The UK economy needs a lift after it sank into recession in the second half of 2023.
It’s not an easy task when so many of the problems are longstanding and the measures needed for a cure could take years to have an effect.
Jeremy Hunt, the chancellor, has hinted that tax cuts on personal incomes could be included in his budget next month, even though they could trigger a sugar rush of spending that would fuel inflation and persuade the Bank of England to delay the date of its first cuts in interest rates.
As an alternative, here are five ways the government – with some help from the Bank -could get the economy moving again without triggering the return of inflation or spooking the global financial markets as Liz Truss managed to do in September 2022.
1 Unfreezing the tax thresholds and taxing wealth
Income is more heavily taxed than wealth. It is a fact that has become more pressing in the years since the 2008 financial crash, when the accumulation of wealth has far outpaced rising wages.
Rishi Sunak’s major tax initiative was to freeze personal tax and national insurance thresholds in April 2022, pushing more people into higher tax brackets. The Institute for Fiscal Studies said the Treasury could rake in as much as £52bn by 2028.
Ending the freeze would be costly, and could boost spending, making the Bank think twice about interest rate cuts, but the effect could be offset by a shift to some kind of tax on wealth.
There is little agreement about what wealth should be taxed and how, but there are some easy wins. Council tax bands in England could be extended beyond band H as they have been in Wales to capture the value of more expensive homes, handing local authorities more money.
And multimillionaires are ready to pay more, according to a poll last month that coincided with a gathering of powerful policymakers and the super rich at the World Economic Forum in Davos. A majority supported the introduction of a 2% wealth tax on people with more than $10m (£8m).
2 A broad-based devolution to cities and regions
Devolution is a risky endeavour for any government. Several of the councils that have gone bust over the last two years have made bad decisions and racked up huge losses. But a more robust structure – one that balances autonomy with responsibility and predictable revenues – could ignite growth in the regions.
Levelling up the north, Midlands and west of England with London and the south-east has proved to be impossible when it relies on civil servants doling out small packets of cash after a complicated bidding process.
Achieving net zero would be more likely without the dead hand of Whitehall on every council’s shoulder.
3 Bring down interest rates
This is not in Hunt’s gift, but lower rates would hand some money back to beleaguered mortgage payers and businesses. According to the latest retail prices index figures, mortgage inflation is running at 45%, which is crippling for those who need to re-finance their loans.
Britain, like most developed countries, is highly indebted, so small adjustments to interest rates can make a big difference to the annual costs of borrowing.
The Bank’s monetary policy committee (MPC), which sets interest rates eight times a year, meets again next month, but is not expected to begin reducing the cost of borrowing – currently 5.25% – until June at the earliest.
There are plenty of economists who believe the GDP figures are bad enough to change the MPC’s stance.
4 Boost social housing
Private housebuilders prefer to drip-feed the property market with new homes to maintain prices, making them a fair-weather friend of any government that wants to increase the housing stock.
A government that wants to encourage the building of green homes on a consistent trajectory, eliminating boom and bust, could turn to housing associations and other social landlords.
They are suffering from a lack of funds and high borrowing costs on their existing stock of loans. The Treasury could help out by lending at lower interest rates and going some way to answering the industry’s request for £15bn a year to build 90,000 homes for people on low incomes.
5 Support to get the long-term sick back to work
The legacy of Covid-19 is a lengthy list of people suffering from the long-term effects on their physical and mental health.
Recent figures have shown the trend is getting worse, forcing more people each month out of the jobs market. Hunt has pledged to increase spending on mental health services and reduce hospital waiting lists, but there needs to be a more concerted, tailored effort from government.
The payback would be a larger, fitter, happier workforce that would increase the productive capacity of the economy.
It would also help the Bank bring down rates by tackling its concern that a shortage of workers will be a permanent feature of the jobs market which will see employers forced to pay higher wages and increase what they charge for their services, locking the economy into an even longer period of stagnant growth and rising prices, or stagflation.
