Rachel Reeves is struggling; her job is at risk
The harassed UK Chancellor of the Exchequer hoped that green infrastructure and home building would lift the economy. But her large payments to public sector employees and high taxation to pay for the spending has countered growth. Criticism is rife. Economic news has been poor week after week.
Reeves has asked advisors to seek alternative ways to grow the economy. Reeves, regarded as a “lightweight” has told regulators to “embrace risk” . She is concerned that regulators are stifling the economy. She appears to forget that regulation is needed to counter fraud. Prime Minister Keir Starmer is backing greater use of artificial intelligence to boost the UK’s slack productivity.
Economists contended that the measures merely tinker with deep seated problems. Brexit has weakened the economy but nothing is done to move closer to the EU’s Common Market.
Sceptical Business
Both business people and the public are sceptical. It is only seven months since Labour was elected. Instead of a new government honeymoon, polls indicate that Labour’s support has slid by 10 points to 24 per cent. The government is one point behind the right-wing Reform Party and three points above the Tories.
Low growth and high, expensive borrowing
Latest economic data shows that the British economy had zero growth in the three months ended November 2024. Inflation of 2.5 per cent in December remained above the official target of 2 per cent. Reeves was banking on growth to cut government debt which has soared from £800 billion in 2009 to the current £2.8 trillion ($3.5 billion) State debt is almost 100 per cent of gross domestic product (GDP) . The UK Office of Budget Responsibility (OBR), predicts that annual Government debt interest will be £112 billion until 2030. This compares with the £40 billion a year average in the first decade of this century.
Pound weak. bond yields high
Since Reeve’s heavily criticised budget on October 30 last year, the pound has tumbled. In the same period, yields on ten-year gilts have soared from 4 per cent to a peak of just under 5 per cent before falling slightly. The recent peak was the highest government bond yield since 2007 when the economy was much stronger.
Overall dollar strength and higher US bond yields have hurt UK and other major markets. But Bond vigilantes are circling a struggling government that critics say has favoured the public sector over business. Compared with levels before the budget, sterling has tumbled by 8 per cent against the US dollar and has weakened against the euro, yen and Singapore dollar.
The FTSE 100 index of mainly multi-national companies have rallied because the businesses benefit from a weak pound. But the FTSE 250 index of mainly local companies has been flat for months.
Anecdotal evidence a concern
Data is dated but anecdotal evidence indicates continued economic deterioration. Reeve’s stringent taxes on businesses have stifled both business and consumer confidence.
A Bank of England survey found that over half of British businesses expect profits to tumble this year. The Bank questioned more than 2,300 finance directors. As many as 54 per cent of respondents expect thinner profit margins while 55 per cent said that they would lay off staff. Moreover, yields on top quality company bonds have soared to 6 per cent. Indebted companies renegotiating loans are at risk from even higher interest payments.
A survey by accountants KPMG and the UK Recruitment and Employment Confederation (REC) shows that businesses laid off workers and froze hiring in December. Job vacancies fell at the fastest pace since August 2020. Redundancies increased.
The labour market is fragile mainly because Reeves has hiked business national insurance contributions from 13.5 per cent to a punitive 15 per cent. The Chancellor hopes to raise an estimated £25 billion from the move which is over and above company tax of 25 per cent. Reeves may well be disappointed.
“Businesses are taking stock of higher employment costs, a more gradual pace of interest rate cuts and inflation,” said Jon Holt, senior partner of KPMG UK.
The UK Federation of Small Businesses claimed that 92 per cent of its members were worried that they might have to shed workers. They are also worried about a looming package that gives employees extra rights that will raise costs.
Both Stuart Machin, CEO Marks and Spencer and Ken Murphy CEO, Tesco said that they were worried about the impact of inflation on costs and interest rates. Simon Roberts CEO of Sainsbury’s the second largest supermarket after Tesco said that customers are tightening belts on food bills. They are feeling the squeeze, he added after the worst inflation shock in decades.
Decline in super rich spending
Up market jewellers, fashion houses and realtors are complaining that multi-millionaire high spenders are leaving London in droves. The Labour government has ruled that Foreign, so called “non domiciled” residents in the UK can no longer have lower tax advantages. According to New World Wealth consultants, Britain lost a net 10,800 millionaires last year, a 157 per cent increase on 2023. The outflow included 78 centi-millionaires with assets exceeding £100 million and 12 billionaires.
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