If the Chancellor was still on a high from last week’s big growth-focused speech, the Bank of England has just pulled her back down to earth and, for good measure, poured a bucket of cold water over her.
This is a time for hard truths and none harder than the hammer-blow fact that the Bank of England has slashed its economic growth forecast in half.
Having previously thought that the UK economy would grow 1.5 per cent this year the Governor Andrew Bailey broke the news yesterday that they now anticipate a rate of just 0.75 per cent – barely noticeable.
Yes, the Bank cut interest rates which is good news for some mortgage borrowers and borrowers but they did it precisely because the economy is in the emergency room; inflation could reach 3.7 per cent towards the end of this year, unemployment is rising and in the restrained words of the Bank of England – business and consumer confidence has declined – since last October’s Budget.
In the run up to the Budget City AM warned that the government’s miserable doom and gloom tone would spook businesses and consumers – and of course it did; investment decisions were deferred, expansion plans put on hold, there was a palpable nervousness right throughout September and October and the consequences of that became clear in November’s growth figures – just 0.1 per cent – and we’ll get December’s data next week.
Then the Budget itself rained tens of billions of pounds of new taxes on businesses along with a mountain of additional costs and – as what was feared became real – employers across the country began to react.
Survey after survey has shown us that firms began this year by letting staff go, cancelling investment and passing on cost increases – and just this week we got the latest data from the manufacturing and services sectors of the economy – not good – and now of course the Bank of England has totted up all this misery and concluded that the economy is basically not going to grow this year.
So, growth is stagnating and inflation is lingering – there’s a word for this, and it’s not a pretty one – stagflation – a disastrous state of affairs – now we’re not in it yet, but we can certainly see it on the horizon.
The question is, can we avoid it?
Well we know that the government is going to have to take some dramatic action next month once the OBR – the watchdog of the government’s tax and spend plans – publishes its own assessment of growth in the year ahead.
Economists fully expect them to conclude that, thanks to high borrowing costs and poor growth, Rachel Reeves has lost her so-called fiscal headroom – basically how much room she has to spare in order to stay within her self-imposed iron-clad rules regarding the public finances.
After the Budget this headroom was around £10bn but the thinking now is that it could in fact have turned into around minus 20 billion – in other words, a black hole.
A £20bn black hole in the public finances. Where have we heard that before? The last time the Chancellor claimed to have identified one, left over from the previous lot, she set about launching a £40bn tax raid on business.
Will she do so again? She says not. Though she hasn’t exactly promised not to. This brings us back to the dramatic action expected in March once the OBR shows its workings; how will the Chancellor balance the books? She had banked on economic growth, but her policies have destroyed it so – spending cuts or tax hikes?
How about spending cuts in the Spring followed by tax hikes in the autumn? Our latest monthly poll of voters carried out by Freshwater Strategy reveals that the public are wise to this risk; with a majority now expecting hikes to corporation tax, income tax and VAT during this parliament. That same poll – of the general public, not just City AM readers – revealed that 70 per cent of people have no confidence in the Chancellor or the government’s economic policy.
But here’s another option for the Chancellor: cancel the deeply, deeply damaging tax rises and regulatory burdens due to kick in over the next few months.
Recognise that the situation has changed, the economy isn’t able to bear the burden right now – blame Trump if you want, I don’t care, blame the Tories if need be, but find a way out of the mess that has been made.
Growth in the future is great, I’ve said it before, build the houses, build the roads, build the runways, build the nuclear power stations – another great policy announced this week – but, if the government persists with its growth-destroying policies in the here and now then it’s not crazy to ask – what exactly are these future power stations going to power?