There was more bad economic news for Chancellor Rachel Reeves this morning as the closely-watched S&P Purchasing Managers’ Index (PMI) data came out. Output was marginally up in January, relative to December, but job cuts in December and January were at their fastest pace since 2009 when we were in the Great Recession following the Global Financial Crisis. And the outlook for new orders was its worst since 2023.
This combines with other recent data to suggest that the economy was weak in the last three months of 2024 and things are likely to get worse in early 2025.
That is broadly the timing expected and predicted by those who said the Bank of England made mistakes in 2023, raising rates too high, holding them there too long, and allowing a huge, unprecedented fall in the money supply (contracting over 4 percent in the year to September 2023 when a more normal expectation would have been for a rise of 4-5 percent). With the usual 18 month lag, the peak negative effect on the economy would have been expected to come by March 2025. So we are bang on target.
Chancellors have made a bad economic situation worse. Jeremy Hunt raised spending and taxes too high. Rachel Reeves has doubled down on that, and she seems likely to encounter serious problems quite soon now. A couple of days ago the latest public finances data showed that borrowing is running ahead of target. January is the largest month for tax receipts and when we’ll start to have a proper picture of how bad things currently are. But if the economy is turning further down, as today’s data suggest, Reeves’ problems are going to get worse.
Over recent weeks much has been made of the implications of market interest rates for debt rising, and whether that might already mean her missing her fiscal rules. But that’s far from her most serious problem. Her real problem is that with the economy turning down and high-income individuals leaving the country, the chances of her tax rises actually generating the tax revenues she needs are slim. In economic downturns tax revenues drop because businesses produce less profit to be taxed, spending is lower so VAT receipts are down, and so on. High-income individuals pay more than half of all income tax – the government’s largest single source of revenue.
Responding to an economic downturn and flight from the country of the wealthy by raising tax rates even higher risks accelerating the economic problems without actually bringing in any more money. Higher taxes probably aren’t an answer. Cutting spending for individual programmes might be politically feasible, but cutting overall public spending is not – Labour MPs didn’t get elected to cut spending. The only real options are somehow achieving faster real GDP growth, raising medium-term inflation to inflate away some of the UK’s debts – or waiting for a true fiscal crisis and the arrival of the IMF to impose cuts as happened in the 1970s.
Reeves may yet get lucky. Maybe Trump will impose higher tariffs on other countries than the UK, diverting economic activity here. Maybe Trump and Musk’s race to land on Mars will boost UK space sectors. Maybe increased defence spending by EU countries will boost the UK defence industry. Or maybe general tech developments in AI, lab-grown meat, cancer vaccines and the like will rescue us.
Such luck is not impossible. But in the meantime, it looks like things are going to get worse before they get better.
There was more bad economic news for Chancellor Rachel Reeves this morning as the closely-watched S&P Purchasing Managers’ Index (PMI) data came out. Output was marginally up in January, relative to December, but job cuts in December and January were at their fastest pace since 2009 when we were in the Great Recession following the Global Financial Crisis. And the outlook for new orders was its worst since 2023.
This combines with other recent data to suggest that the economy was weak in the last three months of 2024 and things are likely to get worse in early 2025.
That is broadly the timing expected and predicted by those who said the Bank of England made mistakes in 2023, raising rates too high, holding them there too long, and allowing a huge, unprecedented fall in the money supply (contracting over 4 percent in the year to September 2023 when a more normal expectation would have been for a rise of 4-5 percent). With the usual 18 month lag, the peak negative effect on the economy would have been expected to come by March 2025. So we are bang on target.
Chancellors have made a bad economic situation worse. Jeremy Hunt raised spending and taxes too high. Rachel Reeves has doubled down on that, and she seems likely to encounter serious problems quite soon now. A couple of days ago the latest public finances data showed that borrowing is running ahead of target. January is the largest month for tax receipts and when we’ll start to have a proper picture of how bad things currently are. But if the economy is turning further down, as today’s data suggest, Reeves’ problems are going to get worse.
Over recent weeks much has been made of the implications of market interest rates for debt rising, and whether that might already mean her missing her fiscal rules. But that’s far from her most serious problem. Her real problem is that with the economy turning down and high-income individuals leaving the country, the chances of her tax rises actually generating the tax revenues she needs are slim. In economic downturns tax revenues drop because businesses produce less profit to be taxed, spending is lower so VAT receipts are down, and so on. High-income individuals pay more than half of all income tax – the government’s largest single source of revenue.
Responding to an economic downturn and flight from the country of the wealthy by raising tax rates even higher risks accelerating the economic problems without actually bringing in any more money. Higher taxes probably aren’t an answer. Cutting spending for individual programmes might be politically feasible, but cutting overall public spending is not – Labour MPs didn’t get elected to cut spending. The only real options are somehow achieving faster real GDP growth, raising medium-term inflation to inflate away some of the UK’s debts – or waiting for a true fiscal crisis and the arrival of the IMF to impose cuts as happened in the 1970s.
Reeves may yet get lucky. Maybe Trump will impose higher tariffs on other countries than the UK, diverting economic activity here. Maybe Trump and Musk’s race to land on Mars will boost UK space sectors. Maybe increased defence spending by EU countries will boost the UK defence industry. Or maybe general tech developments in AI, lab-grown meat, cancer vaccines and the like will rescue us.
Such luck is not impossible. But in the meantime, it looks like things are going to get worse before they get better.