The results are in… and, after a year in charge of Britain’s finances, how should we grade the chancellor’s stewardship of the economy?
UK plc delivered a welcome, and largely unexpected, shot in the arm for Rachel Reeves, with the Office for National Statistics recording second quarter growth of 0.3 per cent, comfortably beating the City’s consensus forecast of 0.1 per cent.
After a gloomy April and May, the summer sunshine warmed June, during which the economy expanded by 0.4 per cent. The quarterly figure was also boosted by April’s contribution being revised up from a contraction of 0.3 per cent to a smaller fall of 0.1 per cent.
While cheerier than expected, these figures still aren’t enough to solve Reeves’s wider problems. The Resolution Foundation, a think tank focussed on the plight of low income Britons, put it well. The economy isn’t shrinking, it said – but it is slowing, and quite a bit from the 0.7 per cent growth recoded in the first three months of the year.
The first quarter was powered by manufacturers racing to get product made and sent across the Atlantic ahead of Donald Trump’s tariffs. That effect went into reverse after Trump’s “Liberation Day” on April 2, when most of his levies on imports kicked in. The UK economy contracted as manufacturers paused for breath and the tax increases announced in Reeves’s Budget gave industry pause.
The initial chaos delivered by Trump has now washed through the economy and it has found a level. However, the negative impact of Reeves’s tax rises is still casting a pall. Economists said it had resulted in a sharp fall in business investment, which is something the government wants and needs. It rose by 3.9 per cent in the first three months of the year, but then went hard into reverse, falling by 4 per cent in the second.
Businesses inevitably responded to the increases in their taxes, as businesses are wont to do. They focussed on reducing their costs to mitigate the impact of the increased labour costs caused by Reeves’s decision to raise employer national insurance. And they shelved their investment plans while they were at it.
Higher government spending helped to offset these effects. But that isn’t sustainable if the private sector continues to stutter.
The danger now is that the Office for Budgetary Responsibility downgrades its forecasts. That matters because it uses those forecasts to check the Treasury’s sums, and whether the chancellor’s tax and spending plans comply with her fiscal rules. The latter requires that day-to-day government spending is funded by taxation. Ministers can only borrow more to invest.
If the OBR forecasts are downgraded, then the fiscal hole Reeves is in only deepens, requiring more tax rises to fill it.
The chancellor got another unexpected boost as it emerged that the decision to scrap non-dom status, a controversial tax break available to some wealthy people who live here but are considered to be domiciled overseas for tax purposes, has not led to the sort of mass exodus of millionaires some had predicted. A number have left – but the numbers are broadly in line with Treasury projections. File under “small crumbs of comfort”.
Reeves, naturally, has hailed the fact that the UK’s performance beat expectations – but she is right that there is “still more to do”. Some of that must include more pro-business policies to get investment flowing again. Promises not to further increase the tax burden on them must also be kept. Yes, the chancellor needs revenue. But she needs growth to sustainably deliver it. Adding to the burdens on businesses now would simply be cutting off her nose to spite her face.
A year in, and it is hard to grade her economic stewardship at much better than, say, C+. True, these figures do show that Britain is still outpacing the rest of the G7 – something Reeves highlighted and a line you will hear a lot if you can stomach spending any time listening to debates in the House of Commons (it isn’t an edifying activity).
But just because the neighbours are doing badly doesn’t mean the UK is doing well. It isn’t. It needs to do better. The chancellor faced a challenging situation when she took office, true. But she also needs to do better. She can’t keep blaming the other lot. It won’t wash with the voters.
Finally, a word or two about mortgages. While the Bank of England is primarily focussed on inflation, the labour market and wage settlements, these figures will nonetheless add to the case of the interest rate hawks when it comes to the question of further cuts following the Bank’s recent decision to lop a quarter point off base rates to 4 per cent (which they opposed).
That’s bad news if your mortgage tracks base rates, and bad news if you’re looking for a fixed-rate deal, the price of which is dependent on the City’s interest rate swaps market. The expectation there is that the rate cut curve will be shallower than had previously been hoped.
Barclays recently delivered a fillip to would-be borrowers by cutting the price of some of its deals. However, I wouldn’t expect to see many more announcements like it, at least not until we see signs that inflation is on a downward track. And that isn’t currently the case.
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