Time to wrap up…
Fears are growing in the City that the tax-raising plans at the heart of this week’s budget may not be credible.
City consultancy Oxford Economics has warned that the markets could gradually lose faith in the budget. They’re warning that the risk of a sudden confidence crisis remains live.
Oxford Economics are concerned that the fiscal tightening is backloaded (so may not happen), that there is no attempt to restrain spending, or boost growth, and that the effectiveness of various tax measures is unclear.
The Office for Budget Responsibility (OBR) has cast doubt on claims Rachel Reeves dropped plans to raise income tax in this week’s budget because of rosier forecasts, pointing out she knew about these well before the change of heart.
In a move likely to exacerbate tensions with the Treasury, the OBR chair, Richard Hughes, has taken what he acknowledged was the “unusual step” of writing to the Treasury select committee to explain how its forecast evolved, “given the circumstances in this case”.
Black Friday appears to be going better for online retailers than the high street, in the UK.
Asda has criticised the government for “killing confidence” among consumers but blamed “self-inflicted” problems that left gaps on shelves for a big reverse in sales.
Updated
Deutsche Bank economists have also voiced some scepticism about this week’s budget plans.
In a new note today, they point out that the raft of smaller tax-raising measures creates uncertainty.
Here’s why:
Out of the many tax raising measures, the OBR has identified 13 policy measures that come with either “high uncertainty” or “very high uncertainty”. Indeed, the behavioral impact of CGT relief on employee ownership trusts, mileage-based charge on electrical vehicles, and many others all come with wide confidence bands.
How much tax revenue is uncertain? Of the total (gross) consolidation (~ £30bn), the OBR estimates that roughly £4.2bn of estimates tax revenues come with higher amounts of uncertainty. Tax slippage on these estimates therefore pose a material risk to the Chancellor’s headroom calculations.
Deutsche Bank also say:
Bottom line, while the Budget was indeed a historic tax-rasing event, the growth impulse from policy decisions alongside some front-loading of government points to some positive momentum over the next couple of years - despite the projected increase in fiscal tightening over the next couple of years. On our growth projections, the drag in GDP only emerges from 2029 onwards.
