Yahoo Finance Rishi Sunak’s tax raids trigger recession warning
Rishi Sunak’s tax raid risks tipping the economy into recession as families and businesses are already struggling with surging prices, economists have warned.
The economy shrank by 0.1pc in March, data from the Office for National Statistics (ONS) revealed, even before the Chancellor’s national insurance increase which pushed up taxes for households and businesses by 1.25 percentage points.
It came at the same time as energy bills jumped by 54pc, which the Bank of England estimates has already forced inflation up to 9pc – pushing policymakers to raise interest rates to a 13-year high of 1pc.
Suren Thiru, head of economics at the British Chamber of Commerce, called on Mr Sunak to scrap the extra tax for at least the rest of this financial year as the toxic combination of rising prices, borrowing costs and national insurance threatens to cause a recession.
He said: “We are seeing a real financial squeeze, a lot is on households but we are seeing similar issues for businesses as well.
Mr Thiru added that there was “a real chance the UK could be in recession by the third quarter of this year”.
He said: “That is partly due to cost pressures – high inflation, energy bills – and also national insurance squeezing consumer spending and business investment.”
That will be exacerbated by the fall in Covid spending, which has boosted the economy through the vaccine rollout and the Government’s Test and Trace programme, as well as the extra bank holiday which takes away a working day in June.
Samuel Tombs at Pantheon Macroeconomics said he expects households’ real expenditure to “buckle” in the second quarter under the weight of the “huge jump in energy prices and the increase in employees’ national insurance contributions”, causing GDP to fall.
Barret Kupelian, economist at PwC, said the NI rise and the freeze to tax thresholds “amplified” the pressure on households, while Kitty Ussher at the Institute of Directors said the bills add to “the huge shock to economic confidence stemming from Russia’s invasion of Ukraine”.
March’s decline leaves the economy 1.2pc above its pre-Covid level of February 2020, according to the ONS.
Retail and wholesale activity fell by 2.3pc with the sale and maintenance of vehicles crashing by more than 15pc amid global supply chain chaos.
Information and communications services also shrank in March, with finance and insurance activities also a touch smaller in the month than they were in February.
However, personal services picked up while healthcare grew by 2.1pc on the month, with the return of more GP appointments and A&E care pushing up output.
In-person appointments add more to the economy than the phone consultations which became the mainstay of the practices in the pandemic, boosting GDP as services return to something more like normal.
But the boost from extra health spending in the pandemic is fading, said James Smith, an economist at ING.
He said: “Health spending has been a key driver of GDP through the pandemic, and in fact, the overall size of the economy would be around 1pc smaller had output in this sector stayed flat since early-2020.
“Throw in the distortion of the extra bank holiday scheduled for June, as well as the ongoing impact of the consumer spending squeeze, and we’re likely to see a modestly negative GDP figure for the second quarter as a whole.”
Manufacturing output fell 0.2pc in March, with a slump of more than 5pc in pharmaceuticals, 4.1pc in textiles and 3.5pc in chemicals.
The construction industry managed to grow by 1.7pc on the month, with strong demand for maintenance work on homes, as well as for new commercial property.
Over the first quarter of the year as a whole, GDP grew by 0.8pc as the economy recovered from the omicron wave over winter, before the war in Ukraine sent already-high inflation spiralling further, largely through a leap in costs of goods such as petrol.
Those surging oil and fuel prices helped push the trade deficit to a record high of £25.2bn in the first quarter.
Business investment fell 0.5pc in the quarter, which bodes ill for future growth.
Mr Sunak said: “Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.
“Growth is the best way to help families in the longer-term so as well as easing immediate pressures on households and businesses, we are investing in capital, people and ideas to boost living standards in the future.”
How Britain's 'roaring twenties' dream turned into an inflation nightmare
Brief hopes of a “roaring twenties” rebound from Covid have fizzled out, leaving the UK on the brink of recession.
Britain’s current GDP has barely risen to above its pre-coronavirus level and the economy is already shrinking.
While March’s 0.1pc dip in GDP is far from the only wobble on the road to recovery - in December, for instance, the economy shrank by 0.2pc - it is being viewed as the herald of a new downturn.
The dip at the end of last year was caused by omicron, another outbreak of Covid scaring Christmas shoppers away from the high street and keeping would-be festive revellers at home instead of heading to bars and restaurants.
But this time the dip is different.
Now, GDP is down because inflation is on the rampage, with prices shooting up in a way Britain has not seen for a generation. An oil shock on a par with the 1970s, combined with supply chain carnage, has sent inflation up to its highest since 1992 - and potentially soon to rise to levels not seen since the early 1980s.
While help was on hand in the pandemic, with furlough, business rates breaks and Eat Out To Help Out dished out by the Chancellor, this time around Britain has been ordered to take its medicine.
Tax attack
Higher taxes are the order of the day now, with Rishi Sunak’s pockets swollen by the national insurance increase even as households see their pay packets gobbled up by the health and social care levy and rising prices.
The Office for Budget Responsibility (OBR) predicted in March that real disposable household incomes would fall by 2.2pc this year, among the steepest drops ever recorded, and being outpaced by tax rises.
The Bank of England’s predictions this month, with the strength of the inflation explosion becoming ever clearer, puts the loss at 3.25pc.
At the same time, the Bank is raising interest rates in a bid to combat inflation - again in contrast to the Covid policy of slashing borrowing costs - but one which comes at the cost of undermining economic growth.
Price rises bite
Inflation hit 7pc in March. The Bank of England estimates it is now already at 9pc and could jump into double figures later this year. This is eating into families’ spending power as wages rose by just 5.4pc in the 12 months to February: nowhere close to keeping up with the cost-of-living.
Officials, led by Andrew Bailey, the Governor of the Bank, have acknowledged the risk of recession, predicting a drop in GDP towards the end of this year when the energy price cap rises again, with the result that the economy will be smaller next year than it is this year.
March’s figure of 0.8pc growth in the first quarter growth was below that anticipated by the Bank, meaning the outlook is already worse than the Monetary Policy Committee thought at the start of the month.
Yet more rate rises are still needed, says Paul Dales at Capital Economics.
“With the full hit of the cost-of-living crisis yet to be felt, the chances of a recession have just risen,” he says.
“Even so, with price pressures still strengthening, the Bank of England may have no choice but to add to the woes of households by raising interest rates further.”
A haphazard year
The best hope of dodging a recession is that GDP will bounce in a haphazard pattern this year, which evades the usual formal definition of two consecutive quarters of contraction despite being every bit as painful.
For instance, GDP in the current quarter will take a knock from the Jubilee bank holiday, which gives much of the workforce a day off.
This break will not be repeated in the third quarter, and that extra day of work could be enough to push GDP up in the three months to September, missing the formal definition of a recession, even as energy bills jump again just in time for the winter, sending output down again in the fourth quarter.
Expect a messy, painful year which feels like a recession, regardless of whether the bean counters officially name it such.
