Yahoo Finance Demand is weak and investment’s faltering. That’s OK then
The government is hoping low inflation will keep the electorate from getting restive. But it will only be achieved thanks to feeble consumer and public spending
As the nation’s shoppers turn their thoughts to Christmas, a dark cloud looms. Could it be that rising inflation will spoil the party? Only a few weeks ago, Theresa May, Philip Hammond and the rest of the cabinet could have been forgiven for worrying about the impact of inflation after most economic forecasters predicted it was about to send shop prices sky-rocketing. And, worse, more of the same is expected next year, with rising prices eating into disposable incomes to more than halve Britain’s GDP growth rate.
In recent days the news has been better. Comments by Hammond and Brexit minister David Davis holding out the possibility of a more accommodative stance towards the European Union have pushed up the value of sterling against the dollar and euro and cut the chances of a much more expensive festive period.
Of course, a higher pound could snuff out a welcome recovery in manufacturing output since August. But voters shop much more than they work in manufacturing. So from the narrow perspective of a government attempting to keep the population on side during a potentially turbulent pre-article 50 negotiation period, during which migration data shows record numbers of continental Europeans rocking up on British shores, a lack of inflation will be good news.
This situation is unlikely to hold. Davis’s comments that Britain might find a way to pay for access to the single market was simply another way of saying that all options were open. Hammond was also repeating himself: more importantly, he is well known as being a soft Brexiter, a breed vastly outnumbered around the cabinet table.
Next week the theme could be hard Brexit – a change directed as much by the EU’s tough-talking negotiators as by a wild comment from Boris Johnson – pushing sterling down again.
The difficulty in predicting inflation while the Brexit conflict continues lies behind the divergence between various forecasts, with the National Institute of Economic and Social Research reckoning it could rise to 4% by the end of 2017, while others believe prices will grow by little more than 2%.
Unfortunately for the forecasters, the pound is not the only influence on prices. There is also the impact that comes from demand for goods and services. At the moment, businesses and the government are sucking demand out of the economy.
In the autumn statement, the chancellor extended austerity into a third parliament, with cuts to disability payments and tax credits. His message was that a boost to infrastructure spending would compensate by creating thousands of well-paid jobs in areas such as engineering, science and construction.
Last week Robert Chote, chairman of the Office for Budget Responsibility (OBR), took a sword to this narrative and killed it stone dead. He said Hammond’s plans to boost infrastructure spending with a £23bn “national productivity investment fund” failed to move the dial on its forecasts.
“This is not the near-term fiscal stimulus package that some people either expected or feared or wanted,” Chote said in testimony to the Treasury select committee. “It’s a relatively small, gradually phased increase.” He added that it minimised one of the main boasts for infrastructure spending – a “multiplier effect” that sends out ripples of extra work to suppliers and services companies that in turn increase investment and employment.
An example of how feeble the infrastructure package is likely to prove was given last week by the tax adviser George Bull of accountant RSM. He was talking of Hammond’s planned 100% capital allowance for companies investing in electric car charging points, and investment of £80m to expand the charging infrastructure.
Bull, who describes the move to increase the number of electric vehicles on UK roads as “gloriously inconsistent” with the government’s reduction last year in subsidies for renewable electricity generators, asked who would benefit from this extra tax relief and how much it would be worth.
HMRC’s answer was: “In practice it [the new tax relief] impacts only on those businesses with qualifying plant and machinery expenditure above the level of the annual investment allowance of £200,000.”
“In other words,” said Bull, “very few businesses. And the cost to the exchequer, according to HMRC, is negligible.
“So here we have a new tax relief which can’t be used by many businesses, which will hardly cost the exchequer a penny, but which seems inconsistent with the government’s broader policy on renewable energy.”
The Institute for Fiscal Studies looked at another autumn statement initiative – the government plan to extend free childcare for three- and four-year-olds in England from 15 to 30 hours a week – and asked whether it was likely to boost parental employment.
The answer was: “Only slightly.” So it would leave demand in the economy little changed.
Demand can also be affected by business investment growth, which the OBR expects will falter as the Brexit vote debate gets into full swing.
It all makes for a bleak picture when low inflation expectations rely on weak consumer spending, low business investment, an autumn statement that can only be described as a non-event and the odd ministerial comment hinting at a softer Brexit.
