Inflation fell to 4.6% in October meaning Rishi Sunak has hit one of the three economic promises he set out at the beginning of the year. Laith Khalaf, head of investment analysis at AJ Bell, examines the PM’s progress on fulfilling his pledges.
- Halve inflation
“Sunak has already nailed this pledge, but the extent to which the government has contributed to falling inflation is questionable, to say the least. CPI came in at 4.6% in October, down from over 10% when the PM made this promise. The key drivers in falling inflation have been higher interest rates and lower energy prices, neither of which fall under the direct control of the government. The PM could possibly make the case that pay restraint in the public sector has had some marginal effect on the inflation figures, but if he’s playing that game, it’s fair to point out the government increased the National Minimum Wage in April by almost 10%. Setting aside the merits of this policy, higher wages do contribute to inflationary pressures.
“While this is a technical win for the prime minister on his inflation target, out there in the real world consumers aren’t likely to be feeling the pinch getting any less painful. Inflation at 4.6% still means prices overall have risen considerably in the last twelve months, on the back of those double digit inflation figures last year. Meanwhile core inflation remains particularly sticky at 5.7%, and households have to do without last winter’s £400 energy subsidy from the government. Homeowners are also dealing with a giant leap in the cost of their mortgages, so the tough times are still rolling for UK consumers.”
- Grow the economy
“Of Sunak’s three economic pledges, this is the one where the PM is on the stickiest wicket. So far this year the economy has grown by 0.5% in the first nine months, equivalent to 0.7% on an annualised basis. That compares with a pre-pandemic average of 1.8% since 2000. You can’t deny it’s growth, but the prime minister would be exposing a solid brass neck to claim he has succeeded on this front.
“The precise measurement of the success of this undertaking wasn’t made clear in January when Sunak delivered his pledges. The BBC has recently reported that Downing Street has said the pledge will be met if GDP in the fourth quarter of this year is bigger than in the third quarter. Perhaps the prime minister is banking on a Buy Now Pay Later Christmas to swell the economy’s coffers. It’s beggars belief that the PM will stand up and claim to have fulfilled this promise based on one quarter of GDP growth, and if he does he could well be laughed out of the House. But after a lacklustre third quarter, the latest forecast from the Bank of England is that the economy will grow in the fourth quarter, by a resplendent 0.06%. (The actual figure will be released by the ONS at the beginning of February).
“Instead of nailing his flag to one quarter of economic growth, Sunak would instead be better off charting the improvement in GDP compared to forecasts when he made his promise. At the time, the Bank of England was projecting a 1.9% fall in GDP this year and a recession was widely expected. Instead 0.5% growth is in the bag so far, and the central bank reckons this will be topped up to 0.6% by the end of the year. Avoiding recession and beating economic forecasts would be a more credible way to tick off this pledge, seeing as growth has been so limp. Of course a more grown up approach would be to admit that politicians might be able to influence economic growth but they can’t control it, and any meaningful and lasting economic incentives they put in place by definition only have an impact over the longer term.”
- National debt
“Rishi Sunak also pledged in January that he would get the national debt falling. This is a totally moot promise seeing as the government’s fiscal rules already set a target for the national debt as a percentage of GDP to be falling in five years’ time. These are rolling targets based on budgetary forecasts so every year they move further off, meaning the day of reckoning never actually arrives, which incentivises chancellors to keep kicking the can down the road. It’s a pretty sad indictment of government finances that although rolling targets give chancellors plenty of scope for fiscal chicanery, Jeremy Hunt was still forced to increase the time period for the fiscal rules to be met from three years to five.
“Treasury policy can therefore be relied upon to have the national debt falling in five years’ time based on the forecasts supplied by the OBR, so the PM may simply point to the satisfaction of this fiscal requirement as the fulfilment of his pledge. But higher than expected tax receipts may provide the prime minister with a more meaningful debt statistic to crow about. At the time he made his promises, the national debt stood at 99.5% of GDP. Despite reaching 100% of GDP for the first time since 1961 in May, this has now fallen back to 97.8%. If this trend continues to the end of the year, Sunak can point to this statistic as delivering on his pledge.
“Pointy-headed critics might draw attention to the fact this isn’t quite the same measure of national debt used in the Treasury’s fiscal targets, which excludes the Bank of England, but that’s not likely to cut through in the House of Commons or amongst the electorate. Taking a step back, shaving off a percentage point or two when debt to GDP is close to 100% would be a pretty pyrrhic economic victory, but that doesn’t detract from its political currency if it allows Sunak to put a tick in one of his five boxes. The ONS will release public sector finance figures for December 2023 around 23 January.”
