Low growth, high inflation: welcome to Reevesonomics

Telegraph

2 days ago

We are not the fastest growing. Nor do we have the highest level of productivity, or the strongest stock market. Still, there is one economic measure by which Britain is topping the G-7 league tables, as the Chancellor Rachel Reeves promised we would during last year's election campaign.
We now have the highest rate of inflation of all the major developed countries – and, worst of all, it is the soaring cost of Government that is driving prices higher.
It is yet more bad news for the Chancellor. After output shrank last month, and borrowing overshot its target, we learned today that prices are now rising at 3.6 per cent a year, significantly up on last month, and well above the predictions of most mainstream economists.
That will inevitably make life even tougher for anyone already struggling with the cost of living. And it will make the Government's finances look even worse, with the 'triple lock' driving pensions higher, with price rises fuelling demands from the public sector unions for even higher wages, and with the interest payments on index-linked gilts going even higher (the UK has £600 billion of inflation linked bonds outstanding, the highest in the developed world). The inflation figures are not just an unfortunate blip. They are a major problem for the Government.
And yet, it has only itself to blame. When it came into office, inflation was down at close to 2 per cent, right on target. Everything the Starmer administration has done since then could have been purposefully calculated to drive prices higher. It has loaded a huge tax increase on businesses, in the form of employer's National Insurance, and ignored warnings that it would be passed on in higher prices. The result?
Given that the supermarkets were among the hardest hit, by the extra tax, along with pubs and restaurants, it should be no surprise that food prices are one of the main contributors to rising inflation. Likewise, it has accelerated a poorly planned rush for net zero, brushing aside fears over mounting costs.
Energy costs are also going through the roof. Meanwhile blockbuster pay awards in the public sector have driven up wage demands across the economy, whole extra borrowing and spending has pushed up demand. Indeed, given how much the Government has done to raise prices, it is surprising that inflation is not even higher.
There is more to come. The impact of the NI increase has only just started to feed through into the data. The rise in business rates has still to make itself felt. And the pressure on wages driven by the public sector is not going to abate any time soon. Indeed, the massive numbers of people now opting for benefits instead of work will mean pay has to be a lot higher to hire those that still want to work.
In reality, with the state now accounting for 44 per cent of GDP, and on track to punch through the 50 per cent barrier over the next few years, it is the cost of Government that is now the major determinant of the overall level of prices. The cost of the British state is spiralling out of control – and today's inflation figures are, unfortunately, just a taste of what is to come.