Five questions about Sunak’s statement today

26 May

Rishi Sunak, having made his Spring Statement, wanted an autumn follow-up – saying last month that it would be “silly” before to take further major action before then, when the energy price cap is due to rise again.

With poverty for working families hitting a record high, almost a fifth of adults having less than £100 in savings, one in five families facing fuel poverty and Britain facing the biggest drop in living standards since the 1950s, it is scarcely surprising, welcome and almost inevitable that he has been forced off course.

But while there may be some good news today for voters, I am not so sure that it will mean good news for the Conservatives – or the Chancellor.  The downsides of spending money or cutting tax or both now means that those same tax cuts and spending rises can’t be made later – during the run-up to the next election.

Nor are voters, having become used to Sunak deploying his big bazooka during the pandemic, likely to thank him for firing it once again now: familiarity with spending sums so vast as to elude most people’s comprehension may not breed contempt, but it seldom brings gratitude.

And while it is right to give more help to desperate people, the timing of the statement is suspect: clearly, the Government is attempting to “move the story” on from yesterday’s report by Sue Gray.  Which provokes the question: are these measures coherent – or opportunistic?

Confidence that they will be the first is undermined by the weak position of the Chancellor in the wake of the non-dom controversy – and by him having to return to the Commons within only a few months of his last major statement.  And he is worse placed to resist the demands of a Prime Minister whose economic instincts are different from his.

Jack Sunak would eat no fat, and his boss would eat no lean.  It would be unfair to claim that the Chancellor has no interest in growth: his recent Mais lecture was preoccupied by it.  But there is a clash within the Government and elsewhere about the main economic problem facing Britain.

To the Treasury, rising prices are enemy number one.  And so it leans towards lower borrowing and tax rises: it is preoccupied by further interest rises that could intensify an economic downturn. To its critics, low growth is our main foe and, with the deficit lower than was forecast, the Treasury is choking off growth through unnecessarily high taxes.

Johnson’s instincts are to cut tax, spend, borrow if necessary, whack up infrastucture, and “eat, drink and be merry, for tomorrow we die”.  It has been briefed that Sunak will splash out another £10 billion today.  That would be a relatively small proportion of the £90 billion or so by which the deficit undershot the Treasury forecast.

So, then – five sets of questions for today.

  • To what degree will the Chancellor target his measures on those most in need?  Crudely speaking, what will be the trade off between Universal Credit rises and tax cuts (if any)?  If the latter happen, will they be concentrated on workers and business or the retired?
  • How much of this new spending will he seek to find from new windfall taxes and how much by relaxing his plans for deficit reduction and debt repayment…?
  • …And so where will he settle on the relative threats that rising prices and low growth pose to the economy and our future? Will the Treasury shift its position?
  • Will the statement be relatively narrow or broad?  The broader it is, the more of a Spring Statement or Budget-type event it will be.  And the more problematic for Sunak it will become if he is forced to make further such statements before the Budget.
  • If the statement is relatively broad, what will he have to say about supply side reform, faster growth and borrowing to invest in infrastructure, science and skills?

In sum, to what extent will he present a clear plan projected by a clear message?  My starter for ten is “help hard-working people and go for more growth”.

I’m sure that the Chancellor, David Canzini, Isaac Levido and so on can do better than that.  But in order to do better, they need to say something.

Gerard Lyons: Ministers have an opportunity to cut taxes, drive supply side reform – and help reduce the cost of living

17 May

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

“My Government’s priority is to grow and strengthen the economy and help ease the cost of living for families.” These opening two lines of the Queen’s Speech provided a powerful message.

Further action is needed to address the cost of living crisis. Also, those affected are not just families, but the vast bulk of households that are being squeezed. If the Government doesn’t appreciate this, then it may have its work cut out.

To its credit, the Government has already announced a host of targeted measures. These include a £150 refund on council tax for those in bands A to D. While welcome, the gains are partially offset by a rise in the average Council Tax in band D of £67.

The main help by far, though, was announced by the Chancellor in the Spring Statement – an increase in the threshold at which the higher rate of national insurance is to be paid. This has now been aligned with the starting threshold for income tax, around £242 per week. There is also the expectation that the Government will act again, as energy bills are expected to rise again this autumn, when the new price cap kicks-in.

Indeed, the cost of living crisis looks set to get worse, before it gets better. UK inflation is set to peak soon, probably above 10 per cent, and will then stay elevated for some time. While inflation is set to decelerate next year, it seems unlikely to return to its two per cent target anytime soon.

It also vital to appreciate that we are very quickly moving away from the main problem being inflation to it being a lack of economic growth. There thus needs to be a reiteration of a clear, executable vision and strategy to grow and strengthen the economy. But first, the cost of living crisis merits further attention.

High fuel and food prices are already exacerbating problems for lower income households, who spend a higher proportion of their income on these areas. At the same time, a large part of peoples’ disposable incomes fund their housing costs. Furthermore, as the retail price index heads higher, rail fares will rise, and changes earlier this year added to the cost of repaying student loans.

While some have savings they can dip into, many don’t. Thus, overall, discretionary spending will be squeezed with widespread negative consequences for retailers and many firms. In turn, there will be upward pressure on costs, prices and wages.

Even the labour market, where unemployment is low, could see change since a sharp economic slowdown is likely, including the possibility of a technical recession with two successive negative quarters of economic growth.

