Reasons to be cheerful! Don’t believe the doomsters. Despite grim figures, the economy is strong – but only tax cuts will bring a Tory revival, argues ALEX BRUMMER
There is no escaping the truth that the British economy faces perilous times.
In line with the rest of the world, we’re contending with a gruesome combination of problems — the bumpy emergence from the pandemic, Russia’s brutal war on Ukraine, disruption to global trade and surging consumer prices — and all of them are damaging the country’s economic prospects.
Both the Bank of England and the American central bank, the Federal Reserve, will deal another body blow this week by raising interest rates again in their desperate efforts to contain inflation. In the case of Britain, this will be the fifth time since December — the steepest run of rate hikes in 25 years.
Rising: The Bank of England (pictured) is once again set to raise the interest rates, for the fifth time in about half a year
So, yes, we face serious challenges. And yet I simply do not believe there is any justification for the gloom-laden interpretation by large sections of the broadcast media and fierce critics of Boris Johnson’s government.
These Cassandras peddle a diet of relentless financial woe as they carelessly claim that the nation is in recession or heading for one.
But closer inspection shows not only that things are nowhere near as bad as they claim, but that there are serious grounds for hope in certain sectors, too.
Resilience
True, the UK economy lost momentum recently, shrinking by 0.3 pc in April.
But what no one has mentioned is that this was largely down to a statistical quirk, and respected City forecasters are still actually predicting a 3.2 pc expansion of the UK economy this year, followed by 0.9 pc in 2023.
The big danger is that the constant barrage from the doom merchants could begin to influence events and destroy the resilience of consumers and enterprise — resilience which is still delivering for this country.
What is more, with a change of tack in the Government’s approach, I believe the economy could be recharged.
Of course, the country will struggle if it is required to contend with inflation, rising interest rates and a mountainous tax burden all at the same time. If consumers and businesses are doubly squeezed by higher interest rates and higher taxes, household incomes will be devastated.
Chancellor Rishi Sunak may not cut taxes but he has set out £15billion to support poorer households
Chancellor Rishi Sunak has to recognise that, in his determination to restore the public finances after borrowing so much during the pandemic, he has gone too far and too fast in raising taxes on ordinary working families and businesses.
The truth is that, with the nation close to full employment and the City of London and services — comprising more than 70 pc of national output — performing well, there was absolutely no need to urgently hike taxes, if at all.
Income tax, national insurance receipts, VAT and corporation tax receipts have all been flowing into the exchequer in record volumes. All that future rises will do is stymie spending and the willingness of companies to invest.
And the main reason for that fall in output of 0.3 pc in April? It is because the Government suddenly ended the NHS’s Test and Trace operations — which had grown into a formidable industry, employing tens of thousands of people — as the country emerged from the pandemic.
In fact, April saw activity in consumer services jump by 2.6 pc. In spite of the £100-a-tank of petrol, the £8-a-pint of best IPA and rocketing food prices, a recession — defined as two quarters of negative growth — is unlikely.
Even if Rishi Sunak does not cut taxes, his £15 billion package of targeted support to help poorer households with the rising cost of living means incomes should now rise in the second and third quarter of the year. It is equal to nearly 2 pc of their earnings and will boost the country’s spending power.
Consumer services have been growing, while the economy as a whole is nearly one per cent larger than before the pandemic
What the doom-mongers fail to tell you is that investment bankers Goldman Sachs recently pointed out that consumer services are ‘robust’ and Britain’s economy is 0.9 pc larger now than it was before the nation went into lockdown.
Economic activity in the crucial services sector, meanwhile, is 2.6 pc higher.
But it is not just the consumer activity — along with the £370 bn plus of pandemic savings in the current and savings accounts of households — propping up the economy.
New data just released shows that the drive towards the UK becoming a high-tech, high-value nation continues to make Britain prosper.
So far this year, the country has sucked in £12.4 bn of investment into the tech industry, the highest level of any country other than the United States.
Carping
As for the argument that Brexit has done for Britain, it is comprehensively rubbished by the City consultancy firm EY, which argues that, when it comes to financial services, ‘six years since the EU referendum, we can be confident that Brexit has not damaged the UK’s fundamental appeal’.
Since the financial and professional services are the biggest generator of income for HMRC, and the UK’s most successful export to the rest of the world, this should surely be a source of national pride rather than Remoaner carping.
Indeed, wherever you look, the excellence of Britain’s life sciences sector — as evidenced by the rapid development and distribution of the Oxford-AstraZeneca vaccine during the pandemic — continues to shine.
British businesses in the science sector like Oxford-AstraZeneca have been performing well
The UK’s other big pharma firm GlaxoSmithKline, the world leader in developing vaccines, has just revealed positive trial results for the world’s first vaccine for serious respiratory diseases — such as pneumonia for adults — and a new Covid vaccine effective against the Omicron variant.
It is also on the eve of unveiling a £400 million investment in a bio-sciences park in Stevenage likely to attract researchers from around the world.
Given such confidence, such investments, suggestions of a national malaise look to be far wide of the mark. But what is needed to maintain prosperity and stave off recession is action from the Chancellor.
Having come to the rescue of consumers hurt by the unconscionable rise in energy prices, he now needs to find a way of offsetting the rise in interest rates. Some 74 pc of owners are on fixed-rate mortgages, so there is some protection against a total meltdown in the housing market like the one seen in the late 1980s.
Decisive
But more needs to be done. And by that I mean Rishi Sunak must put an end to the tax hikes — or even reverse them.
His reluctance is, to an extent, understandable. He was scared witless by the scale of the fiscal mountain to be climbed after Covid-19. As a result, he froze personal tax allowances until 2025-6, along with the thresholds for capital gains tax.
Analysis by the Institute for Fiscal Studies shows that, as a consequence of inflation and surging wages, this will provide additional revenues to the Government of about £20.5 bn a year.
Sunak also opted to raise corporation tax from 19 pc to a whopping 25 pc next year. And to help pay for the NHS and social care, every employee and employer in the country is now paying a 1.25 pc surcharge on national insurance.
Together, all these measures (before inclusion of the windfall tax on oil production) mean that Boris Johnson’s government is raising more tax from the British people and commerce than any UK government since the 1940s.
Such a position, given the precarious economic circumstances we face, is completely unsustainable. If the Johnson government wants to fight the next election with a healthy economy, taxes have to be cut with a decisive policy shift.
And if that happens, it could just be the magic pill for a Tory revival.
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