Conservative party chairman Oliver Dowden says we should maintain a sense of proportion, insisting the UK isn’t facing an economic horror story.
Speaking on Radio 4’s Today program, Dowden says the UK is facing challenges of a scale not seen for at least 40 years.
He says inflation is being driven up by supply chain pressures as we recover from Covid, the lockdowns in China, and increase in oil and gas prices due to the crisis in Ukraine.
Dowden says he has “read and fully accepts” the Bank of England’s analysis (which sees inflation over 10% by the end of this year, unemployment rising to 5.5%, and GDP shrinking in 2023).
We are facing an unprecedented global inflationary challenge, and that does demand unprecedented action from the government.
That’s what we’ve done with the £ 22bn of support we’ve provided.
Q: In the face of this latest economic horror story, shouldn’t a Conservative government be cutting taxes (as some cabinet ministers argue) not putting them up?
Dowden replies that we need to have a bit of sense of proportion about the situation.
I don’t accept your characterization of this being an economic horror story.
He argues that not locking down last winter means the economy is in better shape than it would have been.
Q: Are you saying it’s not bad?
Dowden repeats that we need “a correct sense of proportion about this” and he doesn’t accept it’s a horror story.
[But if you can’t afford to feed your family, or heat your home, or lose your job, surely it is?]
Q: Roger Lee, head of UK equity strategy at Investec (a major investment group) has said the Bank of England’s forecasts are “the sum of all our fears”, with growth forecasts downgraded, inflation expectations upgraded and interest rates still going up.
Dowden says the UK faces an “unprecedented challenge of global inflation” from the recovery from of Covid and the Ukraine war, and the British people want the government to focus on those challenges and show bold leadership.
Q: Why not show bold leadership and cut taxes?
Dowden claims they have cut taxes, pointing out that Rishi Sunak lifted the threshold where people pay national insurance (by £ 3,000 to £ 12,570, from July) in the spring statement, cut fuel duty (by 5p per liter), and will cut income tax to be cut to 19p by 2024.
On those points … Lifting the NI thresholds will mean workers earning under £ 35,000 are taxed less. But, overall, that £ 6bn cut in national insurance is more than wiped out by the £ 12bn increase in tax from lifting the NIC rate by 1.25 percentage points (the new health and social care levy).
The Office for Budget Responsibility has calculated the UK tax burden is heading for a 70-year high.
And overall, the lack of support for low-income families in the spring statement means 1.3 million people will be pushed into absolute poverty next year.
The pound has slipped to a new two-year low this morning, after its worst day since the Covid-19 pandemic began in 2020.
Sterling has dropped another half a cent to $ 1.23, the lowest since June 2020.
It’s being hit by the risk of a recession, and predictions that the Bank of England won’t raise interest rates as fast as previously thought, given the very gloomy economic outlook.
The cost of living crisis, and Thursday’s interest rate rise, will soon weigh on house price growth, says lender Halifax.
Prices climbed by another 1.1% in April, the 10th monthly rise in a row, Halifax’s latest house price report shows.
Average property prices hit another new record high of £ 286,079, up £ 47,568 over the last two years.
But that post-lockdown property boom could fade as incomes are squeezed, and the cost of borrowing rises, says Russell Galleymanaging director at Halifax.
“For now, at least, despite the current economic uncertainty, the strong increases we’ve seen in house prices show little sign of abating. Demand in the housing market remains firm and mortgage servicing costs are relatively stable with fixed-rate deals making up around 80% of mortgages on homes across the industry, protecting many households from the effects of rate rises so far.
“However, the headwinds facing the wider economy cannot be ignored. The house price to income ratio is already at its highest ever level, and with interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year. ”
The best way to help struggling families through the cost of living crisis is to uprate benefits now in line with this year’s surge in inflation, the Resolution Foundation says.
Benefits such as Universal Credit and the state pension only rose by 3.1% in April, as they’re based on last September’s Consumer Price Index, so are already lagging behind inflation (which hit 7% in March).
That mechanism means they should rise higher next April – but that’ll be too late for families struggling now.
