Britain’s economic recovery from lockdown is stalling and inflation is on the rise. With the approach of autumn, prophecies made earlier this year for a surge in consumer spending appear to have fallen flat, washed out by the wettest summer in a decade.
It was all supposed to have been so easy for the chancellor, Rishi Sunak. Lockdown had helped households save more than £200bn and left consumers champing at the bit for the reopening of pubs, bars, restaurants and shops. With such vital growth ingredients, a belt-tightening autumn budget to scale back emergency pandemic support would prove painless to administer.
Reports are seeping through that Sunak is talking a tough game before next month’s three-year spending review and autumn budget, which will be used to set the post-Covid tax and spending landscape up until the next general election. After Boris Johnson’s cabinet reshuffle last week, the Tory election-winning machine is being revved up to speed.
Yet when it comes to tax and spending, there is a different message entirely. Cabinet ministers are being warned of meagre spending settlements, with Sunak expected to set out new fiscal rules at the coming budget – designed as an iron cage to prevent a splurge of government spending.
It will be music to the ears of those Tories who fear Johnson’s profligacy might cost the party its reputation for prudent management of the public finances, after the prime minister’s £12bn raid on national insurance to fund health and social care.
Yet this mood music comes as the British economy enters a rough patch. Gone are the reports of rapid growth and unfurling pent-up demand for goods and services post-lockdown. Instead, the most severe shortages of workers and materials since the 1970s are holding back growth, while consumer spending has plateaued at best.
Business leaders are growing increasingly frustrated about the lack of a government response. Far from receiving support, bosses have been served notice for a tax rise that could dent job creation and investment. Economists say there is more than a whiff of stagflation pervading Britain, reminiscent of five decades ago when blackouts and the three-day week stalled the country’s growth engine.
Against this backdrop, Sunak raising the spectre of tough action on public spending makes sense to fiscal hawks. The government will remove dollops of demand from the economy next month; ending furlough, scaling back VAT cuts for hospitality, and slashing universal credit benefits in the biggest ever overnight reduction in social security.
Treasury sources say inflation is one of a number of risks closely monitored by the chancellor, and demonstrates why the public finances must return to a sustainable footing. Forecasts suggest a sustained…
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