Churchill Knight Blog

June was dominated by the run up to the Emergency Budget and its aftermath. Overall, this was well received despite hikes in tax on capital gains and VAT. The former will largely affect higher earners, whereas the latter will affect us all and is probably a regressive tax in that it hits the less well off progressively more than the wealthy. On the other hand, the increase is only 2.5%, so it should not have an inordinately large impact on spending overall. In fact, we may see a mini boom towards the end of this year as people try to get their discretionary spending in ahead of the increase. At least children’s clothes and food are not affected; they could so easily have lost their exempt status.

One positive result of the Budget was that the credit rating agencies appear to be satisfied that we are heading in the right direction, as they have left our AAA rating in place. Had they not done so, the cost of our massive national debt repayments could have sky-rocketed, making it far more difficult for us to dig our way out of the hole.

The creation of an Office for Budget Responsibility (OBR) may sound as if it will only interest economists, because it is largely to do with data reporting. But in fact, it will be as important to us all as is the Bank of England’s Monetary Policy Committee (MPC).

The OBR will be involved in making an independent assessment of the public finances and the economy for the emergency Budget. But more importantly, forecasts will no longer be determined by the Chancellor’s judgements; he will have to accept the OBR’s forecasts for every future Budget and Pre-Budget Report. The OBR’s independence will ensure that policy is made on an unbiased view of future prospects, improving confidence in the fiscal forecasts.

Chancellors will, of course, retain responsibility for fiscal policy and will set targets for fiscal policy. They will, however, no longer be able to move the goal-posts, as the previous incumbent did with the so-called “Golden Rule” on borrowing. In each Budget and Pre-Budget Report the OBR will confirm whether the Government’s policy is consistent with a better than 50 per cent chance of achieving the forward looking fiscal target set by the Chancellor.

News that the balance of trade slipped further into the red during March (the latest figures available) was something of a shock for economists who had expected recent improvements to accelerate. The deficit on goods fell from £6.3bn in February to £4.5bn; the problem was rapid growth in imports with a fall in exports. Even allowing for the service sector, the overall deficit increased from £2.2bn to £3.7bn. According to the Bank of England’s Agents’ summary of business conditions for May, there has been a recovery in export volumes, but poor demand from our trading partners (especially with a weakening euro) is constraining recovery in terms of value.

On the other hand, manufacturing output has continued to rise and credit conditions, while still tight, appear to be relaxing – although this is largely benefiting larger businesses. Employment intentions are also showing early signs of recovery with some companies in the business services sector reinstating trainee and graduate recruitment schemes to cope with expected demand. However, while employment in the private sector is at least stable, that in the public sector is set for headcount reductions.

There has also been a slight recovery in pay rates, but higher employment costs largely relate to a return to full time working, where there had previously been a reduction in hours.