The “chaos” around Budget measures may delay further interest rate cuts as the Bank of England figures through the effects of a flurry of tax rises, despite Rachel Reeves’ stated commitment to set the conditions for borrowing costs to be lowered.
The Chancellor has said curbing the cost of living was a key “priority” at the upcoming Budget as inflation has remained well above the Bank’s two per cent target.
She is expected to unveil targeted policies on stripping VAT from energy bills and taking green levies of the Ofgem price cap in a bid to lower prices for British consumers.
Together with an extension to income tax thresholds, thereby dampening demand, as much as 0.5 percentage points could be taken off headline inflation, according to some City estimates.
But a mixture of policies which could include increasing business rates for large stores, which retailers have warned would push up prices for consumers, and raising sin taxes could have the adverse effect on inflation and spook the Bank from cutting interest rates, economists have warned.
Thomas Pugh, an economist at the accountancy RSM, has warned that the “chaos” around Budget measures, some of which may only be introduced at the end of the forecast period, could leave inflation higher than expected in the shorter term.
“If this year’s Autumn Budget is heavily backloaded, with the majority of the tax increases not coming until later in the decade, then the economic pain will be reduced next year, as would any downward pressure on inflation.
“The Bank of England is unlikely to cut interest rates now to offset a hit to the economy that might come in 2029.”
Budget may unnerve bond vigilantes
City analysts have also warned that upcoming Budget measures may fail to persuade investors that public finances are on a stable footing, undermining efforts to lower government borrowing costs projected to total £110bn this year.
“One reason for this bout of bond market jitters is sticky inflation here in the UK, while another is wider, global concern about levels of sovereign, or government, debt across the G7 and beyond,” AJ Bell’s investment director Russ Mould said.
Mould added that “bond vigilantes” could take a poor judgment of the government’s efforts to boost growth given central banks could be encouraged to keep interest rates low to enable looser fiscal policy to keep growth on track.
“Bond vigilantes fear [high levels of debt and sticky inflation] could lead fiscal policy – and thus governments – to try and dictate to monetary policy and thus challenge the independence of central banks, with the result that chances are taken with inflation through purportedly growth-friendly policies, as well as headline interest rates, which may be kept artificially low in an effort to make governments’ interest bills more manageable.
“Bond markets are sufficiently wary of the UK’s economic credentials that it currently costs the country more to borrow money for 10 years than it does either Portugal, Ireland, Italy, Greece or Spain.”
The Bank of England is widely expected to cut interest rates at the next meeting, although the justifications for it are equally worrying to economists.
Some Bank members have highlighted their fears about high wage growth leading to spiralling price jumps, with an expected increase in the national living wage at the Budget likely to keep policymakers on edge.
But dovish rate-setters at the Bank are expected to persuade colleagues in favour of a cut in December due to rapidly worsening jobs data.
Tories track job losses
Those job losses, which have pushed the unemployment rate up to 5 per cent, have come after businesses were taxed at some £25bn last year through hikes to employers’ national insurance contributions (NICs).
Analysis by the Conservatives has uncovered a list of some 60,000 job losses across businesses ranging from carmaker Ford to the likes of EY, Post Office and Vodafone.
The opposition party’s research spells out the slump in business confidence over the last year in clearer terms, directly relating surveys to public reports made by companies.
Andrew Griffith MP, shadow business and trade secretary, said: “Rachel Reeves has smashed business confidence with her disastrous tax hikes and heaped costs on employers’ shoulders. Inevitably, ordinary people are paying the price for her incompetence, with unemployment soaring on her watch.
“Labour’s front bench has no business experience and it shows. Only the Conservatives will give businesses the space to grow and create jobs – including by scrapping business rates for 250,000 high street firms.”