This is Rishi Sunak’s chance to stop a recession; any delay and it will be too late |


The Bank of England’s message to Rishi Sunak was simple. Russia’s invasion of Ukraine is the latest unwelcome shock to the UK economy. It will make people poorer. There is nothing we, the Bank, can do about it. So, over to you, Chancellor.

Threadneedle Street is absolutely right. It doesn’t have the tools to respond to rising global commodity prices but the Treasury does. Sunak has all sorts of ways of alleviating the pain: cutting taxes, increasing benefits, reducing excise duties, helping out with energy bills.

And although the original intention was not to turn Wednesday’s spring statement into a mini-budget, recent events mean that is what it needs to become. Unless Sunak wants to go down in history as the new Philip Snowden – the Labour chancellor who cut benefits during the Great Depression – he will need to come up with something meaningful.

Sunak says he is “done” with tax increases and has sympathy with people struggling to make ends meet. He needs to convert words into action because this is how things look. Inflationary pressure was growing even before Vladimir Putin decided to invade Ukraine, because as the global economy started to emerge from lockdown the supply of basic commodities – such as oil – struggled to keep pace with demand.

Both companies and consumers are affected by rising inflation. Businesses that have to pay higher costs for fuel and raw materials have a choice: try to pass on the costs to their customers or take a hit on their profit margins.

Consumers face a similar problem. If it costs more to fill up the car with petrol or heat their home, they can either try to secure pay increases that keep pace with inflation, cut spending on non-essential items, or rack up debt.

It is not hard to see how things will play out in the coming months. Companies will initially seek to pass on their higher costs to their customers, but won’t be able to make the price increases stick when consumers are belt-tightening.

As any A-level student of economics knows, national output – or gross domestic product – is consumer spending plus investment plus government spending plus exports net of imports.

Consumer spending is going to be weak this year because wages will fail to keep pace with prices. Companies are going to mothball investment as the costs of doing business go up. The chances of an export-led boom are nil given that every other energy-importing country faces exactly the same pressures as the UK.

That leaves the government, where policy is currently the opposite of what it needs to be. Sunak has frozen tax allowances for the rest of the parliament; he will raise employer and employee national insurance contributions by 1.25 percentage points from next month; and he has temporarily scrapped the pensions triple lock. Taken together, these measures will suck tens of billions of pounds out of the economy at precisely the wrong time.

The Treasury has a dual function. It is primarily a ministry of finance with a ministry of the economy tacked on. During the early stages of the pandemic the finance ministry element took a rare back seat because there was an obvious need to spend money to prevent the economy collapsing during lockdown. Now that the pandemic is perceived to be over – even if there appears to be a sting in the tail – the Treasury has reverted to its normal way of working, with reducing public borrowing the main aim. That mindset needs to change.

It is not as if Sunak hasn’t been warned. The Bank of England was already forecasting the biggest squeeze on living standards since modern records began three decades ago, and says the impact of the invasion of Ukraine will make the situation “materially’ worse.

Number crunching by the chartered accountant and political economist Richard Murphy suggests the hit to living standards will be extremely painful: a 14% hit for someone on the minimum wage, 11% for someone on median earnings.

“For half UK households it’s very hard to see how they have any chance of making ends meet without significant government support,” Murphy says. “This is not just disastrous for them, it also signals that a recession is very likely unless Sunak takes action now. Delay would make it almost impossible to prevent a massive downturn happening.”

It’s hard to disagree with Murphy’s conclusion. As things stand, Britain is heading for a monster recession and time is running out to take evasive action.

It is clear that after fighting and winning a battle with Boris Johnson, Sunak is not going to scrap or even postpone the increase in NICs, even though going ahead with them now is an act of economic self-harm.

But the chancellor dropped enough hints on his Sunday morning TV appearances to make it clear he will announce some additional help this week. Fuel duty looks certain to be slashed and there may be a temptation to shoot Labour’s fox by announcing a temporary cut in VAT on domestic energy bills. Either measures would have the effect of increasing spending power and reducing the annual inflation rate.

Sunak announced a package of support for households with their energy bills early last month and that already seems inadequate. The Treasury is, though, resistant to making it more generous until it is clear what will happen to the energy price cap when it is next revisited in October.

That leaves state benefits, which are due to rise by 3.1% next month – about five percentage points below the likely rate of inflation. Raising benefits in line with the expected inflation rate would protect the most vulnerable and boost the economy. It would be costly but not as costly as doing nothing.





Read More: This is Rishi Sunak’s chance to stop a recession; any delay and it will be too late |

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