Britain's Prime Minister Rishi Sunak, centre, alongside Britain's Chancellor of the Exchequer Jeremy Hunt, centre right, at Number 10 Downing Street. AFP
Britain's Prime Minister Rishi Sunak, centre, alongside Britain's Chancellor of the Exchequer Jeremy Hunt, centre right, at Number 10 Downing Street. AFP
Britain's Prime Minister Rishi Sunak, centre, alongside Britain's Chancellor of the Exchequer Jeremy Hunt, centre right, at Number 10 Downing Street. AFP
Chris Blackhurst is a former editor of The Independent, based in London
November 15, 2022
Either this is a classic public relations exercise or the UK really is in for something horrible come this week’s budget.
If it’s the former, even by the standards of PR, the “two chancellors”, Rishi Sunak and Jeremy Hunt, appear to be indulging in major forewarning and softening up. The traditional move is to signal bad stuff to come, then when it’s announced the detail does not appear that harsh. Cue sighs of relief all round, even some smiles and the generation of positive headlines.
In less regulated times, the corporate spin doctor would suggest to the weekend media a figure for redundancies or branch closures, say. Then, on the Monday morning, when the official bulletin to the Stock Exchange dropped, the number would be less and the accompanying quotes not so doom-laden. Play your cards right and you could even get the shares to rise as a result.
So gloomy have been the predictions of what is to be unveiled, and the reasons for doing it, that you must suspect the chasm is huge. Indeed, they will look rather silly if it turns out not to be the case.
What’s troubling, however, is the total reliance on forecasting by the Office for Budget Responsibility or OBR. Such is the mythical status attached to this organisation and its calculations that we’re led to assume they must always be correct, when, in fact, they can often be wrong, and by a significant margin.
It was the absence of OBR back-up that did for Liz Truss and her Chancellor, Kwasi Kwarteng. The markets demanded the opinion of the OBR and there was none — they’d gone ahead without consulting the independent body. Now Sunak and Hunt are working closely with the OBR, co-operating fully with their unelected number-crunchers, bringing them into the government’s thinking.
But it’s possible to go back, to revisit and to compare OBR forecasts with what really happened — and they don’t make for pretty reading. The average size of an OBR forecast error concerning the budget deficit for a “current year” is 0.5 per cent of GDP, 1 per cent of GDP for “one year ahead” and 1.8 per cent of GDP for “two years ahead”.
In terms of the present GDP, that would be equivalent to £11bn, £21.5bn and £38.6bn, respectively. In other words, huge numbers — and significant too, when there is talk of a £50bn black hole in the public finances.
These are averages, don’t forget. Since the OBR’s creation in 2010, in three out of 23 cases the in-year forecast error was 0.75 per cent or larger, of GDP. In seven out of 21 cases the one year ahead forecast error was more than 0.75 per cent of GDP.
And in eight out of 20 cases, the two years ahead forecast error was more than 0.75 per cent of GDP. Even taking out the two worst forecasts owing to the unexpected downturn caused by the sudden arrival of a pandemic, that would leave six of 18 — one third — of the two years ahead forecasts over the last decade out by more than 0.75 per cent of GDP.
Small wonder that the economist, Dr Gerard Lyons, says: “We should be mindful of using such forecasts to force through austerity or tax hikes.”
Sunak and Hunt, therefore, find themselves applying measures that may plunge the country into recession, based on the conclusions of an arbiter which is itself frequently mistaken.
They are entitled to reflect ruefully that it wasn’t meant to be like this: the OBR was established by George Osborne, when he became Chancellor, to bring some credence to official forecasting, which for years had been subjected to manipulation by a Labour administration and its long-time financial controller, Gordon Brown.
The problem, though, is that in terms of status and reputation the OBR has become too successful and mighty
Osborne’s motives were honourable, although there was also political trickery at play on his part. The OBR and its objectivity gave him the authority he needed to not only drive though spending cuts but also conform to the Tory ideal of reducing the size of the state. And, come the election, it was a counter to Labour and their spending plans — the Tories were able to repeatedly call for Labour’s intentions to be authenticated by the OBR.
The problem, though, is that in terms of status and reputation the OBR has become too successful and mighty. Its rise coincided with a downturn among the public in their regard for politicians — almost as if a policy was not a policy until it received the OBR’s nod.
It wasn’t just the media and British people who grabbed at the notion of a politically neutral watchdog (the OBR’s growing importance came as its chief was Sir Robert Chote, himself a former journalist and press-smart). The international markets, too, came to want and to rely upon the word of the OBR.
So vital has the office become that it’s a moot point as to who is even running the country’s funding. If the OBR decrees taxes must rise and spending must reduce to keep government borrowing under check, then that is what must occur — to go against the finding or to not involve the OBR at all, which is what Truss and Kwarteng did, risks disaster.
Sunak and Hunt will present the budget as theirs, but in fact it’s the OBR that is dictating the contents. That would be fine if it was always right, but sadly and critically as far as this week’s budget and its likely tough steps are concerned, it’s not.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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