Resolution says Rishi Sunak should bring forward next year’s increase:
While the Chancellor can’t shield everyone from impact of higher inflation, he has plenty of scope to provide more targeted support for the low-and-middle income households worst affected by this cost of living crisis.
The best way to do this is through the benefits system. Here bringing forward next April’s benefits uprating – currently project to be around 8-10 per cent. For example, an 8 per cent uprating in benefits would be the equivalent to around £ 600 a year on the basic state pension and over £ 300 a single adult’s basic Universal Credit. While even this may not be enough to fully cover the October price cap rise for many – or indeed other increases in the cost of living – it would be a major intervention. It would also have the added bonus of no longer-term cost for the Treasury.
Resolution also warn that nine million English households would be in ‘fuel stress’ this autumn, with the Bank forecasting Ofgem’s price cap will rise to £ 2,750 in October, up another 40%.
The risk of a UK recession dominates today’s front pages:
The Mirror points out that the TUC are calling for an emergency budget to help families with the cost of living crisis .:
The Times report that one cabinet minister says Rishi Sunak should cut VAT to stimulate the economy and help people.
“A recession feels inevitable, we may already be in one. What we’re hearing from retailers is horrifying, prices are going through the roof. “
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Pressure is growing on the UK government to do more to protect struggling households from a looming recession, as cost of living crisis hammers the economy.
Economic fears are swirling, spooking the markets, after the Bank of England warned of a “very sharp slowdown” yesterday, even as it lifted interest rates to a 13-year high of 1%.
With inflation heading to a 40-year high of 10%, unemployment set to hit 5.5% by 2025, the outlook is dire — sending the pound slumping to two-year lows.
The Bank also pointed out there was little it could do to help with the unprecedented jump in energy bills, and the second-biggest fall in living standards on record.
As BoE governor Andrew Bailey put it to CNBC:
“We’re seeing this unprecedentedly large shock to real income in this country coming from abroad, it’s a terms of trade shock.
And that is having a negative effect on real income, we think that’s going to feed through to activity during the course of this year in a big way, ”
Households face an average £ 1,200 hit to take-home pay.
Labor urged ministers to act, with new measures such as a windfall tax on energy company’s excess profits (with Shell and BP both posting bumper earnings this week).
Rachel Reevesthe shadow chancellor, said the government was out of ideas and out of touch.
“Not only are ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with 15 Tory tax rises that will further stifle our economic growth.”
Boris Johnson admitted on Tuesday that the government “can do more” to help families struggling with the cost-of-living crisis, during his bruising interview with ITV’s Good Morning Britain.
The I, though, reports that Rishi Sunak will not intervene before the next Budget to try and stop a recession.
The Chancellor believes that the rise in interest rates – which were hiked to 1 per cent on Thursday – makes it dangerous to increase public borrowing in order to spend more or cut taxes, because the cost of servicing the country’s debts is growing.
Fears over the global economy are rising too, as China’s growth slows and Russia’s invasion of Ukraine continue.
The BoE’s forecasts alarmed markets, explains Jeffrey Halley at OANDAstarting a “massive risk aversion wave” which saw the worst year on Wall Street this year.
It’s what they said, and not what they did, that saw Sterling slump by 2.0%. The bombshell was the 2023 growth forecast, which was marked down massively to -0.25% from 1.25% previously.
The BOE basically said there was going to be a recession next year, somewhat at odds with the Federal Reserve’s statements that a soft landing was possible in the US. Overnight BOE officials basically said they were going to concentrate on tackling inflation because there wasn’t much, they could do to offset a slowdown.
Fears of a ‘hard landing’ wiped over 1,000 points off the Dow Jones Industrial Averagewhich lost 3.1%, while the tech-focused Nasdaq Composite slumped almost 5%.
The steep fall came one day after the Fed chair, Jerome Powell, announced the sharpest rise in interest rates in over 20 years, and said the Fed needed to do “everything we can to restore stable prices”.
European stock markets are set to open lower:
- 7am BST: Halifax house price index for April
- 9.30am BST: UK construction PMI survey for April
- 1.30pm BST: US Non-Farm Claims payroll report