The challenge is that, surely, the Government can’t go on spending taxpayers’ money at every sign of trouble? That is right – but downside economic risks mean intervention is needed, not only to ease the burden but also through low taxes to revitalise growth. The situation also highlights the need to restore both fiscal and monetary stability, once the economy allows, allowing scope to cope with future shocks.

The economic and political shock-absorber is a looser fiscal policy over the next year. Although the budget deficit is higher than one would like, the good news is that it is falling sharply: from £317.8 billion in 2020/21 to £151.8 billion in 2021/22, and is expected by the Office for Budget Responsibility to decline further to £127.8 billion in 2022/23. Moreover, higher inflation is already bolstering tax receipts.

So what should be done? Relaxing fiscal policy and targeted support should not add to inflation since demand is already slowing. Targeted help is needed for those on low incomes, but also there is a need to help the squeezed middle.

Other countries have enacted policies to shield people from rising energy prices, including reduced taxes on energy or VAT; retail price regulation; wholesale price regulation; transfers to vulnerable groups; mandating firms’ behaviour; windfall profits tax; business support; or other measures (such as cutting the green levy in Germany).

While other countries, too, are tightening monetary policy, the UK is unusual in that it is squeezing fiscal policy. Benefits, for instance, were not raised in line with higher inflation in the Spring Statement, when perhaps they should have been. Crucially, the tax take is at an all-time high. The latter needs to be reversed. It includes too many people being dragged into higher tax brackets, and this can only be addressed by raising tax allowances and the levels at which people enter higher tax bands.

Quickly executable targeted measures could include a further increase in the Council Tax rebate. Another would be to use Universal Credit to direct more money to those in most need, while preserving work incentives. A mid-year rerating of benefits to raise them in line with higher inflation may take longer to implement but is another option

Temporary removal of some of the permanent components of fuel duties should be considered although, like many of these measures, further cuts in taxes on energy are not cheap. The temporary five pence cut in fuel duty is set to cost £2.4 billion this fiscal year. Suspending VAT on domestic energy while gas prices remain high has been suggested by some MPs.

Another possible but unlikely option is a temporary suspension of the environmental levy paid on energy bills. It would not, in my view, compromise the Government’s commitment to the green agenda, and could free up about £340 per household per year. The importance of addressing climate change is critical; it is peoples’ ability to pay that is the issue.

There is a clear case for bringing forward the one pence cut in income tax that has been pencilled in for before the next election. The Treasury calculates that this will costs £5.4 billion in its first year, but it would address an important issue in that income tax collection is now heavily concentrated, with roughly four in ten adults only paying it. A broader tax base with low tax rates makes more sense, but that may be a future aim.

There is also a search for non-fiscal measures that can help businesses and households. Measures that both ease the burden on firms and employers, while bolstering their confidence about the future, should figure prominently.

The most obvious is to implement supply-side measures from the Taskforce on Innovation and Growth Report. Although some may take time to feed through, they should bolster business confidence and encourage investment.

Also, measures to turbo-charge the housing market are welcome. Planning reform, while necessary, appears to have taken a back burner. A year ago, in a research paper for Policy Exchange, I outlined measures on the demand side that could help Generation Rent become Generation Buy, including allowing those who cannot afford deposits to use their history of regular rent payment to enter the housing market.

If the economic climate deteriorates, banks should be encouraged to exercise forbearance on loans if firms encounter difficulty. The Bank of England should also re-examine prudential requirements to ensure that these are not having a negative impact on growth.

This proactive policy response to address immediate challenges is complimentary to other areas of policy. It should not threaten the inflation outlook. Crucially, it is consistent with the existing fiscal strategy of reducing the ratio of debt to GDP from its present level of 96.2 per cent and the aim to achieve a significant improvement in the public finances. Strengthening the economy is the aim, easing the cost of living crisis is the immediate focus.

Gerard Lyons: Sunak’s task tomorrow. The best way of reducing the deficit is to go for growth.

22 Mar

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Rishi Sunak needs to provide context, actions and vision when he delivers his Spring Statement to the House of Commons this week.

Context, so that people can understand the present difficult economic environment and what lies ahead. Actions will be needed to cushion the imminent cost-of-living crisis. And the Chancellor needs to outline a vision, both from a domestic political perspective and to reassure financial markets and investors about the outlook for the economy.

The current context is a difficult one. The war in Ukraine and the associated high level of oil and commodity prices has added to uncertainty, both here in the UK and globally. This will be reflected in the economic forecasts from the Office for Budget Responsibility (OBR) that will accompany Sunak’s statement.

At the time of their previous forecast, last October, the OBR was forecasting growth of six per cent and inflation of four per cent this year. Now, depending upon their assumptions, the OBR’s growth forecast could be half and their inflation forecast almost twice as high as then. Hence the increased fear of stagflation – where inflation is higher, and growth lower.

For next year, the OBR will be expecting growth to slow further and inflation to ease. It is their cautious future growth outlook that limits the Chancellor’s room for fiscal manoeuvre. Sunak will also stress that higher inflation and interest rates increases the amount spent on servicing the national debt.

Despite this, the Chancellor should not feel constrained by the OBR’s forecasts into limiting the actions he can take. The margin of error for the budget deficit forecasts has been high in recent years – for obvious reasons, perhaps.

Importantly, the fiscal numbers, while poor, are clearly on an improving trend. During the first ten months of this fiscal year, public sector net debt was £138.5 billion, around half the level of a year earlier. So Sunak may have around £25 billion more to use in this statement than previously expected, and still be able to stick within his fiscal rules. He thus has the opportunity as well as the need to provide some help this week.

