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Boris Johnson jumps from party frying pan into inflationary flames

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These figures have admittedly been inflated by a sharp increase in bonus payouts; regular income has been below inflation. But it is not true that these bonuses were largely won by City’s big players. Bonus payments were widely spread across the economy and were indeed somewhat weaker in finance than in sectors such as construction, hospitality, leisure and technology.

What is true, however, is that if companies seek to retain staff through one-off bonuses rather than ongoing anti-inflationary wage increases, this indicates a degree of uncertainty about the future. or a cautious reluctance to lock oneself into higher permanent conditions. costs.

It is also true that all these figures are retrospective and do not take into account the effect on the household budget of the increase in energy bills and Social Security contributions in April. Anecdotally, many companies are already reducing their hiring and investment plans in anticipation of an upcoming drop in consumption.

All of this suggests that Chancellor Rishi Sunak will indeed need to act quickly to avoid a self-reinforcing downward spiral in economic confidence and demand. He can no longer afford to wait for the fall budget; this is already recognized in Downing Street. Even waiting until July, which seems to be the current plan, may be a mistake.

Moreover, there is no point in taking half measures. The Chancellor will get no political credit for yet another inadequate package. Benefit payments are to be temporarily increased again and, more broadly, VAT on energy bills is to be scrapped, at least until the current price spike subsides. The Chancellor is concerned, as he should be, that a tax giveaway of this type will only make inflationary problems worse. There’s little point in reducing VAT if the benefit to the pound in your pocket is simply eaten up by higher interest rates.

Indeed, there is a certain intellectual dishonesty among those who criticize the government for not reducing taxes on the one hand, and the Bank of England for not acting earlier on interest rates; You can’t have both.

But the idea that help for households in difficulty should be financed by a windfall tax on the North Sea is equally misguided in an economy whose main structural weakness is that we consume too much, but invest too little. As a share of GDP, we already have the lowest business investment rate in the G7.

Policy makers should not discourage it further, especially in a sector that needs to invest a lot more if energy transition goals are to be achieved.

Without wishing to minimize the crisis in the cost of living and the difficulties it engenders, it is important to overcome the current hysteria. Things are not as bad as they are portrayed, and certainly not nearly as bad as they were in 1979 when Thatcher took power.

The economy is in a scrape, of course. But with the right corrective action, Johnson can survive this one too.

Sources

1/ https://Google.com/

2/ https://www.telegraph.co.uk/business/2022/05/21/boris-johnson-jumps-partygate-frying-pan-inflationary-flames/

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