Having had a lot of contact with business people over the past few days, in various parts of the country, I come to you with a message ringing in my ears. It is not just Rachel Reeves\u2019s machinations before her budget in ten days\u2019 time that are casting a pall, it is also the relentless gloom of so much of the commentary on the economy.<\/p>\n
Why don\u2019t we, me, cheer up a bit? People don\u2019t want cheerleaders \u2014 just to recognise that there is good as well as bad happening. Why don\u2019t we leaven the Eeyorish mood with something a bit more Tiggerish?<\/p>\n
The spirit is willing but, not for the first time, it runs up against gloomy reality from the Office for National Statistics (ONS). An under-par growth performance in the third quarter, with gross domestic product (GDP) up only 0.1 per cent<\/a>, and down by that amount in September alone, followed labour market figures showing a rise in unemployment and a significant fall in the number of people on payrolls.<\/p>\n Let me start with the statistics, before moving on to a more general observation. Yes, the GDP figures were disappointing; a quarterly rise of 0.2 per cent had been expected and it was only 0.1 per cent. There are, however, two points to be made.<\/p>\n The first and most obvious is that the figures were clearly distorted by the cyberattack on Jaguar Land Rover (JLR)<\/a>, which pushed monthly GDP down in September when, in its absence, there would have been a small rise. I hate to write that, because it suggests the creepy hackers won, but it is the reality.<\/p>\n This not just my interpretation of the data but that of the economists at Investec bank (\u201cless weakness in UK GDP under the hood than on the surface\u201d), research firm Pantheon Macroeconomics (\u201cunderlying growth is better than the headline\u201d) and many others.<\/p>\n There is another factor: the recent tendency of GDP figures to be much better in the first half of the year \u2014 when the government could claim the fastest GDP growth in the G7 \u2014 than the second. As James Smith, research director at the Resolution Foundation think tank, says: \u201cThe UK is repeating its recent trend of a strong economic start to the year, followed by a slowdown in the second half.\u201d<\/p>\n I would not give the GDP figures a clean bill of health. If underlying GDP growth were stronger, it could laugh in the face of cyber-disruption and other temporary factors. There is no doubt that incessant pre-budget speculation, running through the summer and into the autumn, has dampened growth. The Treasury insists it did not set the summer kites flying, but neither did it do enough to pull them down.<\/p>\n As for the rise in the unemployment rate, from 4.3 to 5 per cent over the past year, it should be set against a fall in the economic inactivity rate from 21.6 to 21 per cent. In aggregate there has been a shift from inactivity into unemployment as more people have made themselves available for work.<\/p>\n \u2022 Job market hit by budget fears while still reeling from past one<\/a><\/p>\n Payroll numbers are down by a provisionally estimated 180,000 over the past year, for which the budget-related rise in employment costs (last year\u2019s budget, that is) must take some of the blame. But while I would not underplay the pain for sectors such as hospitality and retail, and the misery of losing a job, 180,000 is 0.6 per cent of the number of people on payrolls. <\/p>\n And, bizarrely, the official but flawed Labour Force Survey<\/a> is showing a rise in employment of 417,000 over the past year, though a small fall in the latest quarter.<\/p>\n If the statistics are open to less gloomy interpretation, what about the reality? We have a budget soon that will put up taxes again and, despite the government\u2019s efforts to reach out to business, a chancellor with a penchant for tax rises that damage firms and entrepreneurs.<\/p>\n My attitude to this may change fundamentally when I write about the budget here in two weeks, but, for the moment, let me put Eeyore aside and draw on my inner Tigger.<\/p>\n During the week, I took part in a pre-budget event for the consultancy WPI Strategy. Martin Beck, its chief economist, drew a parallel with the early 1990s: there were big tax increases then, and two tax-raising budgets in 1993 alone, but higher taxes were balanced by lower interest rates.<\/p>\n The mood then was very gloomy, but the early 1990s marked the start of a strong and sustained upturn for the economy \u2014 the longest unbroken recovery ever, lasting for 16 years.<\/p>\n The parallels are not perfect, because these days it takes longer for interest rate cuts to feed through. Indeed, many fixed rate mortgage borrowers are still seeing the consequences of the earlier interest rate hikes. In time, though, that will pass through, and the economy will start feeling the benefits of lower rates. One of the good things about the recent weak data is that it makes it highly likely the Bank of England will cut interest rates again, from 4 to 3.75 per cent, on December 18.<\/p>\n The Bank itself sees the delayed effect of higher rates giving way to the impact of lower ones, and forecasts GDP growth picking up to about 1.75 per cent annually over the next two to three years.<\/p>\n Another factor is the budget itself. Even though a hike in income tax rates now appears to be off the agenda, people will hate the tax rises that Rachel Reeves will announce. The question is whether they will be seen as sufficient by financial markets to silence doubts over the UK\u2019s fiscal credibility and end the air of permanent crisis surrounding this government and the public finances.<\/p>\n Things could be worse. The economy has been battered by higher taxes, budget speculation, US tariffs and the delayed effect of higher interest rates, and yet the Office for Budget Responsibility<\/a> will revise up its forecast for this year\u2019s growth from the 1 per cent it predicted in March to nearer to 1.5 per cent. It will also, more importantly, revise down its medium-term growth and productivity forecasts.<\/p>\n Reeves has said this will make her determined to beat those new official forecasts. Let\u2019s hope she does not make it more difficult to do so.<\/p>\n PS <\/p>\n I welcome your budget ideas, but as we get close to the real thing, this will have to be their last outing. Mark Billington says that instead of increasing income tax, the chancellor should cut it by 2p in the pound and raise VAT by two percentage points. Ready-reckoners from HM Revenue & Customs suggest the two things will roughly cancel one another out, but, he suggests, using artificial intelligence, that behavioural changes would mean a big revenue boost.<\/p>\n He also argues that rather than bring back light-blue three-wheelers for disabled people, as Reform UK has suggested, the Motability scheme should be required to use only British-made cars. The question then would be whether we make enough of the right kind of cars any more. But who knows? The scheme allows some people to drive quite posh cars.<\/p>\n \u2022 Rachel Reeves takes aim at Motability scheme to save \u00a31bn in budget<\/a><\/p>\n Alfie Rogers sent in what he accepts is a bold budget idea, inspired by the freezing of income tax allowances and thresholds until 2028, and probably to be extended further by Reeves. He suggests introducing \u201csymmetry\u201d with an accompanying freeze in the state pension, working-age benefits, disability benefits, public service pensions and tax credits.<\/p>\n It is indeed bold, and could raise tens of billions \u2014 and you can imagine the politician introducing it posing with a Javier Milei-style chainsaw<\/a>. I pointed out that some people would be caught out twice, including many pensioners. Their reaction would make the backlash over winter fuel payments look like a tea party. I doubt we have a politician in this country who would dare to do anything like it. Interesting, nonetheless.<\/p>\n Finally, Stuart Hutchesson instead of the widely canvassed \u201ctwo up, two down\u201d change, with income tax up by 2p but employee national insurance (NI) contributions down by a similar amount, to 6 per cent, revenue could be raised by removing the current upper earnings limit for such contributions.<\/p>\n Currently, the rate drops to 2 per cent at the upper earnings limit of \u00a350,270. Keeping it at 6 per cent would bring in some decent revenue and redistribute from the better off. One problem would be that the combined marginal rate of income tax and NI between \u00a3100,000 and \u00a3125,140 would rise from an absurd 62 per cent to a crazy 66 per cent. But that problem needs to be fixed anyway.<\/p>\n