ALEX BRUMMER: Economic history tells us that tightening monetary policy and fiscal policy at the same time will slow, and potentially kill off, expansion
- NICs easy to increase as public thinks money goes directly to NHS
- Simply a Treasury device intended to show fiscal restraint
- It is tax on jobs and on consumers already dragged into higher tax brackets
The Chancellor Rishi Sunak is right. Britain’s growth was best-in-class among the G7 advanced nations in 2021 and the recovery looks well established despite a 0.2 per cent Omicron dip in December.
As should be expected given the £400billion of taxpayers’ cash expended on job saving and business preserving schemes in the pandemic, and the Bank of England’s monetary largesse.
Decision makers moved too quickly after the financial crisis to batten down fiscal policy, suppressing output, investment and household incomes.
Time to change?: Chancellor Rishi Sunak’s NI rise is a tax on jobs and on consumers already dragged into higher tax brackets by the freeze on allowances
It was not all negative. Wage restraint, of the kind clumsily advocated by the governor of the Bank of England Andrew Bailey, meant that jobs were preserved and stored.
Workers at what were the Honda plants in Swindon opted for shorter working hours rather than losing jobs.
The reality about Britain’s Covid-19 economic performance is that if the clock is rolled back to 2020, the UK is a median performer rather than top of class.
The United States, where both Donald Trump and then Joe Biden wrote cheques to every citizen, bounced more quickly than everyone else and gross domestic product is now 3.1 per cent bigger than it was when coronavirus came out of China.
That shouldn’t be surprising. Deficit spending was accompanied by a post-war monetary splurge, which explains why annual inflation hit 7.5 per cent in January 2022 – its highest level in 40 years.
Other Western nations doing better than the UK are Canada, 0.2 per cent up, and France, 0.9 per cent ahead. The laggards are Japan, 0.4 per cent below peak output, Italy, 0.5 per cent down, and bottom of the league is Germany at 1.5 per cent below its 2019 peak.
When one considers the big hit to UK trade caused by Brexit obstructionism in Europe, the dispute over the Northern Ireland border and the damage to services caused by transport interruptions, the data is surprisingly encouraging. Government spending has been a huge driver of recovery and it is not going to fade away any time soon. The public spending review, which accompanied the October 2021 budget, envisaged big real increases in government investment over the next three years.
This should be supported by rising business investment, which climbed 0.9 per cent in the last quarter. It will be bolstered by Rishi Sunak’s big tax giveaway for companies who buy new plant and equipment.
With employment strong and vacancies standing at more than 1m, there are real incentives for firms to splash on transforming IT and robotics as they seek to buttress efficiency.
The elephant in the room is energy prices and inflation. The Bank of England may have been out of the traps first on raising interest rates, and is far from done.
That’s not going to hold back the devastating rise in energy bills in April or the blow to the balance of payments caused by the high price of imported energy.
If the Bank forecasts are right, then the 2 per cent squeeze on real incomes this year will be a real dampener on output.
Energy prices are beyond the Bank’s purview. Even if the Government were to grant more North Sea licences and allow the opening of the Cambo oilfield off Shetland, the country would still be dangerously dependent on imported supplies. Fracking might have offered a solution but it is unlikely to happen.
It is not helpful that the world’s two largest energy burning economies, the US and China, are concluding an agreement under which America will send Beijing considerable amounts of liquefied natural gas, rationing supply to Europe. The variable, which the Chancellor could immediately change so as to offset a Labour-framed ‘cost-of-living crisis’, is to scrap the 1.25 percentage point National Insurance Contribution (NICs) rise for employers and employees scheduled for April which raises a whopping £14billion.
It is a tax on jobs and on consumers already dragged into higher tax brackets by the freeze on allowances. Economic history tells us that tightening monetary policy and fiscal policy at the same time will slow, and potentially kill off, expansion. NICs are an easy tax to increase in that the public thinks that the money goes directly to reducing hospital waiting times and queues. That won’t happen. It is simply a Treasury device intended to show fiscal restraint.
The timing is terrible. It is the bit of the squeeze on incomes which can be controlled and should be vaporised without delay.