Chancellor Rishi Sunak is right. Britain’s growth was best in class among advanced G7 countries in 2021 and the recovery looks well established despite Omicron falling 0.2% in December.
As you might expect given the £400bn of taxpayers’ money spent on programs to save jobs and preserve businesses during the pandemic, and the monetary largesse of the Bank of England.
Policymakers moved too quickly after the financial crisis to reduce fiscal policy, suppressing production, investment and household incomes.
It’s time to change ? : Chancellor Rishi Sunak’s NI hike is tax on jobs and consumers already pushed into higher tax brackets by benefit freeze
Not everything was negative. Wage moderation, of the kind clumsily advocated by the Governor of the Bank of England Andrew Bailey, has made it possible to preserve and store jobs.
Workers at Honda’s Swindon factories have opted for shorter working hours rather than lose their jobs.
The reality of Britain’s economic performance of Covid-19 is that if the clock is turned back to 2020, the UK is a median performer rather than the best in class.
The United States, where Donald Trump and then Joe Biden wrote checks to every citizen, has rebounded faster than everyone else and gross domestic product is now 3.1% higher than it was when the coronavirus is out of China.
This shouldn’t be surprising. Deficit spending has been accompanied by post-war monetary mania, which explains why annual inflation hit 7.5% in January 2022, its highest level in 40 years.
The other Western countries that are doing better than the United Kingdom are Canada, up 0.2%, and France, up 0.9%. The laggards are Japan, 0.4% below peak production, Italy, 0.5% down, and last in line is Germany at 1.5% below its 2019 peak.
When you consider the blow to British trade caused by Brexit obstructionism in Europe, the dispute over the Northern Irish border and the damage to services caused by transport disruptions, the data is surprisingly encouraging. Public spending has been a huge driver of the recovery and it’s not going to fade anytime soon. The Public Expenditure Review, which accompanied the October 2021 budget, forecast strong real increases in public investment over the next three years.
This should be supported by higher business investment, which rose 0.9% last quarter. It will be bolstered by Rishi Sunak’s big tax giveaway for companies buying new factories and equipment.
With strong employment and vacancies at over a million euros, there are real incentives for companies to embark on the transformation of IT and robotics as they seek to strengthen their effectiveness.
The elephant in the room is energy prices and inflation. The Bank of England may have been the first to break out of the trap by raising interest rates, and it is far from done.
This will not prevent the devastating rise in energy bills in April or the hit to the balance of payments caused by the high price of imported energy.
If the Bank’s forecast is correct, the 2% squeeze in real incomes this year will be a real drag on output.
Energy prices are outside the Bank’s jurisdiction. Even if the government granted more licenses in the North Sea and allowed the Cambo oil field to open off Shetland, the country would remain dangerously dependent on imported supplies. Hydraulic fracturing might have offered a solution, but that is unlikely to happen.
There is no need for the world’s two largest energy-consuming economies, the United States and China, to strike a deal under which America will send huge quantities of liquefied natural gas to Beijing, rationing the supply from Europe. The variable, which the Chancellor could change immediately to offset a Labor-framed ‘cost of living crisis’, is to scrap the 1.25 percentage point rise in the National Insurance Contribution (NIC) for employers and employees scheduled for April, raising a £14 billion.
It is a tax on jobs and on consumers already pushed into higher tax brackets by the benefit freeze. Economic history tells us that tightening monetary and fiscal policy simultaneously will slow, if not kill, the expansion. NICs are an easy tax to raise as the public thinks the money goes directly to reducing waiting times and queues at hospitals. It will not happen. It is simply a Treasury device intended to show budgetary restraint.
The timing is terrible. This is the part of the revenue squeeze that can be contained and must be vaporized without delay.