The UK hasn’t yet licked inflation. Yes, the headline annual figure, as measured by the consumer prices index, dropped to 4.6pc in October, sharply down from 6.7pc the previous month.
But that’s still more than twice the Bank of England’s 2pc target. And UK price rises still outpace those elsewhere – with US inflation dropping to 3.2pc last month and the eurozone figure down at 2.9pc.
UK inflation remains high in part owing to the still soaring cost of groceries. Food prices were an eye-watering 10.1pc higher in October than during the same month last year. Since October 2021, in fact, the Office for National Statistics reports the price of food is no less than 30pc up.
But inflation overall still fell sharply last month in part as a result of lower utility bills. At the start of October, Ofgem dropped its energy price cap, bringing domestic electricity costs down almost 16pc, with gas prices falling 30pc. Cheaper petrol and diesel meant motor fuel costs were also almost 8pc down.
Having said that, UK inflation could yet come back with a vengeance. Ahead of a cold winter in the northern hemisphere, the Opec oil exporters’ cartel could engineer a nasty crude price spike for Western energy importers such as the UK, fuelled by further unrest across the Middle East. The Russia-Ukraine conflict could also spark geopolitical turmoil that drives up the price of natural gas.
For now, financial markets are ignoring all that, with the FTSE 100 share index leaping higher on Wednesday’s lower inflation data, as traders ramped up bets on future interest rate cuts. The bond market rallied, as borrowing costs fell – amid expectation the Bank of England will cut rates from 5.25pc by June at the latest.
After Friday’s weak retail sales figures, a steeper rate drop was priced-in, with the Bank’s monetary policy committee now forecast to lower rates below 4.5pc by the end of next year.
Despite inflationary dangers still lurking, then, the political narrative is moved firmly on to growth – with the Tories now under huge pressure finally to get the economy moving.
Britain, after all, is no longer the high-growth, low-tax economy it once was. During the 2010s, GDP expanded on average by just 1.5pc a year – compared with around 2pc in the 1980s and 1990s and more than 3pc during the immediate post-war decades.
Ahead of this Wednesday’s Autumn Statement, countless Tory MPs are urging Jeremy Hunt to at least signal tax cuts are coming, given Labour’s 25-point opinion poll lead. For now, the Chancellor hints if there are to be tax cuts soon, they will focus on business.
In March, Hunt introduced “full expensing”, allowing firms to write off the cost of investments in qualifying plant and machinery against corporation tax. Due to expire in 2026, there are signs this policy could be made permanent. Britain, after all, remains alarmingly under-capitalised, with many companies needing to upgrade technological capabilities.
Yet many small and medium-sized firms are cash-strapped, lacking the ability to invest. Having been hit by Hunt’s rise in corporation tax from 19pc to 25pc last spring, they are in no position to take advantage of full expensing.
Most UK manufacturers are SMEs – and they, in particular, lack access to capital. That’s why it’s far better, in my view, to raise the corporation tax threshold from £50,000 to £300,000 or more, giving our smaller firms – which employ two-thirds of our workforce and generate half of all growth – a chance to repair their balance sheets given the still debilitating impact of lockdown.
Hunt should also unlock more investment from UK pension funds. Too many cutting-edge UK start-ups move abroad, list on foreign stock exchanges, or fold owing to a lack of long-term funding.
The Treasury’s recent Mansion House reforms encouraged pension assets to shift towards venture capital – but while US and Canadian schemes typically invest 15-20pc of their resources in this category, UK regulators set an extremely unambitious 5pc target. If Hunt is serious about fostering growth, this is an area the Autumn Statement could revisit.
And with the economy in the doldrums, and millions of families financially under the cosh given lockdown then the cost of living crisis, I’d say it’s time for a big, bold statement of intent.
We need a tax move that not only bolsters growth but does so in a way seen to be fair – not least across those Red Wall seats Rishi Sunak seems to have abandoned, but which are vital if the Tories are to avoid a truly crushing defeat at the next general election.
While UK unemployment is historically low at 4.2pc, the reality is around 12pc of the working-age population are on out-of-work benefits – a figure rarely publicised. Meanwhile, there are still around a million vacancies, with many sectors suffering from acute worker shortages, with hundreds of thousands yet to return to work since lockdown. And a big reason for high UK “economic inactivity” is that at the lower end of the income scale, work still doesn’t pay.
In April 2021, Sunak, chancellor at the time, froze the tax-free personal allowance at £12,570 – with Hunt extending that freeze until 2028. If this threshold rose with inflation, as normal, it would be worth £15,620 by 2024. By then, this ultimate stealth tax will have raised an additional £540 per worker. For someone on £20,000, that’s an 11pc rise in their annual income tax bill.
What Hunt should do is free up around seven million workers and potential workers from paying income tax by lifting the minimum threshold from £12,570 to £20,000 a year, while keeping the basic rate at 20pc.
This would be progressive, helping poorer households much more, while lifting one in five taxpayers out of tax altogether – including many receiving the basic state pension.
Many Whitehall types will reject this idea, pursing their lips at the “on paper” cost of raising the personal threshold. But the activity and extra spending generated, and the benefit payments spared, means such a move would soon more than pay for itself.
All that’s needed from Sunak and Hunt is courage, conviction, a dash of imagination and, above all, leadership.
Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month, then enjoy 1 year for just $9 with our US-exclusive offer.