After July’s unwelcome hike in inflation the Bank of England relaxed a bit in August as the inflation rate slid back a point or so to 2.5% – still well above the 2% p.a. target but blameable on a worldwide hike in commodity and oil prices. For once it was someone else who had caused the problem.
Droughts in the USA and a wet summer in the UK hit food production and pushed up wholesale prices, whilst the price of a barrel of Brent crude, the benchmark for light oil prices hit a four-month high at $116/barrel. Sadly though, high oil prices didn’t benefit the UK much as North Sea production continued to fall off as wells dried-up – a reminder of how successive governments have relied on revenue from the North Sea since the 1970’s. The hoped-for “Olympic effect” never materialized and demand from consumers flat-lined, confirming the Bank of England’s forecast of zero growth in 2012. One of the few bright spots was an increase in demand for European airline tickets. Why, no-one knows.
The continuing relaxation of Sunday trading laws would benefit no-one.
‘Boo hoo’ said the hotel, leisure and fashion operators, as did Justin King – Chief Executive of Sainsburys. He also made the surprising announcement that in his opinion the continuing relaxation of Sunday trading laws would benefit no-one. His message seemed to be ‘Why incur extra operating costs when shoppers are keeping their wallets shut?’ which is logical enough when consumer demand is flat. But be prepared for one of his speedy U-turns when demand picks up again – as speedy as his 2008 U-turn when he finally admitted involvement in the dairy produce price-fixing scandal.
Another £17 billion of government spending cuts would be needed in 2017-18 to reduce national debt from a record high of 66% of GDP.
In his first budget in 2010 Chancellor George Osborne set himself two targets to strengthen both public finances and overseas confidence in the UK. Without them the country’s credit rating would be downgraded and the government not able to borrow money at low-enough interest rates to finance it’s expenditure. The first target was to slash the level of national debt as a proportion of GDP by 2016 and the second was to eliminate the “structural defect” of borrowing too much in relation to anticipated taxes. But two reports last month confirmed both commitments are unlikely to be met. The Office for Budget Responsibility announced another £17 billion of government spending cuts would be needed in 2017-18 to reduce national debt from a record high of 66% of GDP. Then the Office of National Statistics confirmed that without significant growth in the economy future tax receipts would not repay existing borrowings. The borrowings would then have to be refinanced on far less advantageous terms.
With economic growth and tax receipts as flat as ink was it time for the Chancellor to do a Justin King-style U-turn? Sir Mervyn King (no relation to Justin, thank God), the Governor of the Bank of England, seemed to think so. He started a warm-up act on the financial rating agencies whose advice to overseas investors is critical in setting the interest rate at which governments can borrow money. He started by suggesting the UK government would be justified in breaking it’s promise to reduce national debt if outside factors frustrated it’s efforts. His message was one of reassurance – overseas investors should continue to buy UK government bonds as Sterling is far safer place than the Euro.
It can’t have been easy for Mervyn to say this as he had helped set the Chancellors targets in the first place, but the Prime Minister left him little choice – David Cameron refused in Parliament to recommit to the debt goal. Mervyn showed he was serious by using his first ever live TV interview to tell Channel 4 News breaking the pledge would be acceptable ‘if it’s because the world economy is growing more slowly’ but not acceptable ‘if there was no excuse for it.’ He stuck in the knife by highlighting continuing problems within the eurozone which ‘hovered like a black cloud of uncertainty’ over the UK economy. He then twisted it good and proper by saying that a break-up of the eurozone was still possible and would be ‘awkward’ for investors. I should coco. That was polite bankerspeak for ‘lend us your dosh – the euro is stuffed’.
Supermarkets would be obliged to hike the cost of a £9.00 bottle of own-label vodka to about £13.00.
In the meantime there was an enjoyable diversion from economic troubles when the Health Select Committee published a report into pricing policy for alcoholic beverages. A minimum price of 50p per unit of alcohol is already on the cards in Scotland so to reduce the threat of vast numbers of plastered Jocks staggering home across the border the committee recommended a similar minimum price in England. This would help counter the ‘scourge of binge drinking’ as identified by our Dave and also make HM Treasury happy. Supermarkets would be obliged to hike the cost of a £9.00 bottle of own-label vodka to about £13.00 which according to research by the drink manufacturers, would hand the ‘Big Four’ supermarkets another £2 billion of profits per year whilst doing precious little to counter abuse.
Minimum pricing might be welcomed by HM Treasury (Corporation tax + duty + vat) and the politicians (a nice diversion – just like the fox-hunting ban) but I can’t see it becoming law. Even MP’s know about online ordering and booze cruises to Calais.
Most economists agree that imposing new tax rises will kill the prospect of economic growth stone dead. It seems increasingly likely that Mervyn is going to print more money and inject it into the economy through so-called quantitative easing. The sooner we can get our hands on all that Falklands oil the better.