HAMISH MCRAE: Remember, cut taxes in November
Looking ahead: Chancellor Jeremy Hunt
Interest rates at their peak? Taxes too? That’s the next issue. We know quite well what will happen with monetary policy in the coming months. The Bank of England is part of the global trend of stabilizing interest rates, along with the US Federal Reserve, the European Central Bank and the other major central banks.
There may be an additional quarter-percentage-point increase here and elsewhere this year, but long-term rates have peaked. I expect the first cut from the Monetary Policy Committee to come in the spring.
Now the focus will be on fiscal policy, which, given the election cycle, is highly political. November’s Autumn Statement is, in practice, the last chance the Government has to get its speech to voters. So tax cuts or what?
The Government’s latest accounts were published on Thursday but, unsurprisingly, given the focus on the interest rate decision, they went largely unnoticed.
They were, surprise, surprise, much better than the Office for Budget Responsibility (OBR) predicted. Not only are tax revenues rising, with VAT revenues 12 percent higher than expected, but last year’s fiscal deficit has been revised even further downwards. Borrowing last year is now believed to have been almost £24bn lower than estimated by the OBR in March.
This tells me two things. One is that if tax revenues are strong, the economy should be growing at a decent pace. The other is that the OBR remains too pessimistic about the national finances.
This leads to the question: how much space will Jeremy Hunt have when he draws up the Autumn Statement? The legacy of a year ago, the Truss/Kwarteng mini-budget, still hangs over this Government. So anything the Chancellor does must be backed by the OBR, even if he remains in Eeyore mode. (This does not mean reaching the OBR; it is much better to have the nation’s finances overseen by an Eeyore than by a Tigger.)
My guess is that there will be some room for tax cuts within the broad limitations that the Government has set for itself, and that the financial markets – which have to finance their borrowing – will accept.
Incidentally, there are small notes of confidence in the bond market, with the UK ten-year bond yield now down to 4.3 per cent, lower than the equivalent US Treasury yield of 4.5 per cent. . Our peak was 4.75 percent in August.
Obviously, any decrease in the cost of borrowing further helps the Government and also helps reduce our mortgage rates. It’s not a huge relief for the people who will have to fix it again this fall, but it is a modest help.
The debate will now be about how to use the room for maneuver that the Chancellor has. The key will be to use it not to increase demand (Liz Truss’ idea was to boost growth by giving people more money to spend) but rather to increase supply. We don’t have a demand problem, because one of the wonderful things about the great British consumer is that if they have cash they spend it. Consumer confidence has recovered decently and is now at its highest level since January.
But we do have a supply problem, particularly labor. There are a million vacancies open and companies in many sectors, from high-tech to hospitality, say they can’t find suitable people.
There is the problem of long-term illnesses, as Alex Brummer writes on page 85. There are people who have retired early, more than half a million people have made that decision and some at least now regret it. We need to ensure we have a properly trained and qualified young workforce, as many of our qualified people in areas such as engineering are reaching retirement age. My colleague Ruth Sunderland argues that we should encourage more girls to go into science, technology and engineering, and that we should inspire all young people to be ambitious, believing that work can and should be fulfilling.
We are still beginning to realize the social damage caused by pandemic shutdowns, along with the more obvious economic damage, and to recognize that young people entering the workforce have been greatly affected by the dislocation of their educational and career trajectories.
Addressing this is, in many ways, more difficult than the macroeconomic challenge of driving growth.
There is too much to do. Of course, we are not alone in facing the dislocation and damage of the pandemic and we would do well to worry about a global slowdown this winter. I am concerned about the delayed effect of the increase in interest rates that has been imposed on us.
But improving finances provide an opportunity for this Government, and come November we will see how well it can take advantage of it.