Taxing the lower-paid could stop the economic recovery in its tracks
There are plenty of nasty bills looming for the average British household that could persuade many to keep their savings firmly on deposit and prevent the economy from flourishing.
Anyone looking for a secondhand car will pay 15% more this year than last – that is, if they can find one that suits their needs. Paying monthly energy bills is no fun since world prices rocketed. And the cost of essential services such as childcare are only increasing over time.
Inflation was up 2% at the last count and many economic forecasters expect it to jump well above 3% before Christmas. The shortages of goods across much of the manufacturing and retail industries, combined with staff shortages made worse by Brexit visa restrictions, will see to that.
An increase in national insurance contributions (NICs) is also on the horizon, adding to the squeeze on incomes. Last week the government said it would ask households to cough up an extra 1.25% on their NICs from April, which accounts for around half of the extra £12bn it wants to spend on health and social care.
Separately, income tax thresholds will be frozen from next year, meaning more people will move into the higher-rate tax band.
Making matters worse, Boris Johnson conspicuously failed to rule out further tax rises. Then there are the costs that are harder to quantify, yet might make a reasonable person think twice about splashing their savings on a holiday or buying an electric car.
Climate change is being debated in ever more apocalyptic terms and it is clear the government’s financial support will be aimed at the poorest. Anyone earning around the average wage of £30,000 is going to find they need to cough up thousands of pounds to comply with new rules that aim to bring carbon emissions down to net zero.
If anything, the Cop26 conference in Glasgow in November will only heighten this anxiety, even if it proves to be more hopeful about the journey to net zero than many expect.
London’s adoption of a low-emission zone between the North and South Circular Roads is an event that underscores the battles ahead. Until now, Johnson has put his enmity with London mayor Sadiq Khan ahead of helping low-income households upgrade their old bangers to meet the standards for what will be Britain’s biggest low-emission zone. Other mayors are watching to see how Londoners react to a £12 daily charge if their cars fail to meet the new standards.
With so many extra costs coming down the track, Labour would do well to bring back Ed Miliband’s phrase “the squeezed middle” to depict the huge group of voters who can ill afford to make the transition to a green economy.
Rishi Sunak is clear that the Treasury must focus on bringing down the public debt, which, according to a measure used by the Organisation for Economic Cooperation and Development, now exceeds 140% of GDP.
Incomes are falling in some quarters. Six million families that claim universal credit will see whatever rise in wages they secure subsumed in a wave of cuts throughout October
The chancellor is also convinced by his own rhetoric that rising wages from all the “good jobs” he plans to create means most people can cope with rising costs.
Since last summer, the Office for National Statistics says pay growth has averaged 3.5%, which in normal times is healthy, if not spectacular. However, this improvement is likely to slip back next year, and it was preceded by a period of stagnant wages. Official figures tell us that median weekly pay for full-time employees increased by just 0.1% to June last year on the previous 12 months. Pay in the private sector fell 0.6% over the same period.
Incomes are falling in some quarters. Six million families that claim universal credit benefits will see whatever rise in wages they secure subsumed in a wave of cuts throughout October, as ministers take more than £1,000 from their annual income.
So far, what Sunak says he cannot do to support the economy is borrow more: from next April, it must be business as usual. Yet the chancellor, who increasingly looks like he is setting the agenda inside Whitehall, risks harming the recovery by taking this tough stance.
It’s not so much that he has raised the tax burden to its highest level as a proportion of national income in 50 years. It’s that he has chosen to mainly increase taxes on low- and middle-income workers, allowing the wealthy to escape higher taxes yet again.
He could spend more without raising taxes now that he is on course to borrow around £57bn less in the current financial year than the Office for Budget Responsibility (OBR) forecast back in March, and possibly enjoy even more leeway once the Treasury’s independent forecaster has revised the figures for the budget in October.
If he chooses to save most of the money in order to bring down the annual deficit, the fiscal hawks on his backbenches will cheer. Yet this victory could be his undoing if it needlessly undermines consumer confidence and harms the economy.
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UK economic recovery stalled in July amid worker shortages
Britain’s economic recovery from the winter lockdown almost stalled in July despite the removal of most pandemic restrictions, amid a fall in retail sales and the impact of “pingdemic” shortages in the workforce.
The Office for National Statistics said gross domestic product (GDP) grew by just 0.1% in July from a month earlier, as the government’s end to most restrictions in England failed to offset the fallout from the coronavirus Delta variant. GDP was lower than the 0.6% growth forecast by City economists, and a sharp slowdown compared with June when the economy grew by 1%.
Service sector activity, which accounts for 80% of the economy, recorded no growth overall on the month, with the return of music festivals and sport offset by a sharp drop in high street spending and a decline in the legal sector linked to the end of the stamp duty holiday.
Rising costs and shortages of raw materials triggered a fall in construction, while manufacturing remained broadly flat as firms struggled to fill staff vacancies in July amid a lack of suitable applicants and a reduced number of EU workers.
The figures came as business leaders sounded the alarm over the economic recovery as a shortage of workers and materials fuels the worst supply chain meltdown since the 1970s, threatening to delay the UK’s economic recovery from Covid-19.
Alpesh Paleja, the lead economist at the CBI lobby group, said temporary, targeted interventions from the government were needed to enable businesses to keep their doors open, including relaxing post-Brexit migration rules to help companies hire workers.
Bridget Phillipson, the shadow chief secretary to the Treasury, said the government’s complacency was holding the country back. “The concerning figures today show that just as the UK economy ought to be getting back to normal, disruption to supply chains and other shortages mean our recovery is hitting the brakes,” she said.
“The government has no plan, other than to plough ahead with a tax on jobs as well as a devastating cut to universal credit, taking money out of our high streets just when it is needed most.”
According to the latest snapshot, the UK economy remains 2.1% below its pre-pandemic level. Overall, GDP grew by 3.6% in the three months to July 2021 as the easing of lockdown enabled consumers to return to high street shops and boosted spending in pubs, hotels and restaurants.
There was notably strong growth of 118% in air transport in July as the easing of travel restrictions enabled more consumers to take foreign holidays. However, the sharp rise was from a low base, while output in the sector remains 77% below pre-Covid levels.
The main contributor to growth came from the reopening of an oilfield after a planned maintenance period, helping to boost output in the production sector of the economy – which includes manufacturing, energy supply, mining and quarrying – by 1.2% in July.
Economists said some of the weakness in consumer-facing sectors of the economy came after a stronger month in June, when England’s progress towards the Euro 2020 football final helped to boost retail sales. Wet weather in July also dragged down activity.
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However, analysts warned that persistently high Covid-19 infection rates caused by the Delta variant, as well as supply shortages and rising costs for businesses, could push back the return of the UK economy to pre-pandemic levels by several months until early next year.
Paul Dales, the chief UK economist at the consultancy Capital Economics, said there was a “whiff of stagflation in the air” as growth falters but the price of goods and services continues to climb. “It’s becoming clearer that product and labour shortages are also acting as a brake on the recovery,” he said.
Rishi Sunak, the chancellor, said he was confident Britain’s economy would continue to recover from the pandemic. “Our recovery is well under way thanks to the success of the vaccination rollout and the roadmap, with more employees on payrolls that at any point since last March,” he said.