29 March 2025
by Tony Redondo
According to the Oxford English Dictionary, “Omnishambles” was the word of the year in 2012. The word means a situation which is shambolic from every possible angle. How else to describe the UK economy eight months into Keir Starmer’s government. Last Wednesday, as promised Chancellor of the Exchequer Rachel Reeves made no effort to introduce new taxes in the Spring Statement. Reeves says she is taking difficult decisions to help the UK economy grow and is on the side of working people, yet the steps she announced last October achieve the complete opposite with the increase in employers’ NICs which comes into effect on Tuesday likely to further undermine economic growth, increase unemployment and push down future wage rises. An unwelcome ‘triple tax whammy’ on working people.
The smart money is on further tax rises come the next budget in October. If £10 bn wasn’t enough ‘headroom’ six months ago, it’s unlikely to prove sufficient for the next six months. Even the Office for Budget Responsibility (OBR) says given the state of our domestic economy and global uncertainty it won’t take much to turn that surplus into a deficit. According to one calculation, Reeves has already lost half of her headroom with £5 bn wiped off less than 48 hours after her Spring Statement according to Bloomberg Economics after government borrowing costs rose with the benchmark 10-year yield rising to 4.81% last Thursday, its highest level since mid-January. Dan Hanson, chief UK economist at Bloomberg Economics said “That half the headroom has already been wiped out shows that there’s an awful lot more work to do to shore up the public finances. The autumn is shaping up to be another big policy event for the chancellor.”
Many City firms are already preparing for the worst. Economists at Jefferies and Investec have already said further tax rises are coming in Autumn.
Speaking at a post-Spring Statement event on Thursday morning, Institute for Fiscal Studies (IFS) director Paul Johnson warned that the Chancellor may have to extend freezes to income tax and national insurance thresholds beyond 2030. He also said investors should be aware of a possible wealth tax and that speculation could damage Reeves in coming months.
Then there’s the question of Trump’s tariffs after Trump said he was putting a 25% tariff on all auto imports. The OBR says US tariffs of 25% on UK exports would wipe 0.6% from GDP growth by 2026. The US is Britain’s second largest car export market after the EU. The UK exported over 101,000 units in 2024, equating to £7.6bn of mainly high-end luxury cars.
Currency Exchange Rates Update
The Pound to Euro exchange rate was little moved last week but has fallen 1.4% in the last month. It is still over 2% higher than this time last year.
Against the Dollar, again very little movement last week but up over 2.7% in the last month and 2.5% over this time last year.
With the tax rises announced last October coming into play from Tuesday onwards, the Pound is likely to come under renewed pressure in April but the ‘elephant in the room’ is going to be Trump’s tariffs.
What’s in the news?
UK
Ipsos the polling firm paint a grim picture of public sentiment in the wake of the Spring Statement with only 19% of voters believe Reeves is doing a good job as Chancellor. 51% rate her performance negatively, a jump of 7% since just before the statement. That leaves Reeves with a dismal net approval rating of -32, just five points above the lows of ex-Chancellor Kwasi Kwarteng post-mini budget of 2022 and 7 points below the lows of former chancellors Sunak and Hunt.
As for the economy, 57% feel more concerned than reassured by Reeves’ Spring Statement.
Britain’s tax burden is set to hit a post-war high of 37.7% by 2027/28 but signs are that instead of raising more money, her autumn Budget tax onslaught risks slashing Treasury revenues as individuals and businesses shift their behaviour to escape the squeeze. It’s all down to the Laffer curve which shows that if you drive tax rates too high, you actually collect less revenue. At the extreme end of the curve, a 100% tax rate would raise precisely zero because nobody would bother working but the Laffer curve kicks in at much lower marginal tax rates.
HMRC has previously estimated that raising the higher Capital Gains Tax (CGT) rate by 10% would actually cut tax revenues by more than £2billion, a drop of around 7.5%. That didn’t stop former Tory Chancellor Jeremy Hunt cutting the annual CGT-free allowance from £12,300 to just £3,000. Not to be outdone, Reeves raised CGT on non-property assets to 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers last October. She also cut tax relief for small business owners and entrepreneurs. Now the OBR has slashed its forecast for CGT by £23 bn by 2030.
Good news
UK CPI inflation unexpectedly slowed to 2.8% in February, below market expectations but in line with Bank of England (BoE) forecasts. Speculation on a May interest rate cut by the BoE rose but the next move is not fully priced in until August with the tax and utility bill rises coming in April.
Not so good news
The Office for National Statistics (ONS) reported that UK economic growth (GDP) was confirmed to have grown at a 0.1% snail pace in the final quarter of 2024 following zero growth in the third quarter. Business investment fell 1.9% in the final quarter.
The UK’s trade account’s deficit also widened by £0.5 bn in the last quarter as imports surged rose more than exports. Ruth Gregory, deputy chief UK economist at Capital Economics, said “Today’s deluge of data confirmed that the economy was weak even before the full effects of higher business taxes are felt and that a high household saving rate continues to restrain GDP growth”.