What then of the actions that can be taken? There are two areas he should focus on.

One is actions linked to the war, such as more immediate defence spending or help for refugees. The other is finding money to cushion the cost-of-living crisis.

While he may mention issues linked to levelling up and incentives to boost investment and improve skills, the bulk of tax changes and spending announcements linked to these will have to wait until the Budget in the autumn.

The imminent cost-of-living crisis is explained by higher inflation, rising fuel and energy bills, and increased taxes. The approach that the Chancellor is likely to take to address these is best captured by the three “t’s” – timely, temporary and targeted measures.

Even though people across all incomes, including the squeezed middle, are being impacted, help will be targeted to those on low incomes and most in need.

The rise in inflation is out of his control. But we shouldn’t pretend that no-one is to blame. Costs have risen across the board – initially because of supply disruptions triggered by the pandemic and now because of the war. At some stage these pressures will ease, but not yet.

But inflation has also risen because the Bank of England has been asleep at the wheel. Last year, when inflation was already rising, it printed an excessive amount of money as quantitative easing reached £895 billion. That made the inflation outlook worse, feeding inflation expectations.

The Chancellor can act on fuel duties. During the next fiscal year, fuel duties are expected to raise £28 billion. By comparison, income taxes will raise £229 billion and national insurance £182 billion. A bold step would be to suspend fuel duties completely for a period. But then the pain would be felt when reintroduced.

Indications are that fuel duty will be cut, perhaps for a temporary period. A similar approach has been seen recently in France and Ireland.

For example, take a litre of petrol at £1.65. This price includes fuel duty of 57.95 pence and VAT of 27.5 pence. So total tax is 85.45 pence

If fuel duty is reduced by five pence per litre, then, after taking into account VAT, this would reduce the price per litre by six pence, in this case from £1.65 to £1.59. A small but significant saving for many people.

A radical – but very unlikely – step would be to move environmental levies from fuel bills onto general taxation. From this April these levies on household energy bills will raise £9.2 billion over the fiscal year, around £325 per household per year. The importance of addressing climate change is critical, it is peoples’ ability to pay that is the issue. This leads onto the big issue that Sunak needs to address: taxes.

Two tax increases will bite this spring. There is fiscal drag: as pay creeps up it drags people into higher income tax brackets. Normally, this is addressed by allowing tax allowances to rise in line with inflation. Allowances have been frozen for a couple of years, so it is unlikely anything will change here.

The other tax is the increase in national insurance, which will rise for both workers and employers, and which comes into effect in a couple of weeks. For workers this rises from 12 per cent to 13.2 per cent, so someone earning £30,000 per year will pay £214 more and a £50,000 earner will pay £339 more.

In April 2023, this is replaced by a new health and social care level (which in all likelihood will rise in future years) and the national insurance rate falls back to 12 per cent.

There was no need for this tax to have been increased in the first place. It was already clear last autumn that the public finances were improving. Furthermore, it is a tax on jobs that it is coming into effect now when incomes are being squeezed.

Sunak appears keen not to reverse or delay this tax. Instead, he could raise the threshold at which national insurance is paid by workers. From April, national insurance is paid after you earn £190 per week. By contrast, the threshold for paying income tax is based on annual income but is equivalent to £242 per week.

The Chancellor also recently announced measures totalling around £9 billion to help people most in need. He could find other targeted help. For instance, benefits and allowances could be raised in line with latest inflation figures.

One lesson from following fiscal statements over the years is that, when it comes to chancellors, don’t just listen to what they say, watch what they do. During the pandemic, Sunak responded well. Further action is needed now.

Finally, despite uncertainty, it will be important for the Chancellor to outline a vision. The UK’s trend rate of growth is too low. The UK needs to become a more competitive economy. Sunak wants to reduce the budget deficit. That is understandable. His choices are: borrow, raise taxes, austerity via cutting spending, focus on boosting growth – or a combination of these.

Austerity is rightly ruled out, although public sector reform is needed. The trouble is that taxes are already high, even for people on modest incomes. The best way to reduce the deficit is to boost economic growth, allowing the ratio of debt to GDP to come down gradually, over time.

Anthony Browne: Now is not the time to go slow on Net Zero

21 Mar

Anthony Browne is MP for South Cambridgeshire, and chair of the All Party Parliamentary Group on the Environment.

Does the invasion of Ukraine – and the commodities price crisis that it has exacerbated – mean we should “press pause” on Net Zero? Gas and petrol prices have rocketed up in the past few weeks, increasing the cost of heating and driving, and causing real financial pain to households, particularly those on lower incomes. The Government has unleashed a £9 billion package to bring bills down, but there is a limit to how much it can buck global markets. The call has come for further action – in particular, to start fracking in the UK again.

I fundamentally disagree that Net Zero needs to be paused. Many of the arguments put forward are not just self-serving, but patently irrational. If they were acted upon, we would be repeating rather than learning from the mistakes of the 1973 oil price shock.

I have always seen three major reasons for aiming for net zero – one is to curb climate change, and the other two are to enhance national security and to improve economic resilience.

Weaning ourselves off fossil fuels – which is completely achievable – is not only critically important for the environment, but would mean that we would no longer be funding and dependent on some of world’s worst authoritarian regimes, and the change would make our economy more resilient against volatility in global energy prices.

