Curb your enthusiasm on tax rises, Rachel Reeves – the UK economy is doing OK, says HAMISH MCRAE
Rachel Reeves says the UK’s fiscal position is so bad she will have to raise taxes in the Budget in October. Well, since she has said she will do so, we should expect that to happen.
But actually the country’s economic position is improving so swiftly that there will probably be no need to raise taxes at all.
We had three lots of new information last week.
Curb your tax enthusiasm: Despite Rachel Reeves’ cold assessment of the UK economy, things aren’t that bad, says Hamish McRae
One was that statement about an alleged £22 billion-a-year black hole in Government finances, and this indication of higher taxes to cover it.
The second was the cut in interest rates by the Bank of England.
And the third was the upgrade to the Bank’s forecast about economic growth this year, more than doubling it to 1.25 per cent.
As far as the black hole is concerned, that £22 billion-a-year should be set against Government revenues estimated at £1,095billion in the last financial year and at £1,150billion this year. So even if you accept the Chancellor’s point, it is not huge in relative terms.
However, those numbers will get better because of the other two new elements.
Lower interest rates will cut the cost of servicing the National Debt, and faster growth will boost tax revenues.
In the last financial year, the Government’s interest bill was £102billion. It is difficult to work out quite how much the decline in rates will cut that cost, because other factors such as the shifts in gilt yields and the Retail Price Index (which affects inflation-linked gilts), muddy the water.
However, on Friday the ten-year gilt (or Government bond) yield was about 3.8 per cent, whereas a year ago it was 4.4 per cent.
The Government, like mortgage-holders, can look forward to lower interest charges.
The debt service cost in June was the lowest for that month since 2020, and I can see at least £10billion coming off the total bill for the year.
Two-year gilts, by the way, are now down to 3.7 per cent, whereas a year ago they were 5 per cent.
Since gilt yields directly affect fixed-term mortgage rates, anyone looking for a two-year fix is better placed than last year.
It is also hard to work out how much more tax revenues will rise as a result of faster-than-expected growth.
I think the Bank of England, like other official forecasters, is still underestimating the performance of the economy this year, and that we will eventually learn that growth turns out to have been even higher.
However, you don’t need to be a genius at maths to work out that if the economy is 1 cent bigger than you first thought, tax revenues are likely to be at least 1 per cent higher too.
Not only can the Government expect an additional £10billion in revenue, probably more, but with more people in work, its welfare bill is likely to shrink as well.
None of this is to claim that the state of our public finances is brilliant. The size of Government debt as a proportion of national output is the second-lowest in the G7 group of leading economies after Germany.
But at just under 100 per cent of gross domestic product, it is at its highest since the 1960s, when we were still paying off the cost of the Second World War.
The budget deficit this year was projected by the Office for Budget Responsibility to be 3.1 per cent of gross domestic product. That’s too high.
All I am saying is things have got better over the past few months, not worse, and since they are on track to get better still through the rest of this year, there will probably be no need to increase taxes in October.
So why do it? You can be cynical and say it is the classic trick played by new chief executives when they come into a job.
Claim your predecessor made a mess of things, get all the bad news out of way, and then that makes your own performance (and your share options) look all the better.
If you wanted to be kind to Reeves you would say that she is being prudent, that there are a lot of uncertainties, and she wants to build in a margin of safety.
Either way, there is a danger: clobbering us with yet more taxation clobbers growth.
I hope this new lot are aware of this, but I fear that they are not.
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