Confidence is contagious – and so is a lack of it. The old maxim applies in economics as much as on a sports pitch or a battlefield. High morale and a dose of optimism can carry a group forward, while a slump can send it fleeing in panic.
It’s fair to say that the current state of economic confidence in the UK is glum. Consumer confidence is bumping along at a pessimistic -17, according to GfK. Household savings are running near the highest rate for a decade, excluding the pandemic, suggesting many are battening down the hatches ahead of a storm.
According to YouGov, almost as many people now believe their financial situation will get worse in the next 12 months (33 per cent) as believe they will experience no change (37 per cent), while only 22 per cent expect their circumstances to get better. A year ago, the optimists and pessimists were on level pegging.
Among businesses, the story is even more grim. New figures from the Institute of Directors’ Economic Confidence Index rank the outlook among business leaders at -73, after hitting an all-time record low of -74 in September.
These aren’t hypothetical concepts or idle boardroom chatter; they reflect real concerns and conditions in the economy, and in turn they have concrete impacts on all of our lives. When investors and employers lack confidence, they cancel spending decisions, postpone hiring or even choose to shed jobs.
According to the latest ONS figures, the number of people on payroll in the UK fell by more than 100,000 in the year to September. The Institute for Fiscal Studies expects this trend to continue, forecasting unemployment to exceed five per cent next year.
square HUGO GYE The Budget may end up being a lot better than you think
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No wonder consumers worry about spending – and many opt instead to increase their savings. Thus the contagion spreads: rising savings rates augur lower spending, rising unemployment spooks people more, investors and employers retrench further for fear of a downturn – and on the cycle goes.
Rachel Reeves is a victim of all of the above, in the sense that she still has to make the books add up. But the Chancellor is not an innocent party buffeted by factors outside her control. As the nation’s finance minister, she is responsible for setting the tone of the fiscal outlook that informs the confidence of the market.
She can’t fix the country’s fiscal problems overnight, but for some reason she has chosen to make the task harder for herself. Having overpromised in the general election campaign – announcing “there’s not going to be a return to austerity” – she instantly confused voters by going into overdrive with doom and gloom, including the famous £22bn black hole.
The Government then sought to reassure us that it had matters in hand, because it could use its stonking majority to implement, er, austerity measures. Welfare was meant to be the start, only for public outcry and backbench rebellion to force ministers to reverse the winter fuel cuts and then gut their own welfare reform legislation. Instead, what austerity there is seems to fall entirely on the private sector through tax, such as the harmful increase to national insurance.
In another unforced error, the Government unwisely ploughed on with its costly additions to employment regulation, despite all the problems in the jobs market, accentuating businesses’ caution about spending decisions.
In the meantime, the black hole has grown to an estimated £39bn. The Chancellor has cast about for places to allot the blame – the Tories, of course, and Brexit have been caught in her sights. What’s next is anyone’s guess.
With such big problems and no magic bullet, we now find ourselves in a toxic environment for economic confidence.
Everybody knows that Reeves is going to put up taxes in the Budget. Normally, there’s speculation about a short list of possible tax rises, of which a Chancellor might implement a couple – troublingly, there is now a long list of possible tax rises and people increasingly fear she will implement the whole lot.
Then comes her biggest own goal. That fear over tax rises is damaging in itself. The lack of economic confidence it inspires is contagious and enormously costly. And yet Reeves has chosen to drag it out far longer than normal by scheduling the Budget a full month later than last year. The Budget should have taken place last week – yes, it would have hurt, but at least we’d know where we stand and what we have to deal with.
Instead, like a horror film, we are tortured by the anticipation of knowing that a blow is coming but not knowing where it will land. The Chancellor’s indefensible decision to make us wait until late November for Budget Day drags out that agony – and all the while, confidence falls and the economic pain mounts.
While the Chancellor takes her time, the cost of living inexorably rises, customers stay home and hunker down, worried business leaders shelve their plans, the price of the national debt racks up and up, and international investors seek out places that seem more secure to put their money abroad.
Enduring that extra month of uncertainty comes with a hefty price – and at the end of it, all we have to look forward to is the pain Reeves could have announced already.
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