07/06/2025 by Tony Redondo
The Laffer Curve is an economic concept illustrating the relationship between tax rates and tax revenue. It suggests that at a 0% tax rate, revenue is zero, and at a 100% tax rate, revenue is also zero (as no one would work if all income were taxed). Between these extremes, revenue rises with tax rates up to a point, then declines as high rates discourage work, investment, or lead to tax avoidance. The bell-shaped or parabolic curve, popularized by economist Arthur Laffer in the 1970s, implies an optimal tax rate that maximizes revenue without stifling economic activity.
The OECD (Organisation for Economic Co-operation and Development) downgraded the UK’s growth projections, warning Rachel Reeves that a wafer-thin fiscal headroom poses “significant downside risk” to the UK economy. The OECD downgraded its estimate for the UK’s growth this year from 1.4% to 1.3% and from 1.2% in 2026 to 1%, well below the 1.9% forecast by the OBR. The OECD urged Rachel Reeves to take a “balanced approach” to managing fiscal policy, combining “targeted spending cuts” as well as revenue raising moves such as an update to the council tax rules to realign with house price growth across the country.
Deutsche Bank analysts are forecasting £10bn of tax rises in this year’s Autumn Budget. In a research note, Deutsche Bank analysts say “With a tough Spending Review due in June, we expect fiscal news to worsen over the coming months. By the time the Autumn Budget rolls around, the Chancellor’s fiscal headroom will have likely evaporated.” Deutsche Bank now expects inflation to average 3.3% in 2025, a sharp increase from its previous forecast of 2.8% made last November.
Senior Labour MPs are warning there will be further tax increases after PM Keir Starmer announced the UK is preparing for war. Paul Johnson, Head of the IFS (Institute for Fiscal Studies) told Times Radio “There would need to be some really quite chunky tax increases.”
One of Britain’s biggest pub chains has taken aim at the government’s “damaging” tax rises announced in last year’s budget, warning there is a “fundamental tension” between rising costs for businesses and the government’s expectation of growth. Outgoing chairman Charles Brims said the Autumn budget brought about “a tax and cost burden without precedent in the 21st Century” with larger employers “particularly hard hit.”
According to a Chamberlain Walker study, conducted by former Treasury economist Chris Walker, at least 25,000 or 10% of the UK’s non-doms left the UK last year following Rachel Reeves’ crackdown on the tax status, a rate which if continued into this year would wipe out the Chancellor’s fiscal headroom. This will likely mean the Chancellor faces a multibillion-pound black hole in the public finances, something likely to renew fears that additional tax rises will be needed to make up for the lost revenue.
Currency Exchange Rates Update
The Pound to Euro exchange rate was range-bound this week, with the Pound gaining just 0.2% against the single currency to register a 1% gain over the last month.
Against the Dollar, the Pound gained over 0.6% on the week and hit its highest level since February 2022 on Thursday.
BoE (Bank of England) Governor Andrew Bailey suggested the pace of UK interest rate cuts is “shrouded in a lot more uncertainty” due to the “unpredictable” global economic situation. MPC (Monetary Policy Committee) external member Catherine Mann dissented against the consensus to cut Bank Rate to 4.25% by voting for a 0.5% cut in May’s MPC rate setting meeting. Mann said she wished to take a more “activist” approach with regard to interest rate cuts by making quick and large moves.
This week, the key economic data releases include:
Monday Japan GDP
China Inflation and Trade Balance
Tuesday UK Employment and Wages Data
Wednesday US CPI Inflation
Thursday UK GDP & Industrial Production
US PPI Inflation
Friday Germany CPI Inflation
France CPI Inflation
US Consumer Sentiment
What’s in the news?
UK
The Nationwide reported that UK house prices rose by 3.5% in the year to May.
Rain Newton-Smith, the chief executive of the CBI (Confederation of British Industry) said costly net zero policies must end and urged the Treasury and Department for Business and Trade to roll out an industrial strategy that tackles high UK energy costs which currently far surpass prices seen in competing economies such as France, Germany and the US. Energy costs in the UK are five and a half times more expensive than in the US, around 19% above the EU average and 46% higher than the global average.
Few British businesses now expect to be directly affected by recent changes in US trade policy, with only 12% naming it as one of their top three sources of uncertainty, down from 22% only one month ago.
Good news
The BCC (British Chamber of Commerce) says business investment could increase by 4.8% this year, far higher than the 0.6% increase previously forecast. The BCC says firms in ICT, manufacturing and financial services look set to invest. David Bharier, the BCC’s head of research, said that while the updated forecast was “promising,” most SMEs are not experiencing growth as they “grapple with a range of cost pressures,” such as the hike in the minimum wage and employers National Insurance contributions.
Not so good news
The FSB (Federation of Small Business) says since Labour got into power last July, more than 150,000 jobs have been lost with businesses warning labour costs are one of their largest “barriers to growth.” Tina McKenzie, Policy Chair at the FSB said “It’s of course alarming to see the sustained fall in the number of employees on payroll. The rise in employer National Insurance Contributions (NICs) will ultimately leave many paying more tax on employing people. The Government also needs to think again and rework the parts of the Employment Rights Bill that will wreak havoc on hiring. We know that 75% of small employers are worried about how the Bill will expand the grounds for unfair dismissal, and 74% fear changes to statutory sick pay.”