In 1973, a six day war in the Middle East produced an oil price shock that unleashed explosive inflation and a deeply scarring recession, sending our economy into turmoil for nearly 20 years. That is a critical weakness on an otherwise powerful, diverse economy.

Our economy is less dependent on oil prices now than it was – the energy intensity of GDP has fallen – but we are still vulnerable, as we are experiencing.

After 1973, other countries had deliberate strategies to wean themselves off oil – France went for nuclear power, Denmark for wind power, and Japan for solar. By contrast, we went for North Sea 0il. But since our output is part of global markets, that did nothing to insulate us from global price shocks.

We have more recently boosted renewable energy. Few people realise that more of the UK’s national electricity supply is now produced from wind power than it is from gas. No foreign dictator can stop the wind from blowing on these shores. The fact that over half our electricity comes from zero carbon sources (wind, solar and nuclear) means that its price has been less volatile than if it was produced solely from oil and gas, whose prices are decided by highly volatile international markets.

France, where nuclear power generates three quarters of electricity, and Norway, which is 100 per cent hydroelectric, have suffered from electricity price spikes, but only because they have been exporting power other countries which are vulnerable.

North Norway, which is isolated from the main European power networks, has seen more stable electricity prices from its hydroelectric plants. Two thirds of Norway’s homes are warmed by electric heat pumps, and so are not directly affected by global gas prices.

The UK could produce more fossil fuels, but the UK cannot much influence international oil and gas prices, whether it fracks or not. For as long as our heat and light and transport depend on fossil fuels, we will still be at the whim of international markets. 

But imagine if all our (and Europe’s) electricity production were from zero carbon sources – renewables and nuclear – and if we drove electric vehicles, and had electric heating for homes, then homeowners and drivers would be more insulated from international energy price movements and no longer funding foreign dictators.

The answer to the current crisis is more people driving electric cars, and less electricity produced from fossil fuels – not pressing pause on Net Zero, producing more fossil fuels and doing less to get people to drive electric cars and heat their homes with electricity.

That would simply exacerbate the problem, not solve it. You won’t make the UK less hostage to global fossil fuel prices by making the UK more dependent on fossil fuels. We need to learn from 1973, not repeat the mistakes.

As we get to Net Zero by 2050, there will still be a continued demand for oil and gas as transition fuels, and there will be some residual demand afterwards for industries such as chemicals.

Where that fuel comes from is less an environmental issue than a security one. Since Russia only supplies four per cent of our gas, it is not really an issue for the UK: giving the go-ahead to the wind farms and solar farms already in the pipeline will more than make up for the shortfall from Russia.

The energy gap is more an issue for the EU, which is heavily dependent on Russian oil and gas. If Europe stops buying fossilsfuels from Russia, it will have to buy them from elsewhere, but that does not in any way mean it needs to stop aiming for Net Zero.

The Russian invasion in Ukraine is not a reason to give up on Net Zero. Rather, it is a reason to redouble efforts to get there as quickly as possible.  That will benefit the environment, economic resilience and national security.

 

James Kirkup: Sunak’s task next week. To get cash into the hands of those who need it. And launch an energy efficiency mission.

17 Mar

James Kirkup is Director of the Social Market Foundation.

Perhaps it’s because now, as then, I have Covid, but when I ponder Rishi Sunak’s approaching Spring Statement, my thoughts go back to March 2020. Then, Sunak made his bones with the British public with nerveless statements about the support he’d offer for an economy – and a population – teetering on the brink of panic.

Those early days of his chancellorship seem a long time ago now: it’s been a long two years. But there’s a lot to learn from those moments, even if both economics and politics have changed since then.

Then, the dominant issue was a pandemic that would prove to be longer and more serious than most people realised. Today, the same is true of what Westminster calls the “cost of living crisis”.

That phrase is so familiar that a lot of people who use it think that it’s old news – that everyone out there “up and down the country” knows full well how much prices will rise and real incomes will be squeezed.

Well, if they think that, they’re wrong. Rising prices, especially on energy, are still going to come as a nasty shock to a lot of voters. Just because us media and political types know something will happen, don’t assume the wider public does too.

So the first job for next week’s not-a-Budget statement is ruthless honesty about what’s coming – and the limitations of what the state can do, in the short term, about energy prices.

That doesn’t mean doing nothing. The compassionate, responsible response to rising prices should be to concentrate help on those who need it most. That should start with benefits uprating. As things stand, benefits will rise by 3.1 per cent in April, because that’s what CPI inflation was in September. But it’s now at 5.5 per cent and will likely exceed six per cent for the rest of the year.

If Britain really is One Nation, not two, then preventing a deep real-terms cut in the incomes of the poorest should be a priority for Sunak next week.

There’s more to do, of course. Current plans for a £150 council tax rebate for most homes and what amounts to a £200 loan towards energy bills are both over-complex and poorly targetted.

Instead, HMT could simply give £500 to every benefit-claiming household, and £300 to non-benefits households where no-one pays higher rate tax. That wouldn’t cost any more than the current plans: the SMF proposal would cost around £8.4 billion, pretty much the same as existing measures.

Simplicity and speed are key here. What’s needed is a return to the spirit of furlough: just get cash into the hands and accounts of people who need it.

And some people who don’t: the Treasury’s natural objections to the waste involved in universal payments are normally reasonable, but these – still – are not normal times. The strong and natural desire to declare that the exceptional circumstances of the pandemic have passed should not blind us to the fact that Russia’s war on Ukraine is another event of arguably even greater historical significance.

