What have we learned from the plethora of leaks and speculation over the new Labour government’s first Budget here in the UK? We can be confident that there’ll be more spending, more taxes and more borrowing. Many would welcome more government spending in areas that desperately need it but raising taxes and borrowing when they are already very high is not welcome, especially for financial markets. So, I’ve been left wondering what is the good news that Rachel Reeves will be able to give us on 30 October.
She certainly had some good news last week from the economic data with a big fall in inflation and a rise in retail sales. The fall in inflation has raised hopes that the Bank of England (BoE) will be able to cut rates by 25 bps at almost every meeting over the next year. That would bring the Bank Rate down to 4.5% by Christmas and 3.5% or so this time next year. That would obviously be good news for borrowers, and it would also cut the BoE losses on its quantitative easing (QE) programme which bought gilts at very high prices during covid. The chancellor has suggested that she’d exclude these losses from her fiscal rules, but they still have to be funded.
The rise in retail sales has calmed fears that the recent sharp dip in consumer confidence would herald a slowdown in UK growth. Indeed, I’ve been arguing for some time that UK consumer spending would rise given our high savings ratio, rising real incomes, and falling inflation/interest rates. So this data was a relief to me too!
Of course, one month’s figures should be treated with caution. Inflation is set to rise from here and there were some special factors boosting the retail sales figures. But the prospect of improving growth remains and this would do wonders for the fiscal arithmetic. Indeed, there are suggestions that the Office for Budget Responsibility (OBR) – the independent body that does the Budget forecasts – might just deliver an improved outlook.
Moreover, the September figures are used for the annual uprating of non-pension social security so the government will save here. I still think inflation worries may revive next spring given the 6% rise in the minimum wage and the dropping out of favourable base effects. But as a background to the Budget, things have improved.
Nevertheless, we are still in for a grim Budget with higher taxes on capital gains, inheritance, employers’ national insurance, and excise duties (road fuel, tobacco, vaping, alcohol, betting). These are on top of tax rises planned by the previous government which included higher income tax via frozen thresholds, higher stamp duty on property and increased excise duties.
The bigger picture should be a sensible profile for public finances against a background of an improving economy. At least that’s how I see it.
