Treasury officials, already shell-shocked from a change of management, are expected to come under further pressure this week from figures showing wages growth slowing, retail sales flagging and inflation rising.
Ahead of a budget that is still scheduled for 11 March, economists at the finance ministry will want to assess the impact this will have on the public finances. The verdict is unlikely to be music to the ears of Rishi Sunak, now in place as chancellor after Sajid Javid, who balked at Boris Johnson’s insistence he prefer No 10’s advisers to his own, resigned.
Sunak, a Yorkshire MP, is a keen supporter of “levelling up” the regions and needs to direct as much spare funds to the north and west as he can to boost growth.
The economy was stagnant in the last quarter of 2019 with a 0% rate of expansion. The figure for the year was a healthier 1.4%, but still well short of Javid’s target of 2.8%.
This week’s figures are not expected to give extra comfort. Labour market data is published on Tuesday and most City economists believe average basic weekly earnings growth (excluding bonuses) will decline from 3.4% to 3.3%. Average total weekly earnings will fall further – from 3.2% to 3%.
On Wednesday, the Office for National Statistics will tell us how much prices increased in January. City economists expect the consumer prices index to rise from 1.3% to 1.5%.
On Thursday, retail sales are expected to recover from -0.6% in December to +0.5%. This might seem like a bountiful turnaround, but it only pitches the high street back to a situation analysts describe as weak rather than calamitous.
Last week the monthly British Retail Consortium/KPMG health check of the retail sector found that total sales rose by 0.4% in January, but a deeper look found sales were unchanged once increases in floor space were taken into account.
Government policy will boost the economy by more over the next few years than we had previously thought
The fall in wages and rise in inflation will put an unwelcome squeeze on real wages and consumer spending. The Treasury is only too well aware that consumer spending has propped up the economy for the last three years while business investment, hit badly by Brexit uncertainty, has all but evaporated.
The chancellor will see from official figures and his own staff’s forecasts that some areas of the economy are standing up well. Business confidence and consumer confidence have started to bounce back while exports, though they struggled last year to match a high point in 2018, are still strong. Unemployment stands at a 45-year low, at 3.8%, and City economists expect that to remain unchanged. High employment is also likely to remain the order of the day, keeping income tax and national insurance revenues flowing.
But a slip in wages and an increase in inflation could hit VAT receipts, leaving the chancellor short of the firepower he wants to begin levelling up the regions. He needs extra cash for this project and a lacklustre economy might not provide it.
Ruth Gregory, UK economist at the consultancy Capital Economics, says the need to increase spending, and faltering revenues, mean Sunak is expected to announce less restrictive borrowing rules “and that government policy boosts the economy by more over the next few years than we had previously thought”.
She says the rule that forces the chancellor to balance day-to-day spending over a three-year cycle could be extended to five years. “He would have more leeway to splash the cash in the next few years and put off any fiscal tightening until after the next election in 2024,” she says.
A more radical option would be to drop the balanced-budget objective altogether and replace it with a rule that puts a cap on total public sector net borrowing, including investment.
If he opted for a 4% or 5% cap – more than the 3% that EU countries must adopt – the government could borrow not just to finance investment spending but also to finance tax cuts.
“As long as the government could stomach a rising debt ratio, then it could opt for a 4% or 5% limit,” she says.
Whatever fudge Sunak comes up with, Gregory says the budget will probably mark the start of the biggest fiscal boost seen since the financial crisis. “We had already anticipated a loosening worth 0.5% of GDP in the budget on top of the 0.5% already announced in the 2019 [Whitehall] spending round. The change of chancellor suggests the risks to that forecast are to the upside,” she says.