And that offers something of an opportunity, for a politician big enough to seize it. Here’s how Sunak can do so next week.

The immediate and obvious impact of Russian aggression on British lives is via energy. Even though we buy relatively little fossil fuel directly from Russia, we’re still exposed to international prices that are directly and badly susceptible to Russian malfeasance.

Hence the various Government schemes afoot to reduce that exposure: some more wind power, some more extraction from the North Sea, and some wishful thinking about the Saudis and others agreeing to pump more to prices down.

The remarkable thing about all these efforts is ministers almost totally ignoring the best path to reducing British exposure to international energy prices and so easing household energy bills: use less energy.

This is Sunak’s opportunity, though he’ll have to override Treasury orthodoxy and his own inclinations to take it.

By any international standard, Britain’s homes are poorly insulated and badly energy inefficient. This is one of those big, slow and boring national problems that successive governments have nibbled at then pushed aside over several decades.

There are many reasons for this. Voucher schemes are hard to design and easy to exploit: the people most likely to use them would probably have made home improvements anyway. There are always sexier, more immediate things to promise, which are more likely to pay off in time for the next election. No one wants to be the politician telling people to clear their lofts out and fill their wall cavities. Lagging is boring.

More recently, the Treasury has been resisting energy efficiency drives on the grounds that UK industry can’t deliver: not enough workers, not enough material, inadequate supply chains to provide it.

None of these problems is imaginary. But none is insurmountable, to someone with adequate ambition and understanding of how markets work.

The ultimate reason British energy efficiency schemes have failed over decades is a lack of consistency. No policy has stood for long enough to provide confidence and certainty, either to households or industry. The evidence from successful efficiency policies worldwide — New Zealand, Japan, the Netherlands, to name a few – shows that what’s needed above all is the long-term certainty that only strong government policy can offer.

And that’s what Sunak should offer next week: nothing less than a national mission to make Britain’s homes more energy efficient. That mission will take a decade and more, and should be put above party politics: the Chancellor should make a Big Tent offer to Labour to sign up to his aims.

Importantly, this can all be done without so much as mentioning the words Net Zero. The Chancellor’s public ambivalence on climate issues is regrettable, but might not hurt at all here. The best way to get the public to buy in to the national energy efficiency mission isn’t to talk about carbon foregone but pounds saved. The difference between Energy Efficiency Certificate Bands C and D is around £100 per year. And that’s a recurrent saving: who wouldn’t fancy £1000 more in their pocket over the next decade?

This doesn’t all have to be state provision, incidentally. Some banks and building societies are gagging to lend to households to fund home efficiency measures. The Chancellor should use his bully pulpit to egg them on, and prod the rest to do more.

This advice isn’t original or novel, because the energy efficiency issue is a longstanding one that hasn’t really changed. What has changed are the times.

Britain may not be a direct combatant in Russia’s war, but we face wartime economic impacts. That requires a response of similar scale, a great national effort to defend our homes and incomes from unnecessary over-exposure to international energy markets. If he wants to be

the leader of this decade, Rishi Sunak should use his statement next week to launch that unabashedly patriotic drive for energy efficiency, declaring loudly and proudly that it’s time to Lag for Victory.

Today’s employment figures are the last bit of good news the Chancellor will get for a while

15 Mar

It would have been bizarre for the Chancellor not to have greeted today’s employment news positively. With the jobless rate falling from 4.1 percent to 3.9 percent, it is at its lowest level since the three months to January 2020 – pre-pandemic, in other words. Two years ago, the headlines were determined by lurid headlines of coronavirus’ expected impact on unemployment – with the Office for Budget Responsibility’s July 2020 forecast predicting it would hit 12%. That would have been a rate not seen since 1984, when Mrs Thatcher was triumphing over inflation/consigning a generation to the dole queue (delete as appropriate).

Why Rishi Sunak has avoided being the villain in 2022’s answer to Billy Elliot is not only because of his natural affability, but because of a combination of interventions, luck, and the dismal predictions of practitioners of the dismal science. Despite the economy facing its biggest contraction in 300 years – since the Great Frost of 1709, fact fans – the Treasury’s jobs retention scheme successfully supported 8.4 million workers by the end of May 2020, at the not inconsiderable cost of £14 billion a month. Yet Sunak argued at the time of launching the scheme that the government wouldn’t be able to save every job. So why isn’t the evening news dominated by dole queues, grim-looking charts, and grumpy flat-capped men with regional accents huddled around braziers?

The answer isn’t simply the crisis in Ukraine pushing out all other news. When the furlough scheme was wound up in September last year, the Treasury was still subsidising the pay packets of 1.1 million workers. Yet employment in the six months since then has risen by several hundred thousand to reach 75.6%. Moreover, for the first time, there are as many people looking for jobs as there are vacancies, with the latter hitting a record 1.318 million. Businesses and the Treasury are now confronting the problem of a labour shortage, rather than of mass unemployment.

Partially, the explanation for this lies with Brexit. Areas such as hospitality and agriculture which have previously relied on cheap staff from Eastern Europe have seen an exodus of cheap labour since we left Brussels behind. The pandemic did not aid this process, both by encouraging many to travel home to be with their families, and by keeping (through furlough) many workers who could have moved to fill vacancies in their former jobs. A happy consequence of this is that average earnings in the three months to January were 4.8% higher than the year before – the result of various firms paying extraordinary amounts to attract delivery drivers and the like.

