The Markets


For the UK economy I think the phrase was spot on from the chief economist of the Bank of England, Andy Haldane, when he described it as being in a position of both agony and ecstasy. For the ecstasy we now have an economy that is currently growing faster than any other developed economy on the globe. A rate of 3.1% for this year is expected and that for the UK is quite a pace, although obviously nowhere near the dynamic rates of the developing nations. In fact for the UK’s it could be described as running quite hot – especially when you consider not just the QE money pumped into it but the £22.2bn plus set aside for consumers’ claims from the PPI scandals. Whilst growth next year will likely ease to 2.4% according to the EY Item Club, this is hardly agony, although ecstasy would not be a sensible description either. Reasonable is more truthful, although sustainable would be better.

However, another area of possible ecstasy has been unemployment or, more to the point, employment. In the past twelve months we have seen a record rise in employment of 929,000, and more people employed than ever before at over 30.6 million – which is 1.8 million more than in 2010. In fact the percentage employment rate per head has now risen to 73.1% which is equal to the record high set in 2005. To add to this the number of women in work has also reached a record high of 14.2 million, with the female employment rate now at 68.1%.

The agony comes on the other side. It’s the revenue, or rather the lack of it, that the government was expecting that has caused the pain. The Chancellor had been looking for a substantial increase in income tax revenues, with hopefully an extra £11bn, but so far it appears to be considerably less at around a measily £1bn. Is this tax evasion and avoidance on a grand scale? Well no – it is mostly due to a changing economy and changing rules. The problem has been that the infamous bankers’ bonus windfalls have dematerialised, and with the starting levels of income tax (allowances) being raised, there are now fewer contributors to these taxes. Then add to this the fact that many of the jobs are at the lower end of the pay scale and pay increases are also below inflation for most, and it becomes clearer as to why Osborne’s income plan has a widening black hole. This is budgetary agony.

Nonetheless there are some areas of encouragement and we should remember that the top 1% of earners account for roughly 28% of all income taxes, a level that has grown significantly over the years. On the plus side Stamp Duty and VAT are up but the former, although much higher than before, is a regressive tax and in effect prevents further expenditure and tax income (VAT) as people move and renovate their properties. This should be reformed.

The key issue is pay, or low pay, as this will impact on confidence and people’s ability to spend and thus be unable to generate more tax. The outlook will in fact be improving here, but not until next year and I wonder if that might not be too late for the Chancellor as he has an election to help win before the real value of better pay and more tax probably comes through. It will be a boon though for whoever does finally emerge from what is likely to be a messy and confused election result.