Alex Brummer: This Won't Fix Our Welfare Dependency

A Tumultuous Economic Landscape

The Bank of England has made a rare move, cutting interest rates by a quarter of a percentage point, bringing the rate down to 4 percent. This decision comes after months of inaction, as officials waited for inflation to ease. However, this adjustment is not a sign of confidence in the UK's economic future. Instead, it reflects the desperation of the central bank’s leadership, who are grappling with a struggling economy and persistent inflation.

The current state of affairs is exacerbated by the policies of the ruling government, which have led to job losses and increased financial strain on businesses. Since the last Budget, over 276,000 jobs have been lost, and companies continue to face challenges from rising employer National Insurance Contributions (NICs). The Labour Party’s approach has not yielded the desired results, leaving output stagnant and businesses burdened by significant tax increases imposed by the Chancellor.

This rate cut is intended to provide some relief to consumers and businesses, making home buying and car purchases more affordable. It also aims to encourage companies to borrow and invest in the country’s future. However, there are concerns that this move could lead to further inflation, given that headline prices rose from 3.4% to 3.6% in June, far exceeding the target of 2%.

The Bank of England’s Monetary Policy Committee was divided on the decision, requiring two rounds of voting before reaching a narrow agreement. This division highlights the uncertainty surrounding the economic outlook. The situation is further complicated by the government’s failure to deliver growth or address the growing welfare bill.

The prospect of another tax-raising budget in the autumn is expected to further erode confidence. If growth is indeed the government’s priority, its methods are proving ineffective. Wealthy individuals are increasingly leaving the UK, with reports indicating that many company directors and millionaires have departed following changes in tax policy. This exodus threatens the investment needed in critical sectors such as medicine, creative industries, and technology.

Recent analysis by the National Institute for Economic and Social Research (NIESR) underscores the urgency of the situation. If the Chancellor does not adjust her fiscal rules, the UK could face a significant financial shortfall. Some suggest extending the timeline for balancing the budget, but this could pose risks to the bond market. The Treasury is already paying high interest rates to bondholders, and breaking promises could worsen the situation.

With key revenue raisers ruled out due to manifesto commitments, the government may resort to stealth taxes, potentially freezing tax thresholds again. This measure, already in place, pushes many middle-income workers into higher tax brackets. Increasing taxes further will hinder growth and perpetuate a cycle of tax and spend that could lead to greater financial hardship.

The root of the problem lies in the government’s reluctance to implement welfare cuts. Comparing past and present spending reveals a stark contrast. In the 1950s, welfare, pensions, health, and education spending was significantly lower than today’s figures. The current reliance on state support is driving the need for more stealth taxes and negatively impacting business and entrepreneurship.

By lowering interest rates, the Bank of England offers temporary relief but does little to address the deeper issues of overspending and economic mismanagement. The real challenge remains the nation’s addiction to excessive spending, which continues to plague the economy. Without meaningful reforms, the UK risks facing prolonged economic difficulties.