Nevertheless, the continuing economic headache Sunak faces is highlighted by the fact that, despite wages rising by four times the rate they managed across the 2000s, once the Office for National Statistics adjusted for inflation and excluded bonuses, real wages have seen their biggest fall since July 2014. Against the rising cost of living, real-term pay was in fact 1.0% lower than a year earlier. A bumper bonus season in the financial sector may have meant that pay growth was up 6.5% for the 99th percentile, but the squeeze in real wages will hit those on lower wages genuinely hard this year.

The National Living Wage will rise by 6.6 percent in April – but with inflation already at 5.5% in January, and predictions that it would peak at 6 percent out of date, incomes will soon be squeezed across the economy. Inflation in double digits, spiralling energy bills, rising taxes and interest rates, a particularly noisy neighbour – today’s employment triumph may well be the best news the Chancellor gets for some time. That is especially as the ONS has stated that the inactivity rate stands at 21.3 percent, over a percent higher than pre-pandemic, since 500,000 or so workers aged 50 or over have dropped out – so unemployment does not have much further to fall.

Furthermore, today’s figures for Rishi Sunak comes with the bittersweet knowledge that tackling this economic quagmire will not only mean enduring the largest fall in living standards in 30 years, but will require unemployment to rise to help shake inflation out of the economy. Squeezed incomes will deflate demand and help bring the rate at which prices rise down – but the process is unlikely to be pretty. Still, the Chancellor’s time at Number 11 has so far been one crisis after another. He would be much too optimistic to hope for that changes now.

David Willetts: The case for Sunak to announce a windfall tax on energy companies next week

15 Mar

Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.

The Treasury is supposed to work on a stable and predictable annual calendar of economic events. Other departments, like the Foreign Office or Home Office, may just respond to one crisis after another but the Treasury has a regular timetable it can stick to – rather like the annual pattern of rural life in one of those beautiful illustrated medieval cycles of the seasons.

Key anchors for this are the twice yearly updates of the economic forecasts – in the Spring and the Autumn. Autumn makes more sense for public spending decisions, as spending departments need due notice of change in spending plans for the following year.

Tax is rather different and a Spring Budget can help limit forestalling before the new tax year. At the moment, the Treasury is trying to make the Autumn event its main budget announcement, with the Spring forecast much more modest. There has been strong briefing to lower expectations of any big policy announcements next week. But having emerged from one crisis – the pandemic – the Chancellor now finds himself straightaway in a new one driven now by the invasion of Ukraine. He needs to do something.

There is now intense pressure on living standards from the combination of energy prices, food prices and increases in tax. Our forecast at Resolution Foundation is for real household incomes to fall by four per cent this coming financial year – the sharpest squeeze since the 1970s.

We are about to have an unexpected and significant surge in inflation which will hit families hard unless we get help to them promptly. A key mechanism for doing this is through the uprating of benefits, from Universal Credit to the State Pension. The problem is that benefits are uprated every April, based on the previous September’s CPI inflation rate. But last September was a different era – we hadn’t even heard of Omicron back then.

This means that benefits will rise by 3.1 per cent even while inflation is forecast to rise to over 8 per cent. Over the year this amounts to a £10 real-terms cut in support for millions of low-and-middle income families, as well as pensioners.

One solution would be simply to bring forward next year’s likely uprating increase to this year. There would be a period when benefits are higher than they otherwise would be, but the aim would be to do an uprating of less than inflation next year so as to get back on track. The key advantages of bringing forward benefits uprating is that it is targeted and temporary. The same cannot be said for many of the alternatives being proposed.

There is also pressure from Conservative MPs to help families with tax cuts. One candidate is to postpone or abandon the National Insurance increase to fund the NHS and social care. This measure has turned out to be badly timed, but it is still right to recognise that if we are to spend more on health and social care we have to pay for it. If it were delayed it would come in closer to the next election.

Moreover, low-income families hit hardest by high food prices and energy bills would gain the least from cancelling or postponing this tax rise. And it is important that it does not look as if the Chancellor retreats in the face of political and media pressure. He is earning a reputation as a true fiscal Conservative. That reputation helps him maintain the confidence of markets. He should not endanger it by abandoning the national insurance increase.

Another candidate to deliver tax cuts is fuel duty. Robert Halfon is an indefatigable campaigner on this. It is emblematic of white van man. But how much the financial reality lives up to this is not clear – affluent people have bigger cars and drive further. But the Treasury knows that fuel duty is one of their revenue sources now in long term decline as electric vehicles replace the old gas guzzlers, so they may be more willing to give some of it up just to ease the political pressure.

Another option would be to cut the rate of VAT on energy. This could be branded as a measure made possible by Brexit as we now have more control over our own VAT rates. And it helps a wider range of people than car drivers with higher mileage. I believe it would be a stronger candidate than either reversing the national insurance increase or cutting fuel duty.

However if the Chancellor is spending money bringing forward next year’s benefits increase and cutting taxes he needs some way to help fund that. And there may be emergency increases in spending on military help for Ukraine and support for its refugees. Of course, in a crisis such as the one created by Russia’s invasion of Ukraine now, he could say that some of the spending is generated by war, and that can be financed by borrowing. We spend the money now to make life safer for future generations who may eventually pay – way out in the future. That was demonstrated in a 1958 TV interview exchange between the young Robin Day and the then Governor of the Bank of England, Lord Cobbold:

Day: Have we paid for World War Two?

Cobbold: No.

Day: Have we paid for World War One?

Cobbold: No.

