Time to wrap up…

MPs have been told that Treasury officials may have broken the law when they failed to alert the Office for Budget Responsibility about £9.5bn of spending that should have appeared in the March Tory budget.

Richard Hughes, the head of the Office for Budget Responsibility, told MPs that the system in which the OBR and the Treasury shared information ahead of the budget had “very clearly broke down.”

That, he said, resulted in officials failing to disclose £9.5bn of spending pressures which the Treasury knew about, which “under the law and under the Act they should have”, Hughes said.

As a result, he said, the OBR is “moving from a system of trust, to a system of trust but verify” in its dealings with the Treasury.

The OBR chief also said the watchdog had expected the markets to react to the budget by pushing up UK bond yields, as indeed happened, as investors were being asked to buy more UK debt.

In other news…

UK borrowing costs have jumped, after an auction of British debt attracted the lowest demand in almost a year.

The US dollar has weakened against other currencies as the US heads to the polls, lifting the pound back over $1.30 for the first time in nearly a week.

Growth in the UK services sector has slowed, while in the US it has hit its highest in two years.

A planned strike by tube drivers that threatened to halt all London Underground services on Thursday has been called off, their union announced.

Shares in pharmaceuticals giant AstraZeneca have dropped over 8%, following a report that dozens of senior executives at its China unit could be implicated in the largest insurance fraud case in the country’s pharma sector in years.

AstraZeneca’s tumble has weighed on the London stock market, where the FTSE 100 index has just closed 11.85 points lower at 8172, a drop of 0.14%.

Shares are rallying in New York, though, where the S&P 500 index is up almost 1%.

A planned strike by tube drivers that threatened to halt all London Underground services on Thursday has been called off, the Aslef union has announced.

Talks between Aslef officials and Transport for London management on Tuesday led to a “significantly improved offer”, according to the union.

Aslef had called two 24-hour walkouts in the capital, for Thursday and Tuesday next week.

Finn Brennan, Aslef’s full-time organiser on London Underground, said:

“Following fresh talks, and an improved offer, ASLEF has agreed to suspend our planned industrial action on London Underground.

“Details of the offer will be discussed with our reps at a meeting on Thursday. We are pleased that this progress has been made and that strike action has been averted at this time. We are not able to reveal any further details until after that meeting with our reps on Thursday.”

UK government borrowing costs are rising, after today’s debt auction drew fewer bids than normal (see 1.26pm).

The yield (or interest rate) on five-year UK government bonds has risen to 4.42% today, which would be the highest closing level since November 2023.

10-year bond yields have also risen towards the one-year highs seen after last week’s budget, at 4.51%.

This has pushed the gap between UK and German borrowing cost to its highest in a year (that also reflects forecasts that eurozone interest rates could fall faster than in the UK).

Newsflash: The US services sector grew at the fastest rate in over two years in October.

The closely watched Services Sector PMI report from the Institute of Supply Management shows that economic activity in the services sector expanded for the fourth consecutive month in October.

The Services PMI has risen to 56%, which is the highest reading since July 2022 and indicates the sector expanded for the 50th time in 53 months.

That’s up from 54.9% in September, indicating growth in the sector picked up. Perhaps a sign that Joe Biden will leave an economy in pretty good shape to his successor….

Firms reported a slowdown in new order growth, but firms also took on more staff last month.

Fourteen industries reported growth in October, up two from the 12 industries reporting growth in September.

Some companies reported that recent hurricanes have affected supplier deliveries, but also lifted demand in the equipment sales and rental businesses.

The US dollar is losing a little ground; it’s now down about 0.3% against a basket of other major currencies.

This has lifted the pound back over the $1.30 mark for the first time in nearly a week.

Bitcoin is rallying, though – it’s up over 4% today and just traded over the $70,000 mark.

Over in New York, stocks have opened a little higher as traders await the results of the US election.

The Dow Jones Industrial Average, which tracks 30 large US companies, rose 40.9 points, or 0.10%, at the open to 41835.49.

The broader S&P 500 index gained 9.7 points, or 0.17%, to 5722.43​, while the tech-focused Nasdaq Composite picked up 70.7 points, or 0.39%, to 18250.707 at the opening bell.

