HAMISH MCRAE: Remember, cut tax in November
By Hamish Mcrae
Updated: 11:19 BST, 24 September 2023
Looking ahead: Chancellor Jeremy Hunt
Interest rates at a peak? Taxes too? That is the next matter. We know pretty much what will happen to monetary policy in the coming months. The Bank of England is part of the global trend for interest rates to level out, along with the US Federal Reserve, the European Central Bank, and the other main central banks.
There may be a further quarter percentage point rise here and elsewhere this year, but long-term rates have topped out. I expect the first cut from the Monetary Policy Committee to come in the spring.
Now the focus will switch to fiscal policy, which given the electoral cycle is highly political. The Autumn Statement in November, is, in practice, the Government’s last shot at making its pitch to the voters. So tax cuts, or what?
The latest Government accounts came out on Thursday, but unsurprisingly given the focus on the interest rate decision, went largely unnoticed. They were, surprise, surprise, much better than the Office for Budget Responsibility (OBR) has been forecasting. Not only are tax revenues booming, with VAT receipts 12 per cent higher than expected, but last year’s fiscal deficit has been revised down further. Borrowing last year is now thought to be nearly £24billion lower than the OBR reckoned in March.
This tells me two things. One is that if tax revenues are strong the economy must be growing at a decent clip. The other is that the OBR continues to be overly pessimistic about national finances.
That leads to the question: how much room will Jeremy Hunt have when he frames the Autumn Statement? The legacy of a year ago, the Truss/Kwarteng mini-Budget, still hangs over this Government. So whatever the Chancellor does has to be endorsed by the OBR, even if remains in Eeyore mode. (That is not to get at the OBR; much better to have the nation’s finances overseen by an Eeyore than by a Tigger.)
My guess is there will be some room for tax cuts within the broad constraints the Government has set itself, and which the financial markets – which have to fund its borrowing – will accept.
There are small notes of confidence in the gilt market, by the way, with the UK ten-year gilt 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 per cent in August.
Obviously any decline in the cost of borrowing helps the Government further, and also helps trim our mortgage rates. Not much relief to people having to re-fix this autumn, but a modest help.
The debate will now be on how to use whatever headroom the Chancellor has. The key will be to use it not to increase demand – it was Liz Truss’s idea that you 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 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 of labour. There are a million unfilled vacancies, with firms in many sectors from high-tech to hospitality saying they can’t find the people.
There is the problem of the long-term ill, as Alex Brummer writes. There are people who have taken early retirement, with upwards of half-a-million having made that choice, and with some at least now regretting it. We have to ensure we have a young workforce properly trained and qualified, for many of our skilled 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 work can and should be fulfilling.
We are still coming to realise the social damage caused by the pandemic shutdowns, alongside the more obvious economic damage, and to recognise that young people entering the workforce have been hard hit by the dislocation to their education and career paths.
Tackling that is in many ways harder than the macro-economic challenge of bumping up growth.
So lots to do. Of course we are not alone in coping with the dislocation and damage of the pandemic and would be right to worry about some global slowdown this winter. I am worried about the lagged effect of the surge in interest rates imposed on us.
But improved finances give an opportunity to this Government, and come November we will see how well it can grasp it.
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