11 June 2019 – Boris promises tax cuts to high earners, UK trade deal with South Korea, Trump calls off tariffs on Mexico and Thomas Cook in takeover talks..
Last week as the nation focused on President Trump’s visit and the D-Day celebrations, with very little fanfare, Theresa May officially stepped down as leader of the Conservative Party. She will remain prime minister until her successor is chosen.
All nominations have now been received and there are 10 candidates in the race. In the first stage of the contest over 300 Conservative MPs will vote for their preferred candidate in a series of ballots. The first ballot is this Thursday and a succession of ballots will follow until the number is whittled down to two. It will then be up to Conservative party members to choose the winner and we can expect to hear the result of that at the end of July.
Where the candidates stand on Brexit will naturally be a key issue, but other matters such as how they would run the economy will also be in focus.
Boris Johnson kicked off his campaign this week with a promise to cut income tax for high earners. Writing in his Telegraph column on Monday he pledged to raise the earnings threshold for higher-rate 40% tax payers from £50,000 to £80,000. This would hand a tax cut to around 3 million people currently regarded as higher earners, and would cost the exchequer £9.6bn a year.
This is in stark contrast to Labour Leader Jeremy Corbyn, whose party is currently leading the Conservatives in the opinion polls. In a tax policy that is the mirror-but-opposite of Mr Johnson’s, Mr Corbyn wants to make those earning upwards of £80,000 pay more. He would do this by lowering the 45% tax-rate from its current £150,000 level to £80,000, and then introduce a new higher 50% rate on those earning over £123,000.
Rival candidate Dominic Raab has also pledged to cut income tax. However his plan would be to focus on the lower end and cut the basic rate of income tax from 20% to 15%. Under Mr Raab’s plans, the basic rate of tax would fall by a penny a year, until it reaches 15p.
Meanwhile Michael Gove, another contender in the leadership contest, has announced he would seek to replace VAT with a sales tax if he became prime minister. However Mr Gove’s campaign is increasingly looking in doubt as he continues to face scrutiny around drug taking twenty years ago.
In other news, the UK has signed a post-Brexit, free trade deal with South Korea - home of some of the world’s leading electronics and car companies such as Samsung, LG, Hyundai and Kia.
It’s the first major trade deal the UK has secured in Asia since the referendum. Trade between the two countries was worth around £15bn last year and among EU members the UK is South Korea’s second-largest trading partner after Germany.
Korea exports mostly cars, car components, ships and aircraft parts to Britain, and imports mainly crude oil and automobiles from the UK.
The deal means the UK will be able to trade with Korea on the same terms as the existing deal created in 2011 between Seoul and the EU. Since then the value of trade between the UK and Korea has more than doubled, so this should provide some certainty for trading between the two nations once the UK leaves the European Union.
Meanwhile, across the Atlantic, President Trump has called off his threat to impose a 5% tariff on all Mexican goods. This was due to start on Monday, with a 5% tariff that would rise gradually to as much as 25% until the president was satisfied Mexico had taken sufficient steps to curb illegal immigration to the US.
Late on Friday President Trump suspended tariffs on Mexican goods after the country promised to take what the US president called “strong measures” to stop migration at America’s southern border. This welcome news ends eight days of uncertainty since the levies were announced.
Mexico’s peso rebounded on Monday following the news, rising as much as 2.5% against the dollar, gaining back all the losses that had been made since the tariffs were first announced.
However weaker-than-expected US jobs growth in May has intensified the debate over whether the Federal Reserve needs to lower US interest rates to maintain growth. The US economy added just 75,000 jobs in May, a sharp fall from over 200,000 that were created in April.
While the unemployment rate held steady at 3.6%, the disappointing data will add to worries that the US economy may be slowing and losing some of its momentum.
All eyes will be on the US inflation data on Wednesday, which could provide justification for the Fed to begin cutting rates. According to futures prices the chance of a rate cut as soon as July now stands at 65%.
One person who would welcome a rate cut is Donald Trump who has been very critical of the Federal Reserve raising rates. In an interview to CNBC on Monday he said the Central Bank was being “very, very disruptive” by raising rates too fast and giving China an edge in trade negotiations as a result.
Back home, it’s a relatively quiet week for company results. On Thursday we’re due to hear from DS Smith - Britain’s biggest packaging maker and supplier to online giant Amazon.
In March, the FTSE 100 company agreed to sell its plastic division to private equity group Olympus Partners for over half a billion dollars. The company said that selling the unit would allow it to reduce its borrowing following its recent acquisition of Spanish rival Europac. It would also allow it to focus on its core fibre products as environmental concerns on plastics rise.
DS Smith warned last year that its expansion plans in the UK had been “heavily scaled back” due to the uncertainty surrounding Brexit. However, it recently said it expected margins to improve further in the second half, and it should meet market expectations.
Also on Thursday we can expect an announcement from PZ Cussons, maker of consumer products such as Imperial Leather soap. In January the company downgraded its profit expectations, driven by weakness in Nigeria, which included disruption at the country’s ports.
Finally, with the summer holidays fast approaching, troubled tour operator Thomas Cook has received a takeover approach for its tour business from China’s Fosun. Yesterday shares in Thomas Cook closed up 17% on the news. The company has been struggling with rising fuel prices, Brexit uncertainty and a weak pound making holidays abroad more expensive. It has issued three profit warnings this year and is struggling to reduce its debts. Fosun is already Thomas Cook’s largest shareholder and also owns the Club Med holiday business as well as Wolverhampton Wanderers football club.
However unions have warned the break up puts 21,000 jobs at risk. Manuel Cortes, general secretary of the TSSA union, warned both the tour operator and its potential Chinese buyer that the union would fight very hard against any new job cuts.