The outcome of the US election will impact financial markets around the globe in two ways, says Kathleen Brooks, research director at XTB:

Short term: Global financial markets could be hit by volatility if there is a surprise outcome. As we have mentioned, we think that financial markets are pricing for a Trump victory. Thus, a win for Harris could lead to a short term sell off in the dollar, gold and potentially in US stocks. This could also boost global equities, as Harris is seen to be less tempted to slap tariffs on imports. Chinese stocks could rally sharply, along with key European and UK firms.

Longer term: A win for Trump, could see the dollar pop higher, but we think a win for the former President could have a long-term impact on global financial markets due his plans for tariffs. A US system of import tariffs would reorder global trade flows and hurt global growth.

The Treasury Committee are now holding a second hearing on the budget, with some leading UK economists.

They’ll hear from Mike Brewer, interim chief executive of Resolution Foundation; Paul Johnson, director of the Institute for Fiscal Studies; Yael Selfin, vice chair and chief economist at KPMG; and Andy King, specialist partner at Flint Global.

New economic data today has shown that the UK services sector slowed last month.

Data firm S&P Global reports that its UK service PMI, which measures activity in the sector, dipped to 52.0 in October, down from 52.4 in September.

That’s the weakest reading since last November; S&P Global says it shows “weaker growth momentum in October”, it says, with the PMI still above the 50-point mark.

New orders growth slowed, despite a solid rise in new work from abroad, and firms said they cut their workforces for the first time this year.

Some service firms said heightened business uncertainty ahead of the Autumn Budget was a factor delaying spending decisions among clients. Some firms also noted that geopolitical tensions had weighed on willingness-to-spend.

Tim Moore, economics director at S&P Global Market Intelligence, explains:

The wait for clarity on government policy ahead of the Autumn Budget was widely reported to have weighed on business confidence and spending. Broader geopolitical concerns and forthcoming US elections also added to a sense of wait-and-see on business investment decisions in October. At the same time, cost of living pressures remained a constraint on household spending.

With service providers grappling with softer new order growth and less upbeat business activity expectations for the year ahead, the latest survey pointed to a decline in staffing numbers for the first time since December 2023. A number of firms also noted budget constraints due to elevated salary pressures.

Treasury committee chair Meg Hillier takes the OBR back to its claim that the Treasury did not give you all the information should have done under the Act (see 11.27am).

Q: In your view, did think the Treasury broke the law when preparing the spending forecasts it passed to you in preparation for the March budget?

OBR chair Richard Hughes replies that “they didn’t provide all the information that we require to do our forecast”.

This was a “material amount of information” which would have led to a “materially different forecast” had the OBR had it.

Hughes adds that he thinks every public servant does their best to obey the law, and respect its spirit and letter.

But there was a “systemic failure” in putting together the March forecasts, and potentially a “misunderstanding of expectations on both sides about what needed to be provided”, Hughes suggests.

Q: So what went wrong? Did the Treasury break the law?

Hughes suggests there may have been a “misunderstanding” about how the law should be interpreted, regarding sharing information about departmental spending.

Liberal Democrat MP Bobby Dean then asks the OBR about the impact of raising employers’ national insurance contributions.

OBR member professor David Miles says the OBR’s analysis shows that in the long run, the majority of the impact is that real wages will be lower than they would otherwise of been.

[reminder: Rachel Reeves announced that the main rate of employers’ National Insurance contributions will increase from 13.8% to 15% from April 2025, and lowered the threshold at which an employer has to pay on a worker’s salary from £9,100 a year to £5,000.]

The OBR estimates that three-quarters of the impact of raising employers’ NICS payments falls on workers, with a quarter showing up in lower profits.

Miles says:

Nobody escapes completely, but more of it falls on workers in terms of lower real wages than in lower profits.

The impact in the short-run is a bit different, though, as employers aren’t going to hit workers with immediate pay cuts. Instead, it’s likely that pay rises will be lower in the next few years, to cushion the impact.

Richard Hughes adds that the OBR relies on the Treasury being forthcoming on their best estimates of the costs of government policies and the risks around them.

In this case [the March forecasts], that does not seem to have happened.

Conservative MP John Glen asks about the political row over the ‘black hole’:

Q: Isn’t it highly regrettable that you’ve been sucked into this political debate about a black hole; can that be avoided in future?

Hughes says “what happened” is regrettable.

There was a serious overspend against our forecasts, we’ve needed to make serious adjustments to that, governments had to make serious adjustments to policy.

The OBR doesn’t have the luxury of standing on the sidelines on these things, Hughes points out – it has to draw up forecasts for departmental spending. If there are errors, or undisclosed information, it has to correct for that and explain itself.