A study from CBI (Confederation of British Industry) Economics, commissioned by the lobby group Family Business UK, found 208,500 full-time jobs could be lost by April 2030 as a result of the Chancellor’s inheritance tax raid announced in her 2024 budget.
https://uk.finance.yahoo.com/news/reeves-inheritance-tax-raid-cost-140129346.html?guccounter=1
UK manufacturing PMI dipped to 45.1 in May, marking the steepest contraction in output and employment since 2020. Rob Dobson, director at S&P global market intelligence, said “May PMI data indicates that UK manufacturing faces major challenges, including turbulent market conditions, trade uncertainties, low client confidence and rising tax-related wage costs.”
Mortgage rates spike as inflation bites. Fourteen banks, including Barclays and NatWest, have raised fixed-rate deals. Borrowers looking to remortgage are seeing the most significant rate hikes. According to analysis by Broadstone, the number of individuals with over £300,000 remaining on their mortgage has nearly doubled from 5% in 2017 to 9% in 2024. The trend indicates that one in seven homeowners now carries debt that is at least four times their income.
The latest S&P Global construction purchasing managers’ index (PMI) fell to 47.9 in May with construction jobs cut at their fastest pace in five years. A reading below 50 equals a contraction in that industry. It’s the fifth consecutive monthly decline.
A poll by the IoD (Institute of Directors) shows 72% of business leaders in Britain believe that, without changes, Angela Rayner’s Employment Rights Bill will harm the government’s growth aspirations, with over half of those saying it would have a “strong negative impact” on the economy. 49% said the workers’ rights bill, which is currently being debated in the House of Lords, would make them less likely to hire new staff, while 36% would look to outsource roles or operations to other countries. Roughly a quarter said they planned to make redundancies.
Centrica, the owner of British Gas has signed a £20bn deal with Equinor, Norway’s state energy giant Equinor to import Norwegian gas as part of Energy Secretary Ed Miliband’s net zero charge. It’s enough to heat five million homes a year until 2035. Instead of using the Uks own gas reserves, Miliband is taxing UK producers out of existence, with an effective offshore rate of 78%. Domestic North Sea production is now plunging at 11% a year, more than double the decline forecast before Miliband’s policies took hold.
USA
The US economy added 139,000 jobs in May, above the 130,000-figure expected by most analysts.
The US ISM Manufacturing PMI edged up to 49.3 in May, surpassing expectations and suggesting a modest rebound in factory activity.
The US trade deficit fell 55% in April, on the largest-ever plunge in imports, as companies stopped massive front-loading of goods. The retreat reflects the abrupt hit to trade, after firms had rushed products into the country earlier this year to try to get ahead of new taxes on imports Trump had promised. Shifts in US import flows have already outstripped the pandemic and look unlikely to return to normal before tariff levels reach a new equilibrium.
https://www.bbc.co.uk/news/articles/cvgqzpljx3do
The US has doubled its import tariff on steel to 50%.
The OECD has downgraded its economic growth forecasts for the US, revising the growth outlook to 1.6% this year and 1.5% in 2026.
The EU
The ECB cut interest rates for the eighth time in a year and acknowledged that inflation was under control but warned that economic activity in Europe is falling amid risks of a trade war with the US. The latest 0.25% cut lowers the ECB’s key bank deposit rate to 2.0%. However, ECB President Christine Lagarde delivered unexpectedly hawkish remarks, stating that policymakers are approaching the end of the monetary policy cycle, as the current rate is deemed appropriate for navigating ongoing economic uncertainty.
Euro zone inflation has fallen to 1.9%, below the 2% ECB target rate.
Economic growth however has continued to be lacklustre even as interest rates have eased. The latest estimate shows that in the first quarter of 2025, the euro zone expanded by 0.3%.
The Dutch government has collapsed after Geert Wilders withdrew his Party for Freedom from the governing coalition following a row over migration proposals.
Nationalist candidate Karol Nawrocki won Poland’s presidential election. Voter turnout in the election hit a record high of 71.7%. Parliament holds most of the power in Poland, but the President can veto legislation.
Others
The RBAs (Reserve Bank of Australia) May meeting minutes revealed the board’s preference for a cautious 0.25% rate cut over a larger 0.5% cut. Despite domestic conditions supporting cuts, policymakers remained concerned about inflation not sustainably reaching targets and persistent labor market tightness. The RBA emphasized its commitment to measured, predictable policy while maintaining readiness to act if downside economic risks materialize.
China’s manufacturing activity in May shrank at the fastest pace since September 2022. This contraction occurred despite recent US-China diplomatic progress in Geneva. The private sector survey contrasted with official data showing slight improvement to 49.5, though still contractionary. Both supply and demand weakened substantially, with Caixin noting that unfavourable economic development factors remain widespread across China’s manufacturing sector.
Quote
Winston S. Churchill “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
