Labour's budget is hurting the economy, warns Bank of England
20 December 2024, 19:45 | Updated: 20 December 2024, 19:58
Labour's budget is hurting the economy, particularly with the National Insurance hike, the Bank of England has warned.
Listen to this article
Loading audio...
In a new forecast, the Bank accused Chancellor Rachel Reeves of killing growth due to Labour's budget, a strong contrast from before Labour took over when Britain’s economy was the fastest-growing in the G7.
The Office for National Statistics once described Britain's economy as going ‘gangbusters’ but is now static.
In a new forecast, the Bank lowered UK growth outlook for the last three months of this year to zero after a previous prediction of 0.3 per cent.
This outlook shows that the Chancellor’s £25bn National Insurance increase is still stinging and leaves concerns over Labour’s promise to fix the economy.
Shadow business secretary Andrew Griffith said: "Today’s growth downgrade from the Bank of England follows warnings from almost every business group and forecaster.
"Rachel Reeves has no feel for how to run an economy, instead she has already killed jobs, investment and growth on her watch."
Keir Starmer has reiterated his promise about the economy but has told the public to be patient saying that it ‘will take some time’ before people start seeing a difference.
The chief UK economist at consultancy Capital Economics, Paul Dales has said "The forecast gives more credence to the idea that the economy is flirting with recession."
Shadow chancellor Mel Stride says Ms Reeves will have to break her pledge not to increase taxes future finance plans as concerns grow over inflation.
These fears are reminiscent of a 1970s-style 'stagflation' scenario as inflation has been at an eight-month high which has encouraged the Bank’s nine-member Monetary Policy Committee to leave interest rates on hold at 4.75 per cent.
Bank of England governor Andrew Bailey said: "We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy.
"We can’t commit to when or by how much we will cut rates in the coming year."
Anna Leach, chief economist at the Institute of Directors, said: "There is little doubt... that they see a link between the Budget and markedly weaker confidence and activity in the private sector."
Growth was already stagnant before the Budget was announced in October as gross domestic product shrunk by 0.1 per cent.
Activity levels have decreased according to business surveys which has increased fears over the UK going into a recession.
The UK will be in recession if the GDP continues to decline in the fourth quarter of this year and again at the start of 2025.
Many have blamed Reeve's decision to increase National insurance for employers as the main culprit for the damage done to the economy.
The rate was increased from 13.8 per cent to 15 per cent and lowered the threshold to pay it from £9,100 to £5,000.
Business surveys and the latest available data has reflected the downgrade for the fourth quarter growth, the Bank of England shared.
Another survey of business conditions revealed by the bank found employers "largely unanticipated" the national insurance increase.
The bank continued to say "Many firms will consider reductions in headcount, hours and pay settlements to mitigate the impact on their labour costs."
The survey shared "particularly significant impact on those employing relatively high proportions of part-time or low-paid workers."
Evidence of families continued to face cost of living pressures was also found in the survey with many on middle class incomes still relying on food banks which has become "ongoing norm."
Households have disagreed with Starmer's suggested "stabilised" economy and have said this was "at odds with their experience."
Labour chairman of the Commons business and trade committee, Liam Byrne, spoke with the Prime Minister saying that firms were "going to be cutting investment, wages and workforce next year."
This follows the increase of tax and the ongoing battle for a higher minimum wage, Mr Bryne continues that businesses were "asking to see a plan for growth and they are struggling to see that right now."
The Prime Minister has agreed that the UK's economic growth is not currently ideal but said is because they are "not able to take into account things that have not happened."
Starmer continues "It will take some time, of course it will. One of the biggest mistakes, I think, in the last 14 years was the idea that everything could be fixed by Christmas. It can’t.
"The planning will take time. The change in regulation will take time, we’ve got a national wealth fund which is investing, getting record investment into the country, that will take time."
The Prime Minister has reiterated his promise to reach the highest growth in the G7 by the end of this parliament, despite current forecasts.
National insurance increases have left the bank in "significant uncertainty" over how it will effect inflation as businesses increasing prices will spark inflation, but lower wages and fewer jobs will bring inflation down.
The Bank's target to decrease inflation to 2 per cent has proved promising looking at this weeks figures showing that it has reached an eight-month high of 2.6pc and wage growth rising to 5.2pc, feeding price pressures.
Gilts, ten-year bonds, have led to UK government borrowing costs rising and have been traded at their highest level for over a year.
Advisor to Tory Chancellor George Osborne, Rupert Harrison has said "For businesses and households this has very real consequences in higher mortgage rates and interest payments.
"Coming on top of higher taxes it’s no wonder economic confidence has plunged. The UK is in a bad way."
Former Bank of England rate-setter Andrew Sentance added that "Higher inflation, higher pay increases, and a damaging Budget which has yet to fully affect the economy.
"Not a surprise that the financial markets are pushing up UK bond yields."
Shadow chancellor Mr Stride commented "Without the growth Labour promised, they will be unable to sustain their spending plans and will be under real pressure to break the Chancellor’s pledge
"that she will not be back with more tax hikes. At the end of the day, it is once again working people that will pay have the price for Labour’s economic mismanagement."
