There is no escaping the truth that perilous times lie ahead for the UK economy.
Like the rest of the world, we are grappling with a ferocious combination of problems – the bumpy emergence from the pandemic, Russia’s brutal war on Ukraine, disruptions to world trade and rising consumer prices – all of which are hurting the country’s economic prospects.
Both the Bank of England and America’s central bank, the Federal Reserve, are set to deal another major blow this week by raising interest rates again in a desperate effort to contain inflation. In the UK’s case, this is the fifth hike since December – the steepest streak of rate hikes in 25 years.
Rising: The Bank of England (pictured) is set to hike rates again for the fifth time in about six months
So, yes, we face serious challenges. And yet I just don’t think the grim interpretation by much of the broadcast media and fierce critics of Boris Johnson’s government is justified.
These Cassandras peddle unrelenting financial hardship while flippantly claiming that the nation is, or is heading into, a recession.
But a closer look reveals that not only are things nowhere near as bad as they say, but that there are serious grounds for hope in certain areas.
The British economy has recently lost momentum and shrank by 0.3 percent in April.
But what nobody has mentioned is that this is largely down to a statistical quirk, and in fact respected city forecasters are still forecasting the UK economy to grow by 3.2 per cent this year, followed by 0.9 per cent in 2023 .
The great danger is that the constant barrage of doomsday traders could influence events and shatter consumer and corporate resilience — resilience that still benefits this country.
In addition, I believe that with a change of course in the government’s approach, the economy could be restarted.
Of course, the country will struggle if it has to cope with inflation, rising interest rates and a huge tax burden at the same time. When consumers and businesses are doubly squeezed by higher interest rates and higher taxes, household incomes are wiped out.
Chancellor Rishi Sunak may not cut taxes but he has set aside £15billion to help poorer households
Chancellor Rishi Sunak must recognize that in his determination to restore public finances after borrowing so much during the pandemic, he has gone too far and too quickly to raise taxes on ordinary working families and businesses.
The truth is that with the nation near full employment and the City of London and services – which make up more than 70 per cent of national output – doing well, there was absolutely no reason to raise taxes urgently, if any.
Revenues from income tax, social security, value added tax and corporate income tax have flowed into the state coffers at record levels. All future increases will do is slow corporate spending and willingness to invest.
And the main reason for that 0.3 percent drop in production in April? This is because the government suddenly ended NHS testing and tracing operations, which had grown into an impressive industry employing tens of thousands of people as the country emerged from the pandemic.
In fact, consumer services activity rose 2.6 percent in April. Despite the 100-pound tank of petrol, the 8-pound pint of the best IPA and skyrocketing food prices, a recession — defined as two-quarters negative growth — is unlikely.
Even if Rishi Sunak doesn’t cut taxes, his £15bn package to target support for poorer households as the cost of living rises means incomes should now rise in the second and third quarters of the year. It is almost 2 percent of their income and will increase the country’s purchasing power.
Consumer services have grown while the economy as a whole is nearly 1 percent larger than it was before the pandemic
What the naysayers don’t tell you is that investment bankers Goldman Sachs recently pointed out that consumer services are “robust” and the UK economy is now 0.9 per cent bigger than it was before the nation went into lockdown.
Meanwhile, economic activity in the key service sector is up 2.6 percent.
But it’s not just consumer activity – along with over £370bn of pandemic savings in household current and savings accounts – that’s propping up the economy.
New data just released shows that the quest to make the UK a high-tech, high-value nation is keeping the UK thriving.
So far this year, the country has sucked £12.4 billion in investment into the tech industry, the highest level of any country except the United States.
As for the argument that Brexit has done for the UK, it is broadly dismissed by city consultancy EY, which argues that when it comes to financial services, “six years on from the EU referendum, we can rest assured that the Brexit has done no harm in the UK’s appeal in principle.”
With financial and professional services being HMRC’s largest source of income and the UK’s most successful export to the rest of the world, this should certainly be a source of national pride rather than the nagging of Remoans.
Everywhere you look, the excellence of the UK life sciences sector – as demonstrated by the rapid development and uptake of the Oxford-AstraZeneca vaccine during the pandemic – continues to shine.
British science companies like Oxford-AstraZeneca have done well
Another major British pharmaceutical company, GlaxoSmithKline, a world leader in developing vaccines, has just announced positive trial results for the world’s first vaccine against serious respiratory diseases – such as pneumonia in adults – and a new Covid vaccine effective against the Omicron variant .
It is also about to unveil a £400m investment in a life science park in Stevenage which is expected to attract researchers from around the world.
In the face of such confidence, such investment, and insinuations of national malaise seem far from it. But what is needed to maintain prosperity and avert a recession is for the chancellor to act.
After helping consumers hurt by the ruthless rise in energy prices, he must now find a way to offset the rise in interest rates. About 74 percent of homeowners have fixed-rate mortgages, so there is some protection against a total housing market collapse like that of the late 1980s.
But more needs to be done. And by that I mean that Rishi Sunak must put an end to the tax hikes – or even reverse them.
His reluctance is, to a certain extent, understandable. He was terrified by the scale of the fiscal mountain to be scaled in the wake of Covid-19. As a result, he froze personal tax allowances until 2025-2026, along with capital gains tax thresholds.
Analysis by the Institute for Fiscal Studies shows that this will generate around £20.5 billion in additional revenue a year for government as a result of inflation and rising wages.
Sunak also opted to increase corporate income tax from 19 percent to a whopping 25 percent next year. And to help fund the NHS and social care, every worker and employer in the country now pays a 1.25 per cent surcharge on National Insurance.
Taken together, all these measures (before including the windfall tax on oil production) mean that Boris Johnson’s government has levied more taxes on the British people and trade than any other British government since the 1940s.
Such a position is totally untenable given the precarious economic circumstances we are facing. If the Johnson administration is to contest the next election with a healthy economy, there must be a major shift in tax cuts.
And if that happens, it could just be the magic pill for a Tory revival.