When higher wages and higher skills ... mean higher taxes and higher bills ... who really benefits from the Chancellor's budget and the Prime Minister's vision for Britain.
Rishi Sunak opened the Tory Red Box and a "rarebit" jumped out. It was a dish of melted austerity seasoned heavily with tax and spending plans.
The Chancellor announced £150 billion of spending commitments for hospitals, schools and the justice system. Almost every department received large budget increases. Local authorities would be forced to lean on council tax hikes to balance the books. But money was made available to assist with the leveling up agenda across the U.K.
£100 billion of new spending is expected over the next three years, funded in part by previously announced tax increases in corporation tax, personal allowances and national insurance hikes. With tax increases of £40 billion over the same period, the budget is expansionary with a kick of some 2% of GDP.
The Chancellor promised a "new age of optimism" slightly downgraded from an earlier promise to make the U.K. the best place on the planet. Footnotes indicated the sections drafted by Number Ten. Sunak almost apologized directly for the tax hikes. He was not "comfortable or happy" about the tax burden he said. It really was his mission to see taxes coming down and within the lifetime of this parliament.
His long term ambition was to cut taxes before the next election arguing there was a "moral case" for a smaller state. "Do we want to live in a country where the response to every question is "what is the government going to do about it". Well not every question but it certainly begins with transport, infrastructure, telecommunications, education, skills, training, healthcare, social care, welfare, energy policy, water pollution, global warming, defense, security, police, prisons and more.
"The government has limits, the government should have limits" he added. It was a message to Number Ten about spending, a message to the back benches about future tax policy. Rishi Sunak "Trick or Treat". The Tory lead over Labour moved up. The Chancellor's approval rating moved down. The odds of a move along the street edged lower.
The change in stance had been made possible following the latest forecasts from the Office For Budget responsibility. In March, the OBR had expected the economy to expand by just 4% in the current year. Borrowing over the five year forecast period was expected to be £855 billion. The outlook for finances was so dire, tax increases were introduced to raise some £40 billion.
In October, the OBR revised the outlook for growth following the strong recovery this year. Growth is expected to be 6.5% this year and 6% next. Over the next three years, nominal growth will be over 20%. More people will be in work than previously estimated. Additional tax revenues would mean borrowing would fall by over £200 billion more than previously expected. A perfect opportunity for the Prime Minister to pursue his spending plans and grab the cash rather than reduce the level of borrowing still further.
Will the Chancellor be able to cut taxes ahead of the next election? It may be a tight squeeze with the hustings slated for May 2024. The planned corporation tax increase scheduled for 2023 could be short lived or even suspended.
The problem for government is the future direction of inflation and interest rates. The OBR expects CPI inflation to hit 4.4% in the second quarter next year. Interest rates are expected to rise to almost 1% by the end of 2022. Strong growth is expected over the three year period. The Chancellor may yet get his wish to cut taxes before the election. Now that would be a real trick and treat ...
Stick or Twist ...
Time is running out for central bank reaction in the USA. Inflation CPI basis increased to 5.4% in September. The Fed's preferred CPE measure increased to 4.4%.
Growth in the third quarter increased by 4.9% year on year. Nominal growth adjusted for inflation increased by 9.6%. Growth for the year as a whole is expected to be nearer 5% than the 6% previously expected. Recruitment difficulties and supply shortages are hampering expansion.
The Fed is due to begin tapering before the end of the year. A reduction in the spend on mortgage backed securities a fair bet. The US Treasury may yet need some help with conventional debt in the current year.
Stick or Twist? Joe Biden has a tough decision about the future of Jerome Powell at the Fed. Stick or Twist? The FOMC will have a slightly easier decision about a rate rise before the end of the year. As in the UK no central bank action is envisaged before Christmas. Sterling move down against the Dollar. Inflation expectations in the US remain firmly anchored. Ten year rates moved lower in the week ...
The markets have decided to stick, no twist, no trick just a continued treat ...
The Saturday Economist
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