Many years ago when I was a BBC foreign correspondent I filmed a report in Chile on the effects of inflation. I used a bucket of wallpaper paste and a great wodge of banknotes. The rather obvious point I was making was that the country’s economy was in such a perilous state that it was cheaper to paper the walls with banknotes than use the cash to buy wallpaper. We are, mercifully, a long way from that in this country today. But we’re also a very long way from meeting the target for inflation set by the Bank of England. And that matters to all of us. What worries you most: the rise in food and energy prices, perhaps, or the warning that tax cuts have become a dream rather than a reality?
Let’s deal with interest rates first. Cast your minds back only a couple of years and you will remember that our bank rate was 0.1%. That’s the lowest it has ever been. Today it is 3.5%. Most economic experts expect that another rise will be announced by the Bank’s monetary policy committee within the next two weeks to 4%. That would be the highest level for nearly 15 years. And many forecasts predict yet another increase to 4.5%. That, of course means mortgages cost more and so, in the short run, does a loaf of bread or a kilo of spuds.
Food prices across the board have gone up year on year by 16.8%. That’s the biggest increase since 1977 and higher than most of the experts had expected. The cost of travelling has risen even more steeply. Last month airline tickets rose on average by more than 40%. That's the largest rise since records began in 1989 and the boss of Ryanair Michael O'Leary has said he expects fares to keep rising throughout this year. Bus fares may cost rather less, but they’ve gone up too. The increase last month was more than 11%.
So, one way or another, we all pay the price of inflation – with the possible exception of those who have so much spare cash they can lend it out and get a better return. The latest figures show that we spent a little more over the crucial Christmas period than retailers had feared, but that was largely down to rising prices rather than any great optimism on the part of us, the consumers.
It’s true that inflation has fallen, rather than risen, over the past month – but blink and you might have missed it. In November it was a scary 10.7%. Last month it was down to a slightly less scary 10.5%. That is a very long way from the Bank of England’s target of 2%. The office for National Statistics says the main reason for the fall was a sharp drop in the cost of petrol and diesel as well as slower increases in prices of clothing and footwear. But the cost of food and heating rose relentlessly.
It is tempting to point out that most of us can cope with prices rising if wages rise too. Tempting but illusory.
Official figures show wages have been growing at their fastest rate in more than 20 years. In the private sector there was an average annual pay rise of 7.2%. That’s the highest increase on record outside the pandemic. In the public sector, such as hospitals and schools, there were sharp increases too. But inflation has meant the real buying power of incomes actually fell by 2.6%. That’s why we have seen so many strikes.
But could it be that the roaring tiger of inflation has been tamed, or at least subdued a little? That’s what we are now being told by the governor of the Bank of England, Andrew Bailey. He says Britain has, ‘turned a corner’ and now expects it to ‘fall quite rapidly’ this year. That’s because energy prices – especially gas – had ‘come off quite a lot actually’. Although those falls are not yet feeding through into the inflation figures, he believes that should soon happen. Some analysts agree with him. One firm has predicted that average energy bills could dip below £2,000 by the autumn. That would mean the costs of subsidising home energy bills from the state’s coffers will fall sharply.
The research firm Capital Economics has predicted inflation will fall to around 4.2% by the end of this year, in which case Mr Sunak would have hit his pledge of cutting inflation in half in 2023. Does it also mean that we are, once again, heading for the sunlit uplands of not only lower prices but also lower taxes? Seemingly not. At least not in the foreseeable future and certainly not in the next budget, which is what many Tory MPs and business leaders are demanding. The Office for Budget Responsibility says the last budget will have raised the tax burden to 47% of GDP. Before the pandemic it was 39%. It’s the highest since 1945 and, it seems, it will stay there for the foreseeable future.
Sunak himself was reported as saying this week that only ‘idiots’ would not understand why he is refusing to cut taxes when inflation remains so high. His office denied later that he had actually referred specifically to anyone as an idiot, but whatever vocabulary he used, the billionaire Sir James Dyson may have been in his thoughts. Sir James has warned that the private sector is being ‘handicapped and targeted to pay ever higher tax bills’. He said the government must incentivise private innovation and demonstrate its ambition for growth and he criticised ministers for their ‘short sighted and stupid approach’. Other leading business figures were quick to support him.
Luke Johnson, the former chairman of Pizza Express and Channel Four, agreed with every word he’d said because ‘he understands business, innovation and job creation better than the entire cabinet put together.’ The advertising mogul Sir Martin Sorrell said it was critical to set out a long-term plan for growth after the tax increases of last year. People would accept high taxes for a short time but ‘only if you give them a long-term vision.’ Clive Watson, chairman of the City Pub Group acknowledged that the government was in a difficult spot but said businesses needed clear signals: ‘The whole thing about Brexit was that we could lower corporation tax and here we are increasing it, which is just bonkers’. The founder of Pimlico plumbers Charlie Mullins said ministers had got it wrong and needed to do more to encourage entrepreneurs: ‘We need lower tax rates, a corporation tax cut and some form of incentive to employ people.’
But it seems the pleas of all those eminent business leaders will go unheard. Treasury insiders suggest that the chancellor Jeremy Hunt is not considering tax cuts while he focuses on inflation and the levelling up secretary Michael Gove has said the same: ‘the best tax cut people can have is to cut inflation.’ As for their boss, Mr Sunak insisted that he does want to cut taxes – but not yet. Here’s how he put it: ‘I wish I could do it tomorrow quite frankly but the reason we can't is because of all the reasons you know.’ Those reasons, he said, were the huge cost of the pandemic and the war in Ukraine.
The former business secretary Jacob Rees-Mogg was not persuaded. He said the size of the state is too big: ‘We are spending too much and taxing too much. We need to reduce both sides of the balance sheet. Unfunded tax cuts would not be sensible but funded tax cuts are a good idea.’
The question of Britain’s taxes was raised at the World Economic Forum in Davos by Tony Danker, director-general of the Confederation of British industry. He told delegates ‘If we are going to be plucky outsiders what's the play when you talk to Japanese companies or energy companies? They don't know what the growth plan is and where Britain is going. They need an investable proposition.’ The hotelier Sir Rocco Forte agreed. He said ‘There is a suggestion that the Whitehall blob is firmly resisting any attempts to implement change as it wants us to stay as aligned as possible with Europe in order to ease a return to the single market in the event of labour taking power. Mr Sunak seems to have been captured by the blob and as a result I fear his tenure will be short lived and the country will suffer’.
What is your ‘fear’ – assuming you have one? Are you afraid that high taxes will scare off the investors we need to boost our economy? Or do you accept that that’s the price we must pay to slay the beast of inflation?
Let us know.