Up to 2,700 of jobs have been put at risk after British Steel announced plans to significantly reduce operations at its Scunthorpe steelworks. The announcement comes after China-based Jingye, the owner of British Steel, rejected a £500m state rescue package yesterday.
Sky News owner, Sky, is the latest company to announce major job cuts, with 2000 customer services positions at risk.
Supermarket chain Morrisons confirmed it will close 52 cafes, all 18 market kitchens, 17 convenience stores, 13 florists, 35 meat counters, 35 fish counters and four pharmacies in the coming months. It said impacted employees are expected to be moved into other roles, but 365 workers are at risk of redundancy.
The Resolution Foundation think tank said lower-income households are forecast to become £500 a year poorer over the next five years as a result of the Chancellor’s Spring Statement with an estimated 250,000 more people, including 50,000 children, left in relative poverty after housing costs by the end of the decade as a result of the Government’s squeeze on welfare, according to its own impact assessment. The changes will affect about three million families on incapacity benefits, while 800,000 claimants will have reduced personal independence payments (PIP).
Nikhil Rathi, CEO of the Financial Conduct Authority (FCA), has warned that the Government’s directive to boost economic growth may lead to increased mortgage defaults and other financial risks.
Professional services firm Grant Thornton reported that 71% of small and medium-sized businesses (SMEs) have formed plans to offload rising employment costs onto consumers and almost seven in ten businesses plan to reduce or freeze hiring in the next six months as they battle the extra tax burden.
More than 55% of family-owned businesses and farms across the UK are cutting jobs, halting investment and selling assets to stay afloat in response to sweeping tax changes introduced in October’s budget according to a survey by the Family Business UK and CBI Economics. The research found that the tax overhaul is expected to result in more than 208,000 job losses by the end of this Parliament. It has also projected a net fiscal loss to the Treasury of £1.9bn, undermining its own revenue expectations.
USA
The latest Bloomberg survey of economists show expectations for US GDP growth dialled back this year, envisioning softer consumer spending and more limited capital investment amid mounting uncertainty created by Trump’s tariff policies. GDP is now set to grow 2% in 2025, down from the 2.3% estimate in last month’s poll.
US consumer confidence hit the lowest level in four years as higher prices and Trump’s tariff war stokes concerns about the future of the economy.
A University of Michigan survey show inflation expectations are now at the highest level since February 1993.
Republican congressional leaders say they’re close to agreeing on a plan to extend Trump’s 2017 tax cuts, as Congress looks to approve an economic package by the end of May. House Speaker Mike Johnson said the
Senate is “coming around” to the idea of lifting the debt ceiling by $4 trillion as part of the tax legislation. The rush is justified as fresh estimates show the US could breach the limit as early as mid-July without action.
America’s democrat elite are racing to open Swiss bank accounts and move hundreds of millions of dollars out of the US as they fear being targeted by Donald Trump amid fears of potential restrictions on moving money overseas among ultra-wealthy Democrat families.
The EU
The eurozone’s latest economic activity indicator showed the fastest expansion in seven months. Germany led the improvement, as anticipation builds over the economic boost from its newly approved fiscal expansion focused on infrastructure and defence.
Eurozone consumer confidence fell more than forecast in March reinforcing concerns that households remain cautious despite moderating inflation.
Wells Fargo raised their forecasts for the Eurozone economy, citing additional positive developments in recent months. It now expects the European Central Bank (ECB) to cut interest rates by 0.25% in June and September, taking the policy rate to a low of 2.00% by September, compared to a previous outlook for a policy rate low of 1.75%.
Friedrich Merz is facing a critical moment in his bid to become German chancellor with disgruntled fellow conservatives worried he’s making too many concessions in coalition talks with the Social Democrats. After abandoning campaign promises of fiscal consolidation to secure hundreds of billions of euros of debt financed funding for defence, infrastructure and climate projects, he needs to walk a careful line before finalizing a deal on forming a coalition government.
In France, manufacturing sentiment deteriorated further, with the climate indicator slipping to its lowest since November amid weakening order books.
French prosecutors say that ex-President Nicolas Sarközy should be found guilty and sent to jail for seven years over allegations his 2007 winning campaign was covertly funded by millions of euros from the late Moammar Qaddafi’s Libyan regime.
Others
Australian prime minister Anthony Albanese followed the previous week’s federal budget, featuring tax cuts, energy hand-outs and university loan relief, with the rapid announcement of an election for 3 May in what’s expected to be a closely fought campaign.
New Canadian Prime Minister Mark Carney announced an election data for 28 April and will campaigning on the slogan “Canada Strong,” reminding the electorate that US President Donald Trump wants to annex the country into the 51st US state.
Quote
Nobel winning economist, Milton Friedman, “We have a system that increasingly taxes work and subsidizes nonwork.”
