18 November 2024: The IFS calls Reeves’ budget “ludicrous”

The Head of Britain’s leading independent economic think tank, the Institute for Fiscal Studies, labelled the Budget delivered to the House of Commons on 30th October as “ludicrous.”

Paul Johnson has described how he was baffled by the cut in pensioners’ winter full payments and the increase in stamp duty and inheritance tax for family-owned farms, calling them “counterproductive”.

‘I did not anticipate the rise in employers’ National Insurance Contributions, I believed that the manifesto had ruled them out” he said.

If the man called “Westminster’s fiscal referee,” trusted by MPs as politically impartial, was fooled, it is hard to imagine voters not also feeling tricked.

Given a choice between raising fuel duty and withdrawing the pensioners’ winter fuel allowance, Johnson would have chosen the former.

Rachel Reeves has been blamed for the economy only growing by the smallest margin possible between July and September. Growth was just 0.1% in Q3, although Reeves is clinging to her message that it is the previous Government’s fault, despite having “drawn a line under the past”. She was reminded that the economy grew by 0.7% and 0.5% in the first two quarters of the year as it emerged from a shallow recession.

Shadow Chancellor, Mel Stride, believes that consumers were spooked by the entire cabinet “talking down” the economy following the election.

“And of course what they’ve done now is follow it up with a Budget that has ramped up taxes, particularly taxes that are going to bear down on growth.” Stride continued.

Prime Minister Keir Starmer said on Saturday he would defend decisions taken in his Labour government’s first budget “all day long”, while farmers protested over changes to inheritance tax.

Addressing a Welsh Labour Conference in Llandudno, north Wales, Starmer did not refer directly to the farmers’ complaints, but he said he stood by the decisions made in finance minister Rachel Reeves’ budget statement.

While Starmer spoke, hundreds of farmers protested outside the conference venue over a budget measure that will increase the number of farmers who pay inheritance tax. Their protest included a convoy of tractors.

Farmers have warned that the move will threaten the viability of farms, forcing them to sell land and make produce more expensive, threatening food security.

The pound lost ground even as the dollar paused for breath on Friday as the GDP data pointed to further rate cuts by the Bank of England.

Last week, Sterling opened at 1.2920 and closed at 1.2606 having made a low of 1.2595.

Last week was heavily loaded with comments from Fed officials, all of whom believe that the FOMC will continue to pare rates at a pace that sees inflation continue to fall and employment remain positive, although there was some disagreement regarding what metrics they are considering.

Fed Chair Jerome Powell stated on Thursday that the Central Bank’s rate-setters aren’t in a hurry to lower interest rates to the so-called “neutral rate” and are comfortable making changes to volumes as they seek to bring inflation to their goal.

Before they can reach the neutral rate, there needs to be agreement on just what the neutral rate is.

At an event at the Dallas Regional Chamber of Commerce, Powell opened by saying, “We are moving policy over time to a more neutral setting. But the path for getting there is not a preset. In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks.”

“The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully,” Powell clarified, adding “Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve.”

Earlier, Boston Fed President, Susan Collins, said she believed that the economy was on a “strong trajectory back to the Fed’s 2% target.

Collins isn’t a voting member of the Fed’s Federal Open Market Committee rate-setting committee this year, but she will be in 2025.

Earlier, she said monetary policy continues to be restrictive, and a rate cut is still on the table for December.

The FOMC will hold its next meeting on Dec. 17-18.

One of the world’s most pre-eminent economists, Nouriel Roubini, sees the economic policies of President-elect Donald Trump as “pro-business”. “The Trump administration could grow the US economy and lower inflation”.

“We don’t know yet what his economic policies are going to be, some of them may lead to greater growth and lower inflation in the US and globally,” Mr Roubini said.

Output data is due for release next week, and it will be interesting to note if Trump’s threat to impose tariffs has had any immediate effect on manufacturing output, which has been languishing in contraction all year.

The Dollar index experienced a stellar week, rising to a high of 107.07 last week, although it appeared to be running out of steam on Friday, closing at 106.76.

The European Commission on Friday predicted economic growth to pick up slightly and inflation to keep falling in the eurozone next year while warning of growing risks linked to geopolitical tensions.

“With the EU economy steadily recovering, growth should pick up more speed next year,” commission vice-president Valdis Dombrovskis said.

Forecasts by the commission showed eurozone growth accelerating slightly to 1.3 per cent in 2025, up from 0.8% this year, while inflation in the 20-country single currency area was seen easing to 2.1%, down from 2.4%.

On Friday, Eurostat confirmed that domestic demand was projected to drive future growth, expected to reach 1.6% in the eurozone in 2026. “As the purchasing power of wages gradually recovers and interest rates decline, consumption is set to expand further,”

Meanwhile, Vice President Luis de Guindos says the European Central Bank remains confident that inflation will converge with its 2% target next year, even if some questions over price pressures in services remain.

At the same time, the economy has disappointed recently as consumption is still weak, de Guindos said on a panel in Madrid. “A summary is that we have good news concerning inflation, and on growth, we have not very good news,” de Guindos said. “The main question mark we have, something we must analyse more, is why this is happening, why growth is so fragile.

Interest rate changes should remain the European Central Bank’s primary policy instrument and bond purchases, along with forward guidance, need to be used more sparingly, ECB board member Isabel Schnabel said on Thursday.

The ECB bought trillions of euros worth of debt over the past decade in the hope of rekindling inflation, and there is still more than 4 trillion euros of bonds left on its balance sheet, impacting market prices years after the need for stimulus has ended.

This market distortion is why the ECB should change its approach to how it buys bonds in a process also known as quantitative easing, Schnabel said, just months before a strategy assessment that looks at how the bank uses its instruments.

To effectively manage inflation in this environment, Central Banks need to prioritize agility and flexibility,” Schnabel said in a speech in Washington. “Short-term interest rates therefore remain the instrument of choice in most circumstances.”

Germany’s economy, already in decline, is projected to lose 1% of its GDP due to trade tariffs as promised by the U.S. President-elect Donald Trump.

The Euro has suffered since the U.S. Presidential election, and quite apart from the issue of tariffs, a continued decline for the currency may see inflation pick up as the cost of imports rises.

The common currency fell to a low of 1.0496 last week, although it recovered a little on Friday, reaching a high of 1.0527.

Have a great day!