Don’t be fooled by recent good news, the UK economy is still in a precarious state | Phillip Inman
Too many Labor MPs want all of this, and no amount of pleas from the top of government about depleted public finances are likely to make a difference.
Mostly left-wing MPs want all the mistakes made in the last 15 years to be corrected as soon as possible. The next opportunity to demand more cash will come when Rachel Reeves makes her spring declaration on March 3.
All signs are that the Chancellor will seek to combine caution about the public finances – aimed at backbench MPs – with an optimistic message about the economic recovery to cheer the public up.
Whatever he says, there will be many on his side who will demand that economic orthodoxy be abandoned in favor of a bolder perspective delivered with Liz Truss-like energy. While the former prime minister has praised tax cuts as an economic rocket booster, Labor MPs will instead trumpet public spending as the engine of growth.
Last week’s figures showing a record amount of tax revenue in January will have fueled this desire, suggesting that the so-called Treasury is in good shape and able to meet the many and varied spending demands.
It was also good news that inflation fell from 3.4% in December to 3% in January; It was also good news that the Bank of England was increasingly likely to cut interest rates for struggling businesses and mortgage debt for the younger half of the population.
Lower inflation and lower interest rates, likely to fall from 3.75% to 3% by the end of the year, will not only ease the cost of living of the ongoing crisis but also contribute to public finances.
Low interest bills on government borrowing were also added to record tax revenues in January. Low inflation will give public sector bodies more spending power and stifle union demands for huge wage increases.
City economists predict there could be a further gap of between £10bn and £11bn if the Chancellor gives his update on the public finances next month. This will increase the Treasury’s fiscal buffer to over £30bn.
More broadly, private sector surveys show businesses are more confident about the year ahead, and corporate executives say they are considering reinvesting after a long hiatus.
A major lack of private sector investment has been missing from the UK economy since the 2008 financial crash; So a recovery would be exactly the kind of recovery Reeves and the government would like.
Retail sales rose beyond City economists’ expectations in January. Shoppers bought bags of electronics and replaced their fresh-out-of-the-box TVs and cell phones with new models.
But news of an improving economy cannot hide the weaknesses at the heart of the UK economy and the excessive demands on the public finances; This should put Labor MPs agitating for more spending to back off.
Looking back at January’s tax receipts, it’s clear that most of the extra money comes from capital gains tax (CGT) payments, generated by people disposing of assets to avoid future tax rises.
This means that the increase in CGT revenue is likely to be based on one-off sales of property and financial assets, and so gives little indication of the long-term prospects for tax revenues.
Whatever happens between now and the end of the financial year, UK borrowing is likely to total around £130 billion, just under 4.5% of annual national income; This figure indicates that the government is financially out of control, according to financial markets.
The Office for Budget Responsibility (OBR) predictions include deep budget cuts across most Whitehall departments to preserve more generous funding for the NHS, schools and defence. But when strict spending limits on most civil servants are maintained, the annual budget deficit begins to decline.
Where are the pressure points on public finances? An example of this is the £6bn of funding not taken into account in 2029 from the additional cost of supporting children with special educational needs.
A report from the County Councils Network published last week said transport spending for Send children alone could be as much as £3.5bn in 2030. This is another bill that is excluded from current budget estimates.
The Prime Minister has his own pet projects. Defense is currently the main focus and the budget may need to be increased by as much as £10bn to meet the parliamentary pledge to increase defense spending to 3% of national income by the end of the parliament.
It’s not clear how Donald Trump plans to allocate funds to reach his requested 5% of national income by 2034, but a future prime minister should certainly consider it.
This is an example of how grossly misleading reserve money is right now. Public finances are in a precarious position and could still be thrown off course by rising borrowing costs or the rising cost of youth unemployment; This situation will continue unless more investment can be made to increase growth.
Labor left MPs are in the same camp as Green Party leader Zack Polanski and many Tory and Reform UK MPs who want things they can’t afford. There is no magic money tree. Liz Truss taught us a lesson in sass that no one wants to relive.
