14/06/2025 by Tony Redondo
This was proposed by David Ricardo, one of the most influential classical economists, in the 19th century and later formalized by Robert Barro, a US macroeconomist in the 1970s. It suggests that government deficit spending does not stimulate aggregate demand because rational consumers anticipate future tax increases to pay off the debt, leading them to save rather than spend any additional income. It remains a critical lens for evaluating fiscal policy, especially in high-debt environments.
According to the ONS (Office for National Statistics), the UK’s debt-to-GDP ratio is approximately 95.5% as of April 2025. Then came this week’s spending review outlining departmental budgets for 2025–26 to 2028–29.
The Autumn Budget 2025 is likely to include tax increases to address a potential £23 billion shortfall, driven by high borrowing, low growth, and Spending Review commitments. Probable measures include further CGT adjustments, IHT reforms, pension tax relief reductions, and continued fiscal drag via threshold freezes. Other taxes like stamp duty, fuel duty, council tax, or dividend tax may also rise, as they avoid breaching Labour’s manifesto. The exact measures will depend on OBR (Office for Budget Responsibility) forecasts and political calculations closer to the Budget, expected in late October.
Currency Exchange Rates Update
The Pound had a shocking week, falling 1% against the Euro to hit a six-week low.
It was a volatile week for the Pound against the Dollar, oscillating by over 1.2% that leaves the Pound still up over 0.3% in the last week and over 2% up on the month to date.
This week, the key economic data releases include:
Monday China Industrial Production
Tuesday Japan Bank of Japan Interest Rate decision
Germany ZEW Business Confidence
Wednesday UK CPI Inflation
Sweden Riksbank Interest Rate decision
Eurozone CPI Inflation
US Fed Interest Rate decision
NZ GDP
Thursday UK BoE Interest Rate decision
Norway Norges Bank Interest Rate decision
Friday UK Retail Sales
What’s in the news?
According to the World Bank, the global economy is set for its worst year in 2025 since the 2008 financial crash, with growth expected to decline to 2.3% and over two-thirds of countries will experience restricted GDP potential. The US economic outlook has notably worsened, with growth projected to decelerate sharply to 1.4%, down from a previous estimate of 2.3%. The analysis indicates that 60% of developing economies will also see a slowdown, while the euro area’s growth is expected to be just 0.7%.
On Friday, following Israeli strikes targeting Iran’s nuclear programme, oil prices spiked by more than 9%, the most dramatic jump in more than three years. The IAEA (International Atomic Energy Agency) censured Iran on Thursday for the first time in 20 years over its refusal to work with its inspectors.
Oil surges at fastest pace in three years
Predictably, stock markets sold off and gold prices hit a record high.
UK
The Halifax reported that house prices fell by 0.4% in May, a more significant decline than the anticipated 0.1% drop, with the annual growth rate slipping to 2.5% from 3.2% in April.
Chancellor Rachel Reeves U-turned on the winter fuel allowance and reinstated the benefit for 75% of pensioners, meaning those retirees whose annual income does not exceed £35,000 will now be entitled to a payment of either £200 or £300, up from the £11,500 income threshold. All pensioners will receive the benefit, but the Treasury will claw back the payments from 25% of the wealthiest through a tax adjustment. The policy change will cost £1.25bn but officials claimed £450m would still be saved compared with the cost of restoring the payment to all pensioners. Sir Steve Webb, a partner at pension consultant LCP, said this ignores the additional £200m the Government has spent following a surge in pension credit applications.
In her Spending Review, Reeves insisted her fiscal rules are “non-negotiable” as the Chancellor splurged on transport, tech and energy investment, paving the way for further tax hikes in the autumn. Total departmental budgets will grow by 2.3% a year in real terms, Reeves said defence spending is to increase to 2.6% of GDP by April 2027, including spending on intelligence agencies. NHS spending would increase by an extra £29bn per year. Reeves said, “We are starting to see the results”.
Stephen Millard, interim director of the respected NIESR (National Institute of Economic and Social Research), said “The Chancellor has yet again said that her fiscal rules are ‘non-negotiable’. But given the small amount of headroom at the time of the Spring Statement and the increases in spending announced since then, it is now almost inevitable that if she is to keep to her fiscal rules, she will have to raise taxes in the Autumn Budget.”
John O’Connell, chief executive of the TaxPayers’ Alliance said “We now know there is going to continue to be harsh austerity for taxpayers as they stare down the barrel of yet more devastating tax hikes in the Autumn, all to fund a profligate, wasteful and bloated public sector. Yet again politicians have failed to meet the challenge of fixing ballooning welfare bills and getting people back to work, meaning the inevitable fiscal crunch looms large. Spending has to be brought under control so that we can cut taxes and bring down the national debt – but that means politicians have to be on the side of taxpayers and businesses, which unfortunately very clearly isn’t the case.”
Good news
Professional services giant EY latest Attractiveness Survey for Financial Services shows the UK dominating European investment appeal despite a drop-in activity. The UK recorded 73 foreign direct investment (FDI) projects in 2024, a 32% drop from 108 the previous year with Germany scoring second at 32, down from 38, and France third at 30, down from 39. The UK makes up 25% of all European financial services FDI projects in 2024, which refer to foreign-backed business initiatives such as setting up or expanding operations in a country. EY’s research also showed London clinging onto its leading European city status for financial services FDI, but with Paris hot on its heels.
Not so good news
Handelsbanken’s latest Global Macro Forecast projects a prolonged period of sluggish economic performance in the UK, with GDP expected to remain flat through mid-2025 and only begin a slow recovery over the following three years. The report cites a mix of international and domestic factors behind the stagnation, including weak trade, poor investment sentiment, and home-grown pressures such as record-high taxes and regulatory burdens suppressing consumer spending and business confidence.
NatWest reported that output at London firms declined for the second consecutive month. Firms widely reported Chancellor Reeves’ tax hikes and a rise in energy bills, which kicked into effect in ‘Awful April’, contributed to a decline in production in the month. The sectors in London’s economy which are suffering the most include textiles and clothing, electrical and electronic equipment and chemicals.
A joint report from WPI Strategy and Chamberlain Walker warns that half of Britain’s 2,500 smaller housebuilders could face insolvency by the end of the current parliament due