Macroeconomics: UK economy, IB Economics

Andrew Rawnsley writes in today's Observer, arguing that a Labour victory at the next election would mean inheriting an economy on its knees. Low productivity, fragile public services, a sizeable national debt, high tax levels - reflected in a record tax burden, and continued inequality mean that merely generating economic growth is going to be extremely difficult. 

A day after the Autumn Statement, the IFS have given their verdict: it's not complementary, arguing that the extent of austerity implied are even more painful that the post-global financial crisis period of austerity, with tax 'cuts' effectively being financed by real terms cuts in public spending. 

A textbook description of why yesterday's announcement of National Insurance cuts in the Autumn Statement is actually concealing substantial tax rises for many people. The freezing of tax thresholds has occasioned sizeable fiscal drag, with people entering higher tax brackets and increasing the amount that they are paying in tax.

As the article notes: "Some 2.2 million more workers now pay the basic rate income tax of 20% compared with three years ago, according to official figures, while 1.6 million more people have found themselves in the 40% tax bracket in the same period."

Larry Elliott's take on today's Autumn Statement is, unsurprisingly critical, describing it as having a 'smoke and mirrors' quality. This is to highlight the fact that the tax burden is still growing, and scheduled to reach 38% of GDP by 2028. And equally, with the OBR's economic forecast downgrading future economic growth, it seems odd that some are willing to celebrate a statement that seems to be ushering a second term of austerity by stealth.   

The Office for Budgetary Responsibility (OBR) forecast published to accompany the Autumn Statement has downgraded its growth forecasts for the next couple of years. Whereas previously, economic growth was forecast to be 1.8% in 2024 and 2.5% in 2025, this has been lowered to 0.7% and 1.4% respectively.  Equally, inflation is going to be tougher to get back to target, only reaching 2.8 % by the end of 2024 and only reaching the inflation target by 2025.

More of the same, looking less at the policy solutions and more at the macroeconomic implications of the Autumn Statement for the wider economy. 

Buckle up. Autumn Statement today, although given that it's seemingly all been trailed before, expect cuts to National Insurance - to incentivise work, and increase incomes - and cuts to business taxes - to incentivise investment. Both supply-side measures, hoping to start to create an environment for larger tax cuts in next year's Budget. 

This article highlights the case for tax cuts for the low paid, arguing that the freezing of income tax personal allowances, and the associated fiscal drag has drawn more of them into paying income tax. But will the Autumn Statement raise personal allowances at all, never mind in line with inflation? 

Just when you thought tax cuts were inevitable, the latest public borrowing figures show that last month's borrowing exceeded the level forecast, coming in at £14.9bn. That said the picture for the first half of the financial year is much healthier with borrowing being £98.3bn, compared to the OBR's March forecast of £115.2bn, so the Chancellor still has some wiggle room. 

Not much economic theory here, more an assessment of the policy reality surrounding the Autumn Statement, with Larry Elliott arguing that such is the lack of voter trust in the current government, and the prevailing economic environment that nothing the government pledges this week is going to shift the needle and change either voter perceptions or the state of the economy.

Difficult to disagree with this Guardian editorial which looks at the implications of an Inheritance Tax cut: rewarding the rich and punishing the poor. Regressive in the extreme. 

Larry Elliott with a detailed analysis of the Autumn Statement, looking at the notion of '£13bn fiscal headroom' and how the Chancellor might go about spending it. The fact that he's got this wiggly room is largely due to the effects of fiscal drag as more people are dragged into higher tax bands.

The essential dilemma appears to be whether tax cuts or government spending should be focused upon the demand-side or the supply-side of the economy. The former is risky at a time when inflation remains problematic, and growth low, the latter is unlikely to be effective given the limited amount the Chancellor has to spend. 

An overarching view of the forthcoming Autumn Statement, without much in the way of theory but an interesting look at the nature of policymaking.

To adopt a similar type of thinking to Alistair Campbell, when the Chancellor " says tax cuts are 'impossible'" what he actual means is that they are possible. Making the statement is effectively creating the policy space for any tax cuts to be made out to be an even bigger give away than they actually are, in the hope of generating an even greater fiscal stimulus, and enhancing the Chancellor and government's reputation. 

At the moment, the whispers are the there may be some tax cuts for businesses, with the perpetual question of business rates no doubt in the frame, and the equally perpetual Inheritance Tax debate. Let's hope that the government isn't serious about giving a tax cut to the wealthiest 4% of the population, for the sake of generating positive headlines in the Daily Mail, whose readers, every single one of them, are unlikely to be affected by the tax in the first place. 

