• Overnight news: UST Secretary Bessent said “not worried about the markets”; US strikes Houthis; Chinese economic data beats; China to announce steps to revive spending; US President Trump to speak to Russia President Putin Tuesday
• Data and events: US retail sales
• UK Economic: Welfare spending in the crosshairs ahead of Spring Statement
In markets, US equity futures are down 0.65% and 0.1% respectively, whilst most Asian equity indices are in the green. 10y UST yields fell 2bp to below 4.3% and the DXY is unchanged. Brent crude contracts rose 0.6% to $71/bbl and gold gained 0.2% to $2990/Oz.
US Treasury Secretary Scott Bessent said, regarding the recent weak US stock market performance, that “corrections are healthy, they are normal” and “I‘m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great”, in a Sunday TV appearance on NBC. He added that the American Dream isn’t contingent on being able to buy cheap goods from China, “It’s mortgages, it’s cars, it’s real wage gains”.
Chinese industrial production, retail sales and fixed investments in February all beat expectations. China will also announce steps today to revive spending by boosting incomes, stabilizing markets and offering incentives to raise the birth rate, the official Xinhua News Agency reported on Sunday.
On Saturday, US President Trump, in a post on Truth Social, said he ordered “decisive and powerful” action against the Houthis with him saying the group has “choked off shipping in one of the most important Waterways of the World” and attacks on American vessels “will not be tolerated.” The US defence secretary said on Sunday the military strikes will be “unrelenting” with the campaign potentially continuing for weeks. On Sunday, the Yemeni Armed Fo rces said it retaliated by launching missile and drone attacks against the USS Harry S. Truman aircraft carrier twice in 24 hours.
US President Trump said he will speak with Russian President Putin on Tuesday to discuss an end to fighting in Russia's war in Ukraine, as reported by Bloomberg.
UK PM Sir Keir Starmer said military planning to protect a potential Ukraine ceasefire is moving to an "operational phase" after a virtual meeting with 29 other world leaders over the weekend, as reported by BBC, and they will tighten restrictions on Russia to draw Putin in to talks. Military chiefs from about 30 Kyiv allies will hold a fresh “operational planning meeting” in London on Thursday.
U.S. retail sales are expected to rise 0.4% m/m in February, partially recovering from January’s contraction. This growth is largely fuelled by stronger auto sales and increased gas station sales.
"We need to spend more on national defence, we need to reform our public services, and we need to reform our broken welfare system.” UK Chancellor of the Exchequer Rachel Reeves
This week could mark one of the most significant interventions ahead of the Spring Statement on March 26 th with UK Secretary of State for Work and Pensions Liz Kendall reportedly set to give a speech setting out significant welfare reforms to generate savings ahead of the Chancellor’s statement.
Ahead of the Spring Statement the government’s focus is increasing ly on spending control. The Chancellor’s statement isn’t intended to include major policyannouncements as the government moves toward a single fiscal event per year – a Budget in the Autumn. However, given that the latest Office of Budget Responsibility (OBR) forecast for the public finances are expected to show that her ‘fiscal headroom’ against her fiscal targets has either been eliminated entirely or significantly reduced, the Chancellor is likely to be forced to do more than just present the latest official OBBR forecasts for the public finances to parliament.
Looking to hold off until the autumn to announce tax changes, however, means focusing on spending now. The government has mad e much of the fact that it is adapting a ‘zero based accounting’ approach to the upcoming spending review but that won’t be published until June 11 th and in any case, its main purpose is to divide the spending envelope announced at the Autumn 2024 Budget between departments and government priorities.
So the focus has shifted in recent weeks to looking for savings from welfare spending. As background, UK government can be di vided into two broad categories.
Departmental Expenditure Limits (DEL) - more commonly known as departmental orday-to-day spending. Departmental spending only accounts for around 40% of all government spending but it is the portion of spending that the Treasury has most control over and which is covered by multiyear spending reviews (such as the one scheduled for publication on June 11 th) as its lends itself to multi-year planning.
Annually managed expenditure (AME) - This is spending that is less easy to predict and includes welfare and debt interest spending as well as other items such as public sector pensions and student loan book. Welfare spending is by far the largest componen t of AME accounting for 40% of all AME spending and around a quarter of total government spending overall.
In turn there are two main elements of welfare spending 1) spending directed at pensioners which mainly consists of the state pension and 2) spending directed at people of working age. And the focus of this week’s announcement is on the latter.
Data from the Department for Work and Pensions (DWP) as shown in Exhibits 1 & 2 shows that spending on welfare payments has increased (in real terms) from £180bn in 2000/01 to £290bn this (fiscal) year and is forecast to rise further, to £320bn by 2029/20. As a % GDP, welfare spending by the DWP has increased from 9.1% of GDP in 2000/01 to 10.2% this (fiscal) year.
What the government is focused on in particular is that most of that increase in spending, particularly in recent years, is a result of higher spending directed at people of working age rather than pensioners. Spending on people of working has increased from £80.8bn in 2019/20 (i.e. pre-pandemic) to an estimated £110bn in 2024/26 (both figures in real terms estimated using GDP deflators , in nominal terms spending has increased from £65bn to £107bn over the same period ). Some of that will reflect the impact of inflation on benefit rates, some of it increased case load.
There is said to be a particular focus on one aspect of spending that the government is focused on namely sickness benefits in particular Personal Independence Payments (PIPs). PIPs assist people of working age deal with the extra costs of having a disability. The benefit is not means-tested and is available to those in as well as out of work. Around one-sixth of PIP recipients are in work, a number that has been fairly stable over recent years.
PIPs were introduced in 2013 to replace an existing benefit, Disability Living Allowance (DLA), with the aim of providing better support people in work with the intention of reducing the number of claimants and producing savings. But both the uptake and spending on PIPS has risen sharply post-pandemic, in the current fiscal year the case load expected to be higher than the DLA caseload was at its peak while spending is already higher than that on DLA at its peak.
In particular the government is said to be looking to save £5bn by tightening eligibility, making it harder to qualify for the benefit in the first place, and a further £1bn by freezing payments in cash terms for the next fiscal year.
There are two risks we would identify here. The first is how much of that saving the OBR recognises in its forecasts. As illustrated by the transition from DLA to PIP, g enerating savings from the welfare budget is easier in theory than in practice, or as the OBR would put it ‘subject to delivery risk’. The DWP and Treasury therefore will have to work to persuade the OBR that their plans will deliver. Indeed there is already £1.3bn of wel fare spending savings baked into the OBR’s forecasts from reforms announced by the previous government and due to come into effect from April.
The second is political risks. Cuts to welfare begin to push at the limits of what Labour MPs may be willing to accept. The g overnment has already pushed through cuts to pensioners winter fuel allowance and the overseas aid budget (the latter to fund increased defence spending as discussed in last week’s ‘Big Picture’). The government enjoys a working majority of 167, so could potentially see of even a large rebellion of its own MPs against the measure. However, it would exhaust significant political capital in doing so and t here is already said to be significant disquiet within the cabinet at the plans as currently being discussed. Indeed, weekend newspaper reports said that, in the face of growing internal opposition, the government was considering dropping some aspects of the changes, in particular freezing PIP payments.
