HAMISH MCRAE: Rishi may have met the challenge of paying energy bills, but the bigger question is how to avoid a recession
Rishi Sunak may have cracked it. The individual challenge families face is paying the fuel bills. Pumping an extra £15 billion or so straight into people’s bank accounts, with almost certainly more to come in the future, is the kind of measure that will mean the difference between a growing economy and a shrinking one.
But the national challenge is to avoid a recession. Because it’s not just the money, very helpful for families, but not huge in the context of the country’s economy. It’s the trust factor. Everyone is understandably afraid of the prospect of energy bills this winter that will be almost unimaginably high.
So what are you doing? You’re starting to cut back on all spending now. A YouGov poll last week found that around 40 per cent of Brits said they had already started cutting back on spending on clothes, eating out, takeaways and so on.
Decisions: It is too early to have any sense of the impact of Chancellor Rishi Sunak’s support package
There are always lags in the economy, so if people cut back now, it will affect the economy through the fall. When money is saved that would otherwise have been spent in shops or restaurants, jobs are eliminated – which in turn further reduces the amount of money flowing into the economy. This is how recessions happen.
It is still too early to properly assess the impact of the Chancellor’s package. Let’s wait and see what people are doing, not what economists say they will do. But we know from US policy when the pandemic hit, namely sending cash directly to people’s bank accounts, that this was a big boost to spending. So it would make sense for that to happen here.
On the cash side, that extra £5 billion levy on energy companies is tiny when compared to last year’s £830 billion in tax revenue. But politically it matters because, fortunately, we live in a democracy, and democracies must strive to be considered fair. Profits have been inflated by the rise in energy prices, so it makes sense to tax some of that back.
The financial markets accept the reality of politics. Shell and BP shares were pretty square this week, with Shell up 39 percent and BP up 22 percent for the year. British Gas owner Centrica’s share price was hit hard but then rebounded, up 5 percent from early January.
From the Ministry of Finance’s point of view, the question arises as to how quickly the deficit can be reduced. The first estimate of the deficit for the last financial year was £152bn, although the Office for Budget Responsibility believes it will be revised down slightly. This year the target is around £90bn, so run down but still meaty.
Spending an extra £15bn will theoretically increase the deficit, but if it boosts confidence and keeps consumer spending and employment up, it will raise more taxes.
The big numbers come later, as pensions and benefits rise in line with inflation. That increases the bill by 10 percent. Then there’s the big uncertainty: how much will the cost of government interest bills rise, given that a quarter of the national debt is linked to inflation? That’s inflation, by the way, as measured by the retail price index, which is even higher than the consumer price version.
So there are big uncertainties, the biggest of which is whether the economy will be able to continue growing despite the collapse in energy prices. This not only requires the Chancellor’s package and what follows. It will take something more. That means we have to get back to work.
You’ll have seen those unemployment numbers come down to 3.7 percent, the lowest since the 1970s. You may have heard that the number of payroll clerks hit an all-time high at 29.5 million. But you may also have had to fight your way through Gatwick or other airports and expect lengthy delays due to understaffing.
Most employers scream for people. Although dependent employment has peaked, the number of self-employed people has fallen sharply. That’s partly because of changes in regulation to reduce people who are considered self-employed but are actually in jobs. Even taking that into account, there is a flaw.
So the bottom line is this. If we’re going to keep the economy growing, which we need to do to fund ourselves through the next few years, we need to entice people – who may have taken early retirement – back into some form of employment. And that’s even more of a challenge than paying our energy bills over the winter.
Hamish McRae’s book The World In 2050: How To Think About The Future has just been published by Bloomsbury
HAMISH MCRAE: Chancellor Rishi Sunak must try to avoid a recession
Source link HAMISH MCRAE: Chancellor Rishi Sunak must try to avoid a recession