Day: Have we paid for the battle of Waterloo?

Cobbold: I don’t think you can exactly say that.

But a Conservative Chancellor may wish to show that not all of any increases in spending will be financed by borrowing. Whilst many groups are suffering from high energy prices heavily driven now by the Ukraine crisis there is one group which is clearly benefitting – energy companies.

Their costs of production have not increased significantly but the price of oil and gas has so they are making exceptional profits. There is a case for a windfall tax on them. The political problem is that this is what Labour has proposed, but this policy option should not belong to Labour alone. Conservative Chancellors have levied windfall taxes on banks and on energy companies in the past. And the Chancellor could broaden the base further than Labour. There could be other tax measures too – a tax on the sale of ultra-high-value mansions for example?

So I hope we see help for those under pressure and perhaps other spending as well. And if it costs a lot it should be funded not simply by borrowing but also by a tax on the energy companies who are doing well out of the crisis. But we must promise not to call it a Budget.

Gerry Lyons: What are the economic and policy implications of the war in Ukraine – and what do they mean for the UK?

8 Mar

Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Russia is not an economic super-power. It is the world’s largest country by landmass. Its population is large, at 145 million, but is falling. Ahead of this crisis, it was the eleventh biggest economy in the world, while the UK is fifth. Russia’s income per head is low. Its military (defence) spending is similar in dollar terms to the UK’s, although higher in relation to the size of its economy. In addition to being a military power, with nuclear capabilities, Russia is a major commodity and energy producer.

According to the International Energy Agency (IEA), Russia produced 10.72 million barrels per day (mbpd) of oil in 2021, second only to the US, at 16.39 mbpd. Russia produces more than Saudi Arabia, but exports less than her. Russia’s importance in terms of gas is even more significant, accounting for 45 per cent of the EU’s gas imports and 40 per cent of its consumption last year.

The most significant economic impact of the war will be contagion through higher energy prices. Ahead of the conflict, gas prices were already elevated and oil prices had been trending higher. War adds a risk premium into the prices of both.

Other commodity prices are already higher, particularly wheat, given Ukraine’s importance as a wheat producer. In 2019, I gave the keynote speech at the annual Ukrainian Financial Forum in Kiev, and it was noteworthy then how the economy was reforming, with a range of key exports including metals, minerals, agricultural products, a shift into digital exports, and also that roughly two-thirds of its public debt was foreign-owned. It is depressing that this move towards openness has been stopped in its tracks.

For many countries – including the UK – this rise in energy and food prices is occurring in an environment of rising inflation, not helped by lax monetary policy last year. Now, UK inflation will peak higher, possibly breaching 10 per cent, and persist for far longer, casting light on how low the Bank of England’s policy rate of 0.5 per cent is.

Financial markets are selling off sharply. This both reflects uncertainty about where the war might lead militarily and concern about future growth.

While high energy prices add to inflation, they also sharply squeeze peoples’ disposal incomes and add to firms’ costs. Also, while higher interest rates may be needed to curb inflation, these may slow the world economy later this year and early next. Recession is even possible for the UK.

Financial markets have repriced the outlook for interest rates: the direction has not changed, but the pace and scale of expected tightening has. Markets now see rates rising less rapidly than previously expected.

Another impact from the war is via sanctions. The scale of sanctions will see a deep recession in Russia. As Russia’s military spending is fiscally led, this may dampen its ability to spend more in this area. But there is little historical evidence of economic sanctions halting an aggressor’s military plans.

How will these sanctions impact the UK? Russia is the UK’s nineteenth largest trading partner with total annual bilateral trade of £15.9 billion. Russia is our 26th biggest export market and 15th in countries we import from.

Russia as an export market for luxury goods will be closed. Annual UK exports are £4.3 billion: cars being the largest item at £386 million, medicines and pharmaceuticals £272 million and capital machinery £199 million. Annual imports are £11.6 billion, with the largest items being: oil £3.6 billion, non-ferrous metals £1.3 billion, and gas £559 million, plus a vast array of other goods.

There will be an impact on financial flows. The UK has invested heavily in Russia and many firms may have to write-off these investments. By 2020, the stock of UK direct investment into Russia was £11.2 billion. By contrast, total foreign direct investment from Russia into the UK was £681 million. Although this is only 0.7 per cent of the total stock it may understate the Russian influence. The phrase “Londongrad” has been attributed to the City since the introduction of the golden visa in 2008 and the continuation of Russian involvement ever since.

This is an association we should seek to ditch – while bearing in mind the importance to differentiate between Russia and the Putin regime. Being open, transparent, non-discriminatory, not retrospective, and abiding by the supremacy of English Common Law are important in ensuring there are no unintended consequences from actions we take now. That is, we should punish the Putin regime whilst enhancing the reputation of the City.

In terms of wider financial flows, the UK financial sector does not appear heavily exposed to Russia. The Bank for International Settlements shows total international bank lending to Russia of $121.5 billion, of which the largest was $25.3 billion from Italy, $25.2 billion from France and $17.5 billion from Italy. The UK’s exposure was $3 billion, so relatively low.

The exclusion of Russia from international capital markets should have a profound impact on its economy. London’s role as a global financial centre should not be impacted.

A critical component of the sanctions was to cut many Russian banks off from the west’s global payments system: SWIFT. The impact of this, however, was slightly diluted because of Western Europe’s dependency upon Russian gas and the need to still be able to pay for this; hence some Russian banks are still able to access the system.

