31 October 2024: More than half the tax increases will hit businesses

If anyone felt there was little difference between the Labour and Conservative Parties in modern politics during the election campaign, yesterday will have set them straight.

While Keir Starmer, Rachel Reeves and their colleagues cannot be accused of outright lying in their manifesto promises, they were certainly economical with the truth about their attitude to taxation.

This is what tax and spend looks like.

The Budget that Reeves presented to Parliament yesterday contained forty billion pounds of additional taxes, twenty-five billion of which will have to be found by businesses of all sizes.

The Increase in employers’ national insurance contributions was twofold. From April, companies will pay NI at 15% on salaries above £5,000, up from 13.8% on salaries above £9,100, raising an additional £25bn a year.

Reeves made a significant point about where the funds will be spent: on housing, education, and the NHS, as well as long-term investment in infrastructure projects in energy and transport.

However, the Office for Budget Responsibility which was used by Reeves as justification for the new measures was less than complimentary about the budget in their initial view.

In its fiscal outlook after Reeves’ gruelling budget, the figures don’t make happy reading for fans of economic growth.

They forecast a weaker economy in the long term. Real Growth is expected to be well below the G7 average at 1.7% by the end of this Parliament.

Employers’ groups like the Institute of Directors and The Chambers of Commerce were disappointed, saying that employment would be hit by the added costs.

According to the OBR’s initial assessment, both inflation and interest rates are set to be higher during this Parliament. Budget measures are responsible for a 0.5% increase in inflation and twenty-five basis points in interest rates.

This morning’s papers are scathing about the Budget, using the metaphor of today being Halloween to say how scary the government’s plans are.

There was a lot of criticism of the previous Government and disapproval of an attempt at humour which fell flat when Reeves tried to joke about the effect of an increase in passenger charges for the use of private jets would cost someone flying to California, an attempted dig at Rishi Sunak, which he studiously ignored.

The pound was largely unaffected by the Budget, as the financial markets were both expecting most of the measures announced and are currently more interested in monetary policy than fiscal policy.

It slipped to a low of 1.2937 and closed at 1.2962.

As the Presidential Election draws ever closer, there is still a plethora of economic data to drive the financial markets.

The release of the final cut for Q3 GDP was slightly disappointing, showing that the economy grew by 2.8% between July and September, down from the 3% that was previously reported.

Although down on earlier data, this was still stronger than the growth figures that are being seen in the rest of the G7.

Private sector employment figures were also released yesterday. They showed that there was a healthy increase in jobs in the sector, with 233k new jobs created, up from an upwardly adjusted 159k in September.

Data for lay-offs will be published later today, making up the final piece of the puzzle that is the non-farm payrolls.

Weekly Initial jobless claims are currently averaging around 225k. This is consistent with an employment market which may be running out of steam, although the NFP data is still notoriously difficult to predict.

Data for Personal Consumption Expenditures is also due to be released later today. It is expected that the broader measure of inflation will have eased further, falling to 2.6% from 2.7% in September.

As the election campaign reaches its final weekend, the candidates are still neck and neck in the polls.

They are concentrating heavily on the seven “Swing States” which are likely to decide the result.

In early voting in Georgia, one of the seven, voting is reported to have been the heaviest, as a percentage of registered voters, that has been seen in living memory.

The result of next week’s FOMC meeting is still unclear, as the Committee has now entered its blackout, when its members are barred from making public their voting intentions.

Markets expect interest rates to be cut again by 0.25% on November 7. That’s according to a forecast by the CME FedWatch Tool. The decision will be announced at 7 pm London time. This would be the second cut of this cycle after a 0.5% reduction on September 18 and would take the target range for the Federal Funds rate to between 4.5% and 4.75%.

The dollar index lost ground yesterday as the market’s focus shifted to the possibility of a rate cut next week.

It fell to a low of 103.98 and closed at 104.12.

For what it’s worth, early predictions for the headline figure in tomorrow’s employment report are for around 120k new jobs to have been created. If that is the case, the dollar may react negatively since it would almost certainly see a rate cut next week.

The series of rate cuts that have been started over the past free months appear to be having a positive effect on both consumer and business confidence.

Both increased in the past month, although there has been negligible effect seen elsewhere so far.

ECB Vice President, Luis de Guindos, has been particularly active this week providing plenty of opinion on both the future path of interest rates and the economy.

He highlighted in a speech yesterday that recent data confirms the disinflationary process is “well on track.” However, he cautioned that the outlook is clouded by “substantial risks.” Key concerns include geopolitical conflicts that could raise energy and freight costs, extreme weather events, and persistent wage growth, all of which could prolong inflationary pressures.

His home country has seen violent storms this week, in which a year’s worth of rain fell in eight hours!

He pointed out that economic performance has been weaker than expected, with risks skewed to the downside. “Lower confidence could prevent consumption and investment from recovering as fast as expected,”

His colleague on the ECB’s Governing Council, French Central Bank Governor, Francois Villeroy de Galhau stated yesterday that it is too early to claim victory over inflation and called for the focus to be on getting it to the target of 2% rather than reacting to short-term shock that might put the figure off from the long-term goal from time to time.

“If inflation is above target, but converging at a sufficient pace, this may not call for action,” Villeroy said before the London School of Economics. “Maintaining inflation precisely on target 2.0% at all times is neither realistic nor necessary.”

Furthermore, he also advised against firm statements that inflation might undershoot its target, noting that “[a] too vague medium-term objective without a clear roadmap is a blurred signal that would ultimately undermine credibility,” urging “a clear communication about the horizon and the journey back to target.”

The euro rallied close to its highest level in two weeks yesterday. It reached a high of 1.0871 and closed at 1.0855.

Have a great day!