This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
Tax cuts in the Budget next month? The International Monetary Fund thinks this would be a bad idea, and that has caught the headlines. Jeremy Hunt wants to cut them, but he has apparently warned the Cabinet that there won’t be as much room as there was last year, so will lower taxes remain an aspiration rather than a reality?
Well, for a start let’s get one thing clear. These aren’t real cuts, just as the reduction in national insurance Contributions that has just come in was merely reversing previous increases. The overall tax take as a percentage of the country’s GDP will be the highest since the early 50s. Even if taxes are trimmed a bit, they will still be higher than any stage since the early 80s – so higher than most people in jobs now will have experienced in their working lives.
Yet, as the IMF points out, more money is needed for public services and investment in infrastructure. And while the IMF has not covered itself with glory in recent years in its commentary on the UK – its growth forecasts have proved too pessimistic on several occasions – its concerns have been echoed here by the independent Institute for Fiscal Studies. The IFS argues that whoever forms the next government, it will have to face some difficult trade-offs between reducing the debt-to-GDP ratio, maintaining public spending and holding down taxes.
It is a dismal litany, but to put all this in context, the UK’s debt-to-GDP ratio is similar, and in several cases lower, than that of other major developed countries. Only Germany has a much lower national debt. Taxation as a share of GDP is lower than the OECD average, though higher than other English-speaking countries such as the US, Australia, New Zealand and Ireland. And relative to the other G7 economies, the UK has performed better than the average since 2000. Even the US, which has grown faster than just about everyone else, faces serious problems, notably a fiscal deficit of more than six per cent of GDP compared with the UK of just under five per cent. So not great, but this is a game that we are all in together.
We will get some new growth and inflation forecasts from the Bank of England on Thursday in its quarterly Monetary Policy Report, and the markets expect these to show better growth and lower inflation than the Bank forecast last November. The thing everyone will be looking for, though, will be signals as to when the first cut in interest rates will come through. At the moment this looks like May.
However, we have to wait a bit longer for the data that will be most relevant to Mr Hunt’s tax-cutting hopes. This will be the public accounts for January, which come out on 21 February. As anyone who has just paid their tax bill by the deadline of end-January will be aware, that is the biggest month of the year for government receipts. If revenues are strong, and so far they have been, then a bit of leeway does open up and the question will be how much of that space to use up now. Whatever the Chancellor chooses to do, he has to get the seal of approval from the Office for Budget Responsibility. Put bluntly, what the IMF thinks doesn’t much matter. What the OBR says absolutely does.
Actually there are some quite positive short-term indicators. One came out on Wednesday from the Nationwide Building Society. It was that house prices have started the year on an upbeat note, up 0.7 per cent on the month and now down only 0.2 on the year. It looks as though the housing slump is pretty much over, and that prices will gradually recover from now on. Not a boom, so prospective buyers still have a bit of time, but a pick-up in prices has knock-on impact on the economy as a whole. It boosts consumer confidence generally, and when people move house they need to buy stuff to furnish the new home.
A second positive sign is the solid PMI numbers. These purchasing manager indices are calculated by asking companies whether they expect to increase production, hiring and so on, in the months ahead. They are the best forward-looking indicator for growth, and for the UK they are decently positive. The composite PMI is now 52.2, a seven-month high, with anything over 50 indicating growth. That is actually higher even than the US, and contrasts with the eurozone, where the equivalent numbers are negative. One should never take one month’s figures on anything too seriously, but in the short-term the glass does look at least half-full.
As for the longer-term, which is what the IMF and the IFS were really worrying about, I think we should acknowledge that there are huge uncertainties, but also these are as likely to turn out to be positive as they are negative.
We had a projection just this week from the Office for National Statistics that suggested that the UK population might reach 74 million by 2036. That would be nearly another 10 per cent, and since the increase would be fuelled largely by inward migration, it would generate many problems. But it would also generate huge economic growth. All those fiscal forecasts would have to be completely rewritten. Growth creates many problems, but they surely are more manageable than those created by stagnation.
Those population forecasts are pretty stunning, and if they prove anywhere near right they will transform the country. It really will be a set of problems about growth – managing the rising numbers, building the homes, educating the young, training those of working age, or perhaps just welcoming those who are already fully-trained for the jobs on offer, and so on. It is such a huge issue that breaking it down into bite-sized chunks would take a lot more than a column. Lots of work ahead.
But there is one thing worth noting here and that is a question which is rarely discussed. It is: why do people seem to prefer to come to Anglophone countries?
There is the whole business of the small boats coming across the Channel. France is lovely – many Brits seem to think it would be a nicer place to live than the UK. Pro-Europeans often argue that continental Europe offers better public services, which may be true, and disparage the UK for its many shortcomings. Scandinavia is much admired. The US, by contrast, is generally attacked for its social failings. Yet it happens to be the second biggest recipient of British emigrants after Australia.
I have not seen any really good explanations. The Red Cross argues that many people coming across the Channel want to join family and friends who are here. That must be right, but it is a circular argument because it poses the question as to why those family and friends came in the first place.
The Immigration Advice Service looks at the data and concludes: “Historic reasons for immigration to the UK are, and will remain, consistent as time goes on. The UK has long been a destination for immigrants seeking new opportunities for work or study, and to start a new life with family members.” That must be right too, but it doesn’t explain the sudden surge that has led to these new ONS population projections.
My guess, and I would love to dig deeper into the variety of studies, is that there are three broad attractions. One is the strength of the job market, both the informal one and the organised market. A second is the informality of the society, something in common with the US. And the third is language, an attraction that of course applies to other Anglophone countries.
I’ll try and return to the subject, because it is going to become more and more important as the years ago by. Meanwhile, though, let’s try and think through what we need to do to fit in another seven million people and give them decent and fulfilling lives.
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