Chancellor Jeremy Hunt on Wednesday promised to squeeze “every last drop of high inflation out of the economy”, but that arduous task could put a serious dent in the Conservative party’s strategy for a 2024 general election.
Hunt is under pressure from Tory MPs to deliver significant tax cuts in next year’s spring Budget, in a signal to voters that better times are around the corner.
But if inflation is still high and the Bank of England is trying to cool an overheating economy next spring, tax cuts could be economically reckless.
Hunt acknowledged the risks on Wednesday, as he responded to official data showing UK inflation static at 8.7 per cent, insisting that curbing price growth came before cutting taxes.
Asked about tax cuts, he said: “The way to grow the economy, the way to give ourselves more headroom, to spend more on public services like the NHS, to bring down the tax burden, is to tackle inflation.
“Inflation is the biggest, the most invidious tax rise the British people are facing right at the moment because it’s eroding the value of their weekly, monthly salaries. So that is our primary priority.”
Rishi Sunak, who has pledged to halve inflation to about 5.5 per cent by the end of the year, will face questions about the government’s strategy at prime minister’s questions in the House of Commons on Wednesday.
Many economists thought Sunak had set a modest target when he promised in January to halve inflation, although it appears harder to meet now. International economic bodies have previously forecast that he will hit his target.
The high level of public debt, with the UK debt-to-gross domestic product ratio exceeding 100 per cent on Wednesday for the first time since 1961, is another constraining factor for the government.
Analysts said the worse than expected state of the public finances cast doubt on Hunt’s ability to make big pre-election tax cuts while adhering to his fiscal rules.
Hunt has promised the government will “stick to its guns” on fighting inflation, but if that means the BoE has to push the economy into a recession in election year, it will present a big political challenge.
So far there has been little public or private criticism by senior Tory MPs of the BoE and its handling of inflation, in spite of the central bank admitting it needs to look again at its forecasting models. The bank’s Monetary Policy Committee is expected to raise interest rates again on Thursday.
However, former Conservative minister Jacob Rees-Mogg said BoE governor Andrew Bailey should take “primary responsibility for the bank’s failure on inflation”, adding the MPC took its lead from him.
“When Andy Haldane warned, as the bank’s chief economist, that inflation was not a blip the governor ignored him and now interest rates are going up more than would have been necessary,” added Rees-Mogg.
The Labour party published analysis on Wednesday showing how the average household in the UK is paying more than £1,000 a year more for food this year than in 2020-21.
“This Tory government can’t get a grip of this problem because they are the problem,” said shadow chancellor Rachel Reeves.
Labour’s strategy is to try to draw a link between inflation and the rising cost of mortgages now with the chaos of Liz Truss’s shortlived government last year, which culminated in her “mini” Budget.
“Thirteen years of the Tories and their disastrous mini-Budget are damaging our economic security and leaving families worse off,” said Reeves.
“We need a more secure economy, more secure family finances and a plan to help us grab hold of the opportunities before us.”
Source: Economy - ft.com
