Rishi Sunak has warned “taxes will have to rise” if some semblance of order is to be restored to public finances. The government is going to have to make “difficult” decisions to recover from the pandemic.
The Chancellor of the Exchequer has said, “We cannot simply borrow our way out of any hole”, if spending increases and revenues continue to fall short.
The Office for Budget Responsibility expects borrowing to rise to over £300 billion this year. The level of National Debt has risen to just over £2 trillion pounds. Over 100% of Gross Domestic product, it is the first time the debt to GDP ratio has been so high since 1961.
Should we be worried about the debt level? The Bank of England has pointed out the debt to GDP ratio has exceeded unity, in over 100 of the last 300 years. Thrift, it would appear is a post war phenomenon.
Borrowing costs are so low on Planet ZIRP. The Bank of England has reduced the base rate to just 0.1%. The cost of ten year gilts has fallen to just 0.3%. No worries about a gilt strike. The Old Lady is on standby as the buyer of last resort. Almost £1trillion of gilts could end up in the bank’s coffers, if the spending spree continues.
Markets are not unduly concerned. Sterling has risen against the Dollar and against the Euro. The move above $1.34 a little heady for now, the rally from the pre-Covid low of $1.15 has been significant.
So what’s in store? “We will need to do difficult things. This doesn’t mean a horror show of tax rises with no end in sight but it does mean treating the British people with respect and being honest with them about the challenges we face.”
It’s a pretty fair bet we are all in trouble when a Chancellor says “treat the British people with respect”. The Chancellor is considering a number of options, including, an increase in corporation tax, capital gains tax, fuel duty and further penalties for pensions and pensioners.
Sir Graham Brady, Chairman of the 1922 committee, has warned an increase in taxes could stifle growth. Not all are aligned in cabinet. Thérèsa Coffey, the works and pensions secretary, suggested tax cuts may be wiser than tax increases, if revenues are to be increased.
Either way, the Chancellor would be advised to stay his hand for the moment. The drop in output was over 20% in the second quarter of the year. We expect a further fall in Q3 and Q4 of 10% and 5% respectively. For the year as a whole, most analysts are projecting a 10% drop for the year.
Unemployment is expected to rise to 6.5% by the end of the year. The number could be much higher with estimates of 2.5 million to 3.5 million unemployed as the furlough scheme unwinds.
At peak, over 9 million were benefitting from the Treasury scheme. No wonder, the Chancellor is the most popular member of cabinet. Termination of the furlough plan, with tax hikes in the Autumn Red Box, would scupper the Sunak chances of a move into Number Ten perhaps.
The government is struggling to persuade office workers to return to work. No problem about spending money. House prices are rising, retail sales are increasing. The fast figures for output in manufacturing and services suggest a strong rally is underway. The “Eat out to Help Out” initiative has led to a significant increase in restaurant visits.
For certain sectors, notably entertainment, hotels, travel and tourism, the return to normality will take a little longer.
Angela Merkel has extended the German furlough scheme until the end of 2021. The Chancellor is under pressure to increase the government scheme until the end of the year or Easter next year.
For the moment, plans for tax rises are premature. No rush to raise taxes, time yet to let the recovery gather pace …
About John Ashcroft
We are delighted to be partnering with Dr John Ashcroft to bring you the latest in a series of quarterly briefings and monthly updates on the UK and world economy. We will be looking at markets, growth and inflation and what this all means for the North West, the UK and globally.
Dr John Ashcroft PhD, BSC.(Econ) FRSA CBIM is author of The Saturday Economist, a weekly update on the UK and World Economy and former Chief Executive of pro-manchester, John will be collaborating with us to provide insight on economic and sector specific issues facing our clients and contacts.
