UK manufacturing activity fell in July to the lowest level since 2013. As today’s grim reading shows, the writing is definitely on the wall for the economy – which is why a timely stimulus is needed, or a recession could hit before Christmas.
Brexit is a self-inflicted condition which we can treat, but action is needed straight away.
With a two year period of EU Brexit negotiations imminent, we need a two year stimulus to match. This can directly support economic activity during this time of uncertainty.
Pause deficit reduction
Deficit reduction should be paused for this two year period – a sharp fall in gilt rates shows that markets are still confident in the UK’s ability to service borrowing costs. Current Treasury plans are for the deficit to fall roughly at a rate of £15bn per year. So if a pause could allow anything approaching a £30bn reallocation over these two years, we could significantly offset the slump in consumer and business confidence.
Cut taxes and invest
This stimulus should be targeted to counteract Brexit’s impact on employment, production and sales. For instance, a two-year deficit reduction pause could allow us to support jobs with a cut in taxes. We could trim the Class 1 NICs employer main rate from 13.8 per cent to 13 per cent (costing £3.8bn a year). We could inject £2.5bn a year into affordable social housing, put in a further £2bn into a transport infrastructure fund and support community regeneration with a further £1bn a year. And we could help consumers with the cost of living and offset likely price rises with a 1 per cent cut in the standard rate of VAT to 19 per cent, costing £5.5bn annually.
Time for a Summer Statement
The signs are that a deterioration in domestic UK activity is underway, with today’s Markit PMI manufacturing index suggesting the steepest decline in production since 2012. Together with other indications such as the CBI industrial optimism index and the GfK consumer confidence survey also downbeat, the Treasury should listen and act.
With alarm bells now ringing, the Chancellor should take the opportunity to make it a “Summer Statement” on the day the Commons reassembles in September, rather than an Autumn Statement in November or December. The time is now to press that “reset” button.
As the saying goes: “early money is like yeast – it raises dough.” The same is true for the timely and proportionate injection of a targeted stimulus to maintain a buoyant economy and in turn protect long-term revenues. And protecting revenues is essential to continued support for public services and the eventual return to deficit reduction which is still required.
But waiting until November will be too late. We shouldn’t let a long Commons recess stand in the way of preventing a long economic recession. If Philip Hammond wants to take fiscal measures such as these this summer, to stave off a slump before the end of the year, he should get cracking immediately. These are unusual times and Brexit has changed everything. Ministers – both frontbenches in fact – should wake up and realise there’s no time to lose.
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