among Tesla’s retail investors, many of whom are vociferous supporters of the erratic tycoon. Despite resistance from huge institutional investors and proxy firms, the proposal passed.

Musk portrayed himself as pathologically optimistic while speaking onstage at the annual shareholder meeting in Austin, Texas. “If I wasn’t optimistic, this factory wouldn’t exist,” Musk added, to applause. “But I do provide at the end. That is the crucial thing.”

He had hinted late on Wednesday that the plans were gaining widespread support.

The decision does not, however, resolve a challenge over the pay package in Delaware, which some legal experts believe might last months. In January, the judge nullified the salary package, calling it “unfathomable.”

Musk may possibly face more lawsuits over the gift, which would be the largest in US company history. Shareholders approved this package in 2018.

“This thing is not over,” said Brian Quinn, a professor at Boston College Law School. The Delaware judge will examine the vote and demand Tesla to demonstrate that Musk did not pressure or unduly influence the process, he added.

Judge criticised Tesla’s board

The judge criticised Tesla’s board as “beholden” to him, claiming that the plan was suggested by a biassed board with tight personal and financial links to its CEO.

On Thursday, shareholders accepted a plan to transfer the company’s legal headquarters from Delaware to Texas. They also supported other suggestions, including the re-election of two board members: Musk’s brother Kimbal Musk and James Murdoch, the son of media magnate Rupert Murdoch.

Despite board opposition, shareholders increased investor power by adopting plans to shorten board terms to one year and reduce voting requirements to a simple majority.

Tesla did not announce the voting results on Thursday, but they are anticipated to be released in the coming days. At least half a million people watched the meeting live on social media platform X, with another 40,000 watching on YouTube.

“First and foremost, this statement conveys that Tesla’s retail shareholders approve of what is going on. “It will be interesting to see the exact percentages of votes,” said Lindsey Stewart, a director at Morningstar Sustainalytics.

Shareholder acceptance of the compensation acts as both an affirmation of Musk’s term and an acknowledgement that investors do not want to jeopardise the company’s future.

“They are brushing aside essentially key man risks, where Tesla has become even more dependent on Musk going forward,” said Jason Schloetzer, a business professor at Georgetown University who specialises in corporate governance.

Musk’s focus has shifted

Musk vowed to develop AI and robotics products outside of Tesla in January if he fails to win sufficient voting power. He moved the company’s focus to robotaxis, abandoning cheaper mass-market electric vehicles, to the dismay of some investors who worried the autonomous technology would be difficult to master.

In an update on Tesla’s performance, Musk claimed on Thursday that the business just shipped a record 1,300 Cybertrucks in a week and that plans for volume production of Semi trucks were in place. He spoke extensively about plans for self-driving cars, but he provided no time period for their launch.

Tesla’s stock price has declined by nearly 55% since its 2021 top, as EV sales have slowed and Musk’s focus has shifted between Tesla and other businesses he owns. The stock closed up 2.9% on Thursday.

“Shareholders once again endorsed the terms of the contract, sending a strong signal that ‘a deal is a deal’ and Musk deserves to be rewarded for meeting the lofty thresholds of an entirely incentive-based contract,” said Garrett Nelson, an analyst with CFRA Research.

“The news lifts a major overhang on the shares, although we wouldn’t be surprised by a “sell the news” reaction on Friday following big gains over the past two trading sessions as the likely outcome became clearer.”

The board determined that Musk deserved the package since he met all of the lofty benchmarks for market value, revenue, and profitability. Large investors, including the California Public Employees’ Retirement System, had labelled the pay package “excessive.”

“Elon Musk and Chair (Robyn) Denholm have made this about CEO loyalty and presented the votes as a decision on whether the company can keep Musk,” said Ivan Frishberg, Amalgamated Bank’s chief sustainability officer.

“That is a lot of pressure but it doesn’t change the fact that good governance is good for the bottom line of a company, and the Tesla board is consistently and clearly deficient on that front.”

While Musk is unquestionably Tesla’s driving force and is responsible for most of the company’s success, sales and profits have stalled. There are concerns that he is stretching himself too thin.

Source: Reuters