I’m drawing that view from almost all the statistics I see, and from the International Monetary Fund’s recent line that ‘the worst is yet to come’. The world, it seems, is in for one of the worst periods for economic growth in the last two decades. More than a third of the global economy is expected to contract over the next year and in the UK the Bank of England is forecasting a two-year recession.
Locally, indicators such as the Purchasing Managers Index from Ulster Bank reports that the private sector is deep inside contraction territory. For balance it is only fair that I point out that the labour market has continued to perform well. There were almost 18,000 job ads online here in September. This was a 16% increase from August 2022 and almost a third higher than the same month a year ago. That’s a bright spot that flies counter to every other indicator I’m seeing at the moment. The key indicator I look to, consumer sentiment, is screaming recession. The main measure of UK consumer sentiment, by GfK, is hovering around a 50 year low as households worry about inflation, political turmoil and higher interest rates. Spending intentions for big ticket items have also fallen to their lowest levels since the start of the pandemic as people hold off to see what the next few months brings. There is also a noticeable trend towards down trading among consumers which is seeing more demand for own brand items in supermarkets and also seeing greater market share for discount stores. New figures from Tourism NI suggest that consumer sentiment in NI is similarly downbeat. More than four in ten people are set to eliminate spending on big purchases while seven in ten are planning on reducing spending on eating out and buying clothes.
So, if we accept that we are in, or heading into, recession, the things we shouldn’t do, according to Keynes, are cut spending or raise taxes. I’m afraid we are about to do both. As the chancellor’s fiscal event gets closer, we have been bombarded with media reports of the difficult decisions that have to be made. There are a lot of ideas being floated around at the moment and none of them are particularly palatable. The chancellor is expected to include both tax increases and spending cuts, with some suggesting that Austerity 2.0 could be unleashed. Estimates suggest that at least £40 billion is the figure the chancellor needs to aim for. Back in 2010, George Osborne opted for an 80:20 split between spending cuts and tax increases to meet his aim of balancing the books. This time, it seems more likely that a more balanced approach will be pursued. Capital spending plans could be pared back, which would raise £10bn according to the Resolution Foundation but this option would obviously curtail the ‘infrastructure revolution’ that the UK needs.
Another option, where day-to-day spending is cut across departments is also being considered but to raise £20bn here would require almost 10% cuts in departmental spending, on top of the real terms declines already being suffered as a result of inflation. Then we have the option that doesn’t deliver on the ‘triple lock’ commitment to raise benefits and pensions in line with inflation. This would save about £9bn but would deliver a significant hit to the living standards of low income families and pensioners. It seems certain that a tax raising option will be taken which will likely include more of a windfall tax and possibly moves on income tax thresholds and the reinstatement of the National Insurance increase. There may be moves on pension tax and dividends but time will tell.
Where might all this leave Northern Ireland? Obviously, any moves on taxes and benefits will impact people here directly, and painfully. Any move on public spending will place an already perilous set of public finances here under even greater stress. Our Fiscal Council has identified that NI departments are overspending by £650m this year. Capital spending is 10%, or £187m, over budget. Without corrective action, the Treasury could claw this over spend back next year, a situation that would intensify what is already shaping up to be a particularly difficult funding environment. Whatever comes of the Chancellor’s statement on the 17th, it will not be conducive to growth, and could feel like a very bitter pill to swallow.
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