Q: Ministers relied on officials to provide whatever information the OBR requested – so how can information not be disclosed, given the integrity of Treasury officials?

Hughes replies that the OBR relies on the Treasury to disclose the information it has at the time about departmental spending, adding:

That information was not shared with us at the time of the March budget, and it was information that was available to the Treasury at the time.

The Treasury committee then turns to the ‘black hole’ which Labour claims it found in the public finances when it took office.

OBR chief Richard Hughes explains that the OBR is changing the way it interacts with the Treasury when drawing up its economic and fiscal forecasts.

He tells MPs:

We are moving from a system of trust, to a system of trust but verify.

That will see the OBR ask more questions about the pressures on departmental budgets, and what decisions on, for example, pay, will mean for those budgets.

That, Hughes says, should mean that the “failure of oversight that very clearly happened in March doesn’t happen again.”

Hughes explains:

It will involve greater scrutiny on our part of departmental spending limits, and the preparations of departments’ budgets, to make sure that those kind of pressures do get disclosed to us, and we have a conversation about how they will be managed and offset, and what it means for departmental overspending or underspending.

Hughes outlines how the OBR had built up a way of working with the Treasury over the years, which was a “high trust relationship with the Treasury” that expenditure pressures on departments were being well managed and managed within the spending total allocated to departments.

He admits:

That system very clearly broke down.

Hughes explains that the OBR was not aware of the extra pressures on government departments when, in July, chancellor Rachel Reeves told MPs there was a £22bn black hole in the public finances.

After that happened, Hughes says the OBR asked the Treasury what they were aware of when the fiscal watchdog put its March forecasts together.

That uncovered “£9.5bn of net [spending] pressure which they did not declare to us, which under the law and under the Act they should have”, Hughes says.

Labour MP Dr Jeevun Sandher then asks about the impact of the UK’s health crisis on the economy.

Q: Is it fair to say that potential output is limited by the state of our NHS, with the highest waiting lists in history?

OBR chief Richard Hughes says hundreds of thousands of people are out of work due to health reasons.

But most people on the waiting lists are not those people, Hughes adds: they’re people who are older, who weren’t working, or are still working even though they need healthcare.

So fixing the lengthy waiting lists might have some impact on the labour force.

Liberal Democrat MP Chris Coghlan turns the OBR’s attention to the rise in government borrowing costs after the budget.

Q: How worried are you about the increase in gilt yields – they rose by 10 basis points on Friday, compared to 40 points after the 2022 mini-budget?

OBR chief Richard Hughes says the fiscal regulator had expected the budget to be “a surprise to the markets”, due to the volume of government debt (gilts) that are to be issued.

He tells MPs:

“To a large extent the gilt market response was just a response to higher volumes – if there are more gilts on the market that drives down the price.”

[Reminder: the yield (or interest rate) on a government bond measures the cost of borrowing, and rises when prices fall].

Hughes adds that “the front-loading of the expenditure” in Rachel Reeves’s budget was also a surprise.

The volume that the market was being asked to take down this year and next was more than they expected.

He explains that the OBR had expected the gilt market to be a bit surprised – that’s why the OBR raised its forecasts for UK interest rates by a quarter of one percentage point.

Hughes adds that gilt yields have now settled broadly in line with its forecasts, tho “maybe a little bit above, but not significantly”.

Today, UK 10-year gilts are yielding 4.48%, up from 4.31% the day before the Budget, but below the 4.53% they hit after the fiscal event.

The Treasury Committee kicks off its hearing with the OBR by asking about its forecasts for GDP growth, which are “typically more optimistic” than the Bank of England’s.

Richard Hughes says the OBR has revised its forecast for growth this year up to 1.1%, after the “relatively disappointing” growth of almost 0% last year.

He tells MPs:

We do think that the combination of the momentum coming into this year plus the boost given to GDP by government policies boosts that growth rate up to 2% going into next year.

But, Hughes then cautions that this is mostly a “temporary boost to output”, due to the government increasing spending by more than taxation in this budget.

That raises GDP by half a percentage point at its peak, but it’s a temporary effect, with growth expected to dip back to 1.5% at the end of the forecast horizon (to 2029-30). That, Hughes points out, is below its estimated long-run potential growth of the UK, of around 1.66% per year.

Conservative MP John Glen probes the OBR on this….