Critically, though, a key decision was taken to exclude the Russian central bank and thus limit its ability to access the large amount of foreign exchange reserves it had accumulated, over previous years, the bulk of which are housed in central banks outside Russia. This measure, like crossing the Rubicon, could have profound longer-term consequences. There is little doubt it adds to the financial and economic pressure on Russia.

It could accelerate the move towards a global currency system not dominated by the dollar and a payments system not dominated by the west. China, in particular, is keen for an alternative to the dollar dominated system. Also, Russia and China have both developed their own versions of SWIFT in recent years. Furthermore, we are already in an environment where, regardless of this war or wider geopolitical issues, there is a race underway across countries to develop new global central bank digital currencies.

Another aspect is global defence spending. The war strengthens the case for increased military spending, illustrated most vividly by Germany’s announcement it will increase defence spending to NATO’s target of two per cent expenditure of GDP. The UK already achieves this target, but may yet decide to boost defence spending further. The war also shows the importance of soft power and controlling the narrative, with the BBC being an important tool internationally in tackling disinformation from Russia

Many countries will be impacted by the humanitarian fall-out. The recent UN World Migration Report noted that there are 281 million international migrants. This represents an increase of, on average, six million per year globally over the last decade. Thus, if as some fear, there are five million migrants from Ukraine (population 44 million) it would be huge.

The war, plus sanctions, will trigger an implosion in both the Russian and Ukrainian economies. There will, however, be significant contagion too, via higher energy prices. The UK will witness higher inflation now and an economic slowdown – and possible recession – over the next year.

John Redwood: My critique of the Chancellor’s Mais Lecture, and what the Government should do next

7 Mar

Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales.

Amidst all the harrowing reports from Ukraine and the deaths and destruction wrought there by Russia, the Chancellor has sought to chart a course for the economy for the next couple of years.

In his Mais lecture he echoed his predecessor, Philip Hammond, in seeking a productivity breakthrough. He also reaffirmed the Maastricht rules approach to economic management, wanting tax rises to get the deficit down first. The Treasury should note that its role model the EU has abandoned these rules for the time being, and is pursuing monetary and fiscal expansion.

The lecture was wrong to deny that lower tax rates can bring in more revenues. The Republic of Ireland has been a shining example of this, boosting its per capita GDP far higher than ours or the lower level of the  EU by attracting huge investments through a 12.5 per cent Corporation Tax rate.

Their business taxes offer a higher percentage of total tax take than our higher rates. The Chancellor ignores the findings of Margaret Thatcher and Nigel Lawson who he praises. They produced a surge in revenues from higher paid people by major cuts in income tax rates.

The Government should take the cost of living crisis more seriously. In accordance with the Mais lecture, it needs to create the conditions for private sector investment in creating more better-paid jobs and in producing more of the goods and services we need at home.

Levelling up needs to be private sector led, and offer people the chance to set up and run their own businesses, be trained for better paid employment, and find ladders of opportunity in the areas attracting the projects and businesses.

The Government should not take the fast growth rate of 2021 for granted. It was a one-off based on removing Covid restrictions and on an unprecedented injection of money by the Treasury and the Bank of England. In the end, they overdid it in scale and duration, triggering a nasty inflation. The new investment has to take place against a less supportive public sector background.

The rise of prices well above wages will cut growth, as people spend more of their money on such basics as food and energy. That will leave them with less to spend on leisure and pleasure – on items that are nice to have. The huge rise in energy bills alongside tax rises including National Insurance will sap spending power further. The economy will slow. The lecture did not tell us how the extra private sector investment will be attracted in these conditions, particularly with the planned rises in Corporation Tax to come.

These troubles will be compounded by the Government’s import promotion policies, which are most pronounced in the Business and Agriculture departments. Business is busy allowing the rundown of big energy using manufacture like steel, ceramics, aluminium, and glass in the name of Net Zero.

The trouble is that we then import the products from abroad, meaning that more C02 is created in their production and transport to us. The Business Department is busy reducing our oil and gas output so that we need to import more energy. Again, this adds to our CO2 production worldwide.The Environment Department is developing big subsidy incentives to remove land from food production and to encourage older farmers to give up. That will make us more dependent on imported food.

So why does the Government not like products made or grown at home? Why doesn’t it want more home output to boost jobs, incomes and lifestyles? Any sensible programme of levelling up should be cutting taxes and making it easier for local businesses and farms to set up and grow.

This year, revenues have come in much higher than the Budget forecast, thanks to higher growth – and way higher than the £12 billion that the Government says it needs for a tax rise. The Treasury did not put up rates of tax, so revenue grew. During the next financial year, higher tax rates and frozen starting levels will hit taxpayers hard. Revenue is likely to underperform as growth stutters.

An energy shortage is a big part of the problem. The government should ease the shortages of gas, oil and electricity. They should invite in the oil and gas producers in the U.K. and help them increase production straight away from current fields. They should offer licences for new production from all those new and extended fields that have already been discovered. That’s more jobs, better paid jobs, and plenty of extra tax revenue. It is also less CO2 generated globally, as our own gas produces under half the CO2 of imported LNG gas. We will have much more productive industry if we have cheap or competitive energy.

The Government should work with the electricity industry to keep the lights on. We  will need more capacity than is planned to cover the electric revolution. We need more power for when the wind does not blow and the sun does not shine. We should abandon the current policy of putting in more and more interconnectors to allow us to import more from an energy short continent.  They should produce schemes to promote more home-grown food.