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| | Hi Friend, Growth Upgrade ... The Budget Will Be Tough ...
Britain’s economy received an upgrade
from Wall Street this month. Official data showed another quarter of
growth in the second quarter. Growth in Q2 was up by 0.9% year on year,
following growth of 0.3% in the first quarter, according to official
figures from the ONS, the Office For National Statistics.
Service sector performance pushed the economy higher, despite sluggish growth in manufacturing and a setback in construction.
Bank
of America raised its forecast for UK Gross Domestic Product (GDP) in
2024 from 0.8% to 1.1%. Optimism was also evident in the latest edition
of Forecasts For The UK Economy published by HMT in August. The average
forecast for growth this year increased to 1.1% from 0.9% prior month.
Forecasts for growth in 2025 increased to 1.25%.
The Bank of
England was even more optimistic in the Monetary Report this month.
Growth is expected to be 1.25% this year, easing to 1.0% next. Perhaps
the Bank is more concerned about the autumn budget than others, but more
on that later.
For the moment, the growth estimate of 1.1% is
fair value. This will require a significant improvement in the
performance of the economy in the second half of the year. The latest
Flash UK PMI Composite Output Index at 53.4 this month up from 52.8 in
July, is supportive of the growth upgrade but it won’t be easy.
The
latest data in general was a case of the good, the bad and the ugly.
Growth figures were good, inflation data casting a note of caution. The
borrowing figures were challenging, causing deep concern amongst
Treasury watchers ...
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| | The Budget Cometh ... More Tricks Than Treats ...
“There is a budget coming in October and it will be painful” , Starmer warned in a Downing Street speech this week …
The Autumn budget will be not so much a Happy Halloween
event, but more a Horror Halloween event. More Tricks than Treats in
prospect from the new Chancellor of the Exchequer.
Rachel Reeves
has already warned of difficult decisions and the need for tax rises in
the October budget. The borrowing figures for July continued to be
“above forecast” increasing the probability of tough decisions ahead.
Borrowing
in the first four months of 2024-25 totaled £51.4 billion. This is
just £0.5 billion below the same period last year and £4.7 billion above
the monthly profile consistent with the latest OBR forecasts.
The
OBR explains, the difference with the forecast profile in the July
data, is driven by higher spending by government departments, as a
result of strong growth in public sector pay. Receipts are broadly in
line with profile in the year to date the OBR said.
It looks as
if the OBR forecasts for the year of £80 billion will be exceeded
significantly. The running rate (year on year basis) suggests borrowing
this year will be around £120 billion. The consensus forecasts for
borrowing PSNB basis this year is around £106.4 billion, well ahead of
the OBR outlook in March of £80 billion.
The Chancellor has
strongly hinted there will be tax rises in the autumn budget as she
promised to be "honest" about "difficult" decisions that lie ahead. The
public had been "misled for too long" about the state of the country's
finances.
"There will be more difficult decisions" around
spending, welfare and tax, she added, when asked whether people should
be prepared for taxes to be increased in the autumn.
Watch My Lips No Increase in Major Taxes …
During the election campaign, Ms Reeves promised not to increase major taxes on national insurance, income tax and VAT.
But
there was speculation that Labour could target other taxes, including
capital gains tax, inheritance tax and employers national insurance
charges. No increase in the levels of income tax allowances, would mean
the “fiscal drag” bonus would continue. The Tory cut in National
Insurance charges may be reviewed following the assessment by the Prime
Minister "Things are worse than we ever imagined."
Speaking at a
press conference shortly after announcing a series of spending cuts to
make up part of a £22 billion funding shortfall, the Chancellor said …
"The
truth is we did not know about the £22 billion black hole this year
when we went to the polls on 4th July. There will be more difficult
decisions around spending, around welfare and around tax at the budget
and the spending review later this year.”
The chancellor
has already announced a series of spending cuts, including cuts to the winter fuel
allowance, which will now only go to those in receipt of pension credit.
More cuts are expected in the budget along with the tax rises.
More
tricks, fewer treats in the Horror Halloween event. It’s going to be a
cliff hanger … let’s hope it doesn’t damage the growth ambitions too
much moving forward ... |
| John
To Book An Event email me john.ashcroft@thesaturdayeconomist.com |
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References This week's posts relies on extracts from our daily "What the Papers Say Review." Certain research content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from Adobe Stock and The Saturday Economist Presentation Slide Deck.
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| | © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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