Q: Your assessment over the forecast period is that growth will be 0.7% lower than expected at the March budget. The government, though, would argue that their supply-side reforms would have a positive effect on growth – why have you not factored that in?

OBR member David Miles says the substantial investment in public investment will lift growth, but that takes time to come though – so most of the impact on growth will arrive beyond the five-year horizon.

But on the downside, Miles says the increase in employers’ national insurance contributions will dampen labour market growth, which hurts the UK’s productivity in the long term.

Miles adds that productivity growth has been “absymal” in the last 12 years, for various reasons (such as Covid, and the invasion of Ukraine). The OBR takes the view that the next 10 years will be more positive – and roughly halfway between the dismal last decade and the brighter 40 years before that.

Over in parliament, MPs on the Treasury committee are taking evidence from the Office for Budget Responsibility about last week’s budget.

They’ll hearing from Richard Hughes, Chair of the OBR, along with professor David Miles and Tom Josephs, who are both members of the Budget Responsibility Committee.

The committee says its scrutiny is “likely to examine whether the Chancellor’s new fiscal rules are right for the health of the UK economy and changes to spending, taxation and debt”.

You can watch it live here:

Looking back at the US election, bond trading giant Pimco suggests that the potential economic impact of the candidates’ policies could be less than the market assumes.

Libby Cantrill, Pimco’s head of U.S. public policy, points to four areas where the choice between the Republican and Democratic candidate won’t make a difference:

Specifically, 1) deficits will be higher under either Kamala Harris or Donald Trump – and the differences between the two are not likely to be that much different due to the narrow Congressional majorities that either will likely have to contend with);

2) both candidates will have to deal with taxes in 2025 due to the expiring tax cuts under the Trump Tax Cuts and Jobs Act, and in either case, we are likely to see most, if not all of the tax cuts be extended;

3) both candidates will continue to be hawkish on China; and

4) the Fed will remain independent due to institutional guardrails and no current vacancies (and despite some jawboning that we can expect if Trump wins in particular).

But there are (clearly!) also large differences between the two candidates.

And on economic issues, Cantrill identifies three:

1) tariffs, which are likely to stay high under Harris on China but will likely go higher under Trump and other countries are likely to be subject to increased tariff pressure as well

2) immigration, although we would note that for Trump to do some of what he is said he will do would largely require Congress, and:

3) regulation, where we would expect Trump to have a lighter touch (we would note that reversing regulation is hard, although there would undoubtedly be more regulatory certainty under Trump from the absence of new regulation as well as rolling back Biden executive orders).

Just in: Car sales in the UK fell last month, despite a pick-up in registrations of electric vehicles.

Industry group the SMMT reports that businesses, fleets and private buyers registered 9,241 fewer vehicles last month than in October 2023, bringing total new registrations down to 144,288.

Sales of diesel-powered cars fell by 20%, with petrol down 14% year-on-year.

But…. sales of battery electric vehicles (BEVs) rose by 24.5% year-on-year, helped by “a raft of new models driving the strongest growth this year”. That lifted Bev’s share of the market to 20.7%.

The SMMT warns, though, that manufacturers are subsidising the transition to electric cars with “billions in unsustainable discounting”, adding:

One in five BEV models now retailing for less than the average petrol or diesel but consumer support still needed for fast and fair transition.

Vodafone and Three have welcomed the CMA’s new Remedies Working Paper on their merger.

In a statement, the two (soon to become one?) mobile operators say they believe the Paper “provides a path to final clearance”.

They say:

The Parties welcome the CMA’s recognition that the significant improvements in network quality delivered by their Joint Network Plan will “boost competition between mobile network operators in the long term and benefit millions of people who rely on mobile services.”

The merger is a once-in-a-generation opportunity to transform the UK’s digital infrastructure – which lags significantly behind its European peers – and for more than 50 million UK customers to benefit from a vastly better mobile experience.

Back in the UK, the £15bn merger between Vodafone and Hutchison’s Three UK has moved closer to being cleared.

The UK’s competition authority has declared today that the merger could proceed “if appropriate remedies are implemented,” including upgrading the merged company’s network to speed up the roll-out of 5G services.

The Competition and Markets Authority says:

The CMA has today set out a Remedies Working Paper to seek views on the effectiveness of a proposed remedy package.

It provisionally finds that a legally binding commitment to undertake the network integration and investment programme proposed by Vodafone and Three would significantly improve the quality of the merged company’s mobile network, boosting competition between mobile network operators in the long term and benefiting millions of people who rely on mobile services.

Previously, the CMA had sounded more concerned about the deal – saying it could hurt competition and push up bills.

Back in July, Vodafone CEO Margherita Della Valle told the Guardian that the Labour government will fail to achieve its promise of nationwide access to 5G if the deal was blocked.

With Americans heading to the polls today, the financial markets are in a state of high excitement over the race to the White House.

Market volatility has been picking up in recent days, as investors have tried to assess the likely winner of today’s presidential election, and how congressional elections may play out too.

Yesterday, the US dollar dipped to a two-week low, after a poll showed Kamala Harris with a surprise three-point lead over Donald Trump in Iowa. The greenback is flat this morning.

Stocks fell on Wall Street last night too, with the Dow Jones industrial average losing 257 points or 0.6% to 41,794 points.

As the polls have been so tight, traders are concerned we will not know the result for several days or even longer.

Erik Knutzen and Jeff Blazek, co-CIOs of multi-asset strategies at Neuberger Berman, told clients that the uncertainty could last days, or even weeks:

Uncertainty around control of Congress, particularly the House, could also extend longer than uncertainty over who is in the White House. And a contested result could add still more days or weeks of market volatility.

We have been anticipating a pick-up in volatility as the election nears, and this week is likely to see a peak in that volatility, lasting until we have an unambiguous outcome. This is a key reason why we have been counselling against taking substantial active positions—particularly active positions tilted to one or other election result.

The exception would be in assets that can help to diversify portfolios and dampen their volatility, such as gold and other commodities.

Anxiety over the election has already contributed to US government bonds suffering their worst month in two years in October.

Betting markets have narrowed significantly on the eve of Tuesday’s presidential election, eroding Trump’s lead over Harris as Americans cast their votes.

Last night, Trump and Harris have held their final election rallies.

Harris ended with a message of unity, telling supporters in Philadelphia that her campaign was ending “with energy, with joy,” adding:

“Instead of stewing on an enemies list I will work on my to-do list.”

Trump has just wrapped up in Michigan, where he insulted President Joe Biden, former House Speaker Nancy Pelosi, representative Adam Schiff, California governor Gavin Newsom and Harris, and also promised action on immigration, saying:

“The day I take office the migrant invasion ends.”

You can track all the action in our US election liveblog:

Boeing’s CEO Kelly Ortberg has said he was pleased the plane-maker’s union had ratified the latest pay deal.

In a message to staff, Ortberg said:

“While the past few months have been difficult for all of us, we are all part of the same team.

There is much work ahead to return to the excellence that made Boeing an iconic company.”

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Boeing’s management, and airline operators across the world, will be letting out a large sign of relief today, after its factory workers agreed to end their strike after 53 days.

West Coast factory workers have accepted a pay deal, ending the walkout that began in mid-September and halted much of the company’s jet production.

Boeing’s union said members voted 59% in favor of the new contract, which offers a 43.65% compounded wage increase over four years – 13%, 9%, 9%, and 7%.

Jon Holden, the union’s lead negotiator, told members:

“This is a victory. We can hold our heads high.

Now it’s our job to get back to work.”

Holden has also said that the new contract can “create a new foundation”, to help Boeing return to building the highest quality and safest airplanes in the world.

He says:

“Working people know what it’s like when a company overreaches and takes away more than is fair. Through this strike and the resulting victory, frontline workers at Boeing have done their part to begin rebalancing the scales in favor of the middle class – and in doing so, we hope to inspire other workers in our industry and beyond to continue standing up for justice at work.

Through this victory and the strike that made it possible, IAM members have taken a stand for respect and fair wages in the workplace. Our members perform high quality and flight critical work for the airplanes we build and deserve a return on their labor investment that provides for the quality of life worthy of that labor.

The breakthrough eases the pressure on new Boeing CEO Kelly Ortberg after two previous offers were voted down in recent weeks.

Airlines will also be relieved, after being hit by delays to Boeing’s shipments.

Yesterday, Ryanair said continued problems at Boeing meant it wouldcut its growth plans for next year.

The agenda

• 9am GMT: UK new car sales for October

• 9.30am GMT: UK Service sector PMI

• 10am GMT: Treasury committee hearing with Richard Hughes, chair of the Office for Budget Responsibility, on its economic and fiscal forecast.

• 2pm GMT: Treasury committee hearing with independent economists about the budget