Today's Observer editorial reflects upon the Autumn Statement arguing that the short-termism of recent tax cuts comes at the expense of public services in the longer-term and condemns the UK to a period of austerity after the next election, irrespective of who wins it. 

The Labour Party are hoping that economic growth might increase tax revenues, rather than having to increase taxes after the election, to fund public spending. But that's far from guaranteed. 

The analysis of the Autumn Statement continues apace, with the Resolution Foundation being pretty damning, noting that "£17bn would go on cutting National Insurance and other taxes...at the expense of public services" and that "households would be £1,900 poorer by the end of this parliament."

If that's what economic success looks like to you, you're entitled to agree with the Chancellor's bullish assessment of his fiscal stance. 

And here's yet another perspective on the Autumn Statement, with a number of commentators noting that today's announcements have effectively committed to the post-election Chancellor, whoever that may be, to austerity by default.

Of course, this is all part of the 'plan' - should Labour wish to adopt more ambitious spending plans they will be depicted as 'reckless'. But you might conclude that if this is the best that a party that's been in power for 13 years can do, it might have been even more 'reckless'. 

A very brief Faisal Islam commentary on the Autumn Statement noting that for all the rhetoric, and talk of tax cuts, today's Autumn Statement has actually done relatively little to alter the economic landscape. 

Yes, there are some tax cuts at the margin, but the reality is that the UK's tax burden remains at a post-war high and if tax thresholds remain frozen, this is going to continue for the foreseeable future. 

And the state of the UK economy isn't going to be massively altered by today's announcement either, with the OBR downgrading its growth forecasts. 

One of the biggest tax cuts in the Autumn Statement comes in the form of making a tax break for businesses permanent, allowing them to deduct the full cost of investing in machinery and equipment from their tax bills. 

This is known as 'full expensing' - and the Chancellor claims that the heads of a number of big businesses have suggested it's the most transformational tax break that the government can offer. It means that for every £1 million invested, a firm would see its tax bill reduced by £250,000, hopefully boosting investment and then, by turns, productivity and the economy's supply-side.

A primer for what to expect from the Guardian, looking at everything from government finances to taxes, benefits, support for businesses and investment. 

Prior to tomorrow's Autumn Statement, Phillip Inman has produced a little primer to highlight some of the policy options that he has, and provides a rough costing of them. The cheapest measure would be yet another cut in Stamp Duty, but everything else seems pretty expensive. 

For all the talk of tax cuts, one group, Patriotic Millionaires UK, are calling for the government to increase taxes on the rich by taxing wealth. Strange that the Guardian should choose to publish this. 

Faisal Islam with his assessment of why tax cuts are inevitable in the Autumn Statement - it's in line with the consistent messaging of the past week, and the fact that the government trail the Opposition by such a margin in the opinion polls. 

But what will the tax cuts look like? Well, I'm going to suggest that tomorrow's going to see tax cuts focused on encouraging investment and perhaps a reduction in National Insurance to incentivise work and that the next Budget will be all about pre-election bribes - i.e. income and Inheritance tax cuts. 

Phillip Inman's piece in today's Observer looks, surprise, surprise, at the Autumn Statement, and concludes that for all the rhetoric, there's going to be relatively little that's new in there. 

However, he does make the interesting observation that the parameters of the policymaking 'game' have changed. Whereas for much of the last 15 years governments have been able to borrow at historical low interest rates, that is no longer the case and, as a result, they need to find new sources of revenue. Contrary to what's seemingly likely to happen on Wednesday, with Inheritance Tax being cut, he argues that the best way to do this is to tax the rich. 

The Resolution Foundation's view of the proposed cuts to Inheritance Tax, noting that such a move would only affect a small fraction of the population, at a time when all taxpayers are experiencing fiscal drag as personal tax allowances  and tax bands have remained unchanged, such a move would be regressive, although the government might see it as politically popular.

However, my view is that the notion of an Inheritance Tax give away wouldn't be as well received as the government thinks.  

It seems as though cuts in Inheritance Tax is going to be a part of the Autumn Statement, a £4.5 billion pot for British manufacturing and, potentially benefit cuts. 

The 'economics' of this is that such moves are intended to 'spur' economic activity, because clearly those liable to pay Inheritance Tax will be more productive as a a result of tax cuts, and those in receipt of benefits will be keener to look for work under these circumstances. 

But, on the other hand, it's awfully regressive - and you might argue that given the lower marginal propensity to consume of the rich means that leaving Inheritance Tax as it is, and raising benefits might be more likely to generate growth.