GDP growth proves the Bank of England's mistakes
The GDP deflator – which is a measure of the overall level of prices in the whole economy – came in at 4.1 per cent year-on-year growth. That's down slightly from the last reading but still more than double the Bank's 2 per cent target. Nominal domestic demand was growing too, at more than 5 per cent – providing stronger growth figures but pouring fuel on the inflationary fire.
The Bank itself now expects inflation to hit 4 per cent later this year but the rationale from the five members who swung the Monetary Policy Committee's (MPC) recent rates decision was that the labour market had become so 'slack' that a cut was needed to kickstart growth. The fact the economy expanded 0.7 per cent in June suggests that rates cut wasn't needed. The result: inflation let rip.
Meanwhile, data from the Office for National Statistics earlier this week pointed to pay rises of 4.6 per cent on average. Once price rises were factored in, this is still more than a percentage point above CPI. It seems hard to argue that the inflationary pressures from wage demands had worked their way out of the system before the MPC cut rates.
Another issue is the savings ratio – savings divided by household disposable income – which remains at over 10 per cent. Economic uncertainty is leading to consumers holding back on spending, something Rachel Reeves will be keen to unleash to boost jobs and business revenues. But if the Chancellor achieves this it will be yet more fuel on the inflationary fire. In short, the Bank may have loosened the reins just as the blaze was heating up. We can only hope I'm wrong.
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The Guardian
2 hours ago
- The Guardian
A UK headline wealth tax? It may be simpler to put up existing taxes
Pressure to go further on wealth taxes – by creating new modes of clawing at hoards of hard-to-reach cash – is mounting. For starters, the fiscal picture is looking fairly bleak, with economists estimating that Rachel Reeves must raise £20bn – or even as much as £50bn – to meet her goal of balancing day-to-day spending against the revenue raised from taxation. On the government backbenches, meanwhile, MPs want the chancellor to squeeze the richest in society harder. They even put forward an early day motion last month calling for a 2% annual tax on individual assets over £10m. Yet introducing these kinds of taxes is often not straightforward, with the behaviour of the wealthy being hard to monitor and harder still to predict. The first significant problem is working out where the assets are and who holds them. That has always been difficult and has become even more challenging after one of the most important economic surveys, the household wealth data series, was suspended by the Office for National Statistics because of its low quality. The upshot is that HMRC simply does not know how many millionaires or billionaires there are in the UK. Without reliable figures, it is extremely hard to write policies, cost them and administer them. There is also a battle to be had with an 'old guard with set views' in Whitehall. Whitehall sources paint a picture of a Treasury led by figures influenced by economists whose thinking was prominent at Oxford University in the 1980s and 90s – such as James Mirrlees, Christophe Chamley and Tony Atkinson – leading to something of an orthodox view. In a nutshell, that position is that if you tax capital too much, it will stop investment and hamper growth. Or, in Chamley's words: 'Tax rate on capital income tends to zero in the long run.'. Since this era, the debate within economics has become more nuanced. A growing body of research suggests that some taxation on capital, even at relatively high rates, could lead to greater investment. As it becomes less attractive to hoard wealth because of taxation, risk appetites would then increase in pursuit of higher returns. You might be less tempted to keep your money in a vanilla savings account that can be taxed hard and easily if you can get a much better rate of return – even with a bit more risk – elsewhere. Treasury insiders argue that Reeves has followed the more modern logic, having already taken steps to widen the scope of inheritance and capital gains tax (IHT and CGT). They posit that her reluctance to pursue a headline wealth tax does not mean she has pulled her punches when it comes to taxing wealth. Hostile backbenchers, on the other hand, suggest she follows the old orthodoxy too closely. They often cite her decision to go for relatively small changes in the amounts of tax paid via CGT, rather than bring it more closely in line with income tax at the last budget, which also upset more senior political colleagues. What the debate about how to handle changes to IHT (which have been fiercely opposed by farmers) or CGT illustrates is that if the government really wants to tax wealth more effectively then it has all kinds of ways to do so before opting for a politically – and potentially economically – sensitive route with a headline wealth tax. Yet even changing existing mechanisms might not be easy, when the UK already has one of the highest rates of tax on property and wealth among developed economies, according to the Organisation for Economic Co-operation and Development. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion Political pressure may make it harder to maintain a more gradualist approach, however. Figures on the left of the Labour parliamentary party are attracted to totemic wealth taxes of the kind introduced in Spain – its so-called solidarity tax – and Switzerland. They see it as part of showing a commitment to rebalancing the economy. Reeves is critical of international examples, saying that Switzerland does not have IHT, and that Spain's wealth tax is so riddled with exemptions that it raises too little money. Some developed economies that had comparable wealth taxes have dropped them, too. 'We have inheritance tax. We have capital gains. We've just got rid of the non-dom tax status that doesn't exist anymore in our tax system. So we do have taxes that tax the wealthy,' Reeves said in a recent interview with LBC. Other measures that go further are not yet proven to work, she claims, saying that those who 'come up with simple solutions' must do more to 'explain exactly how it would work, whether it's an ongoing tax, what it would do to tax avoidance, what it would do about people moving or changing the way that their wealth is stored'. Economists argue that the government should focus its energies on raising existing taxes, such as equalising CGT with income tax, for example, or changing gifting rules around IHT first, rather than introduce a novel wealth tax. The Treasury is already examining gifting rules among other possible IHT changes. Yet while Reeves might agree with some of these arguments, it's less clear whether her cabinet colleagues will tolerate a slow and steady approach, particularly if the fiscal picture sours.
Telegraph
2 hours ago
- Telegraph
The Bank of England's credibility is seeping away
The Bank of England's Monetary Policy Committee (MPC) should not have lowered its main policy interest rate this month. That cut from 4.25pc to 4pc was a 'significant error', I wrote last week, that could 'come back to bite us'. Financial market movements over the last week have convinced me I was wrong. The MPC's latest move was in fact a very significant error. If officials at the Bank of England aren't alarmed about the growing gap between the MPC's policy rate and the cost global investors now charge the UK Government to borrow, they should be. And if ministers aren't concerned, not least Treasury ministers, I have to wonder if they really understand what is going on. My main objection to the MPC's latest rate cut is that UK inflation remains high and is rising. By lowering rates when inflation is still clearly a problem, besetting Britain to a greater extent than other comparable economies, the MPC undermines the Bank of England's credibility – at a time when such credibility is sorely needed. During the year to June, the consumer price index rose 3.6pc, up from 3.4pc the previous month. This is the highest headline inflation rate since January 2024, with CPI growth consistently above the 2pc inflation target since last October. Driven by elevated food, energy and transport costs, UK inflation is the highest in the G7 – and has been since June 2024. Britain also uniquely saw month-on-month CPI increases in April, May and June, so our inflation outlier status has become even more stark over recent months. Earlier this month, even the MPC upped its inflation forecast to 4pc this autumn – but raised rates regardless. And there were no compelling reasons in the minutes of the committee's latest deliberations why price pressures will ease any time soon, let alone fast enough to justify dropping rates when inflation, on the Bank's own reckoning, will be double the official target as early as next month. The seeping away of the Bank's credibility is now playing out in real time, not least since last weekend. Over the past year, as the policy rate has come down incrementally from 5.25pc to 4pc, the rate the Government pays to borrow long-term money has moved decisively in the opposition direction. This is a bad sign, signalling that financial markets – not least the global pensions funds and insurance companies that lend government's big money and dominate sovereign bond markets – have a different view of inflation to MPC policymakers. In competitive auctions to lend the Government money, these major institutional investors, even as the MPC has been cutting, have been demanding higher rates when lending to compensate for the elevated inflation they still think is coming. Since last August, as the policy rate has shifted down 1.25 percentage points, the UK's 30-year gilt yield has been pushed sharply up – from less than 4.5pc a year ago to 5.3pc on the morning of Thursday Aug 7, prior to the MPC's midday announcement, a rise of more than 0.8 percentage points in the opposite direction. By last weekend, that market-driven borrowing cost had gone up to 5.43pc, flying in the face of the Bank of England. Some mortgage providers even raised fixed-term lending rates following the MPC's cut – no doubt because they saw gilt yields reflecting investors' concerns the committee's view on inflation is wrong. Such rate-splitting, as I call it, when policy and market rates move against each other, is a sign of growing financial instability. It indicates that market expectations have become unanchored from policymaker preferences – and in the end the market always wins. I'm concerned that, over the past week, we've seen the 30-year rate rise even more, touching 5.57pc on Friday. So since the policy rate has been lowered 0.25 percentage points, the long-term cost of government borrowing has moved rightly the same amount in the opposite direction. I argued last week that by lowering rates when inflation was clearly not tamed, the MPC was in danger of 'rate-splitting' to an even greater extent. That is what has happened. Long-term bond yields are influenced by a multitude of factors, of course, and have lately been nudging up across the world. But the UK's outlier inflation status is matched by its outlier status when it comes to long-term borrowing costs too. Our 30-year yield is also easily the highest in the G7. Even the governments of Europe's previous 'debt-crisis' nations can now borrow long-term money a lot more cheaply than the UK – namely Italy (4.52pc), Greece (4.26pc) and Spain (4.18) at the time of writing. And those rising borrowing costs, of course, need to be paid by the British state – increasingly, it seems, by borrowing even more. In April 2024, the Office for Budget Responsibility estimated that the UK Government would borrow £85bn over the following 12 months. When the fiscal year ended this April, that total was actually £148bn, no less than £105bn of which was spent on debt interest. In June alone, borrowing was £20.7bn – no less than £16.4bn of which was spent servicing our existing national debt. This is utter madness. While the MPC should not have cut rates earlier this month, in the end those really at fault are government ministers – and, more generally, a political and media class that, for so many years, has dismissed the concerns of those of us who have constantly warned that nation states, while they can of course borrow, need to both borrow and spend responsibly. Successive UK governments have not been doing so – today's Labour administration to an increasingly reckless extent.
Times
9 hours ago
- Times
Soaking the rich is the left's new magic money tree
H ow can you tell the difference between an opponent and an enemy? In Westminster your opponents are the ones sitting opposite you. Your enemies are the ones sitting behind. OK, it's an old joke. But it's one that will probably raise a chuckle from Rachel Reeves. Or, rather, a pained grimace. Last year Britain endured a miserable summer. We knew taxes would go up, but not which ones. Rumours flew that Reeves would raise this tax, that tax. Confidence duly withered. Now, it's happening again — in large part because of the people sitting behind the chancellor. It turns out that, from means-testing the winter fuel payment to curbing the horrendous rise in incapacity spending, Labour backbenchers are unwilling to sign off any spending decisions that cause their voting base the least amount of pain. And the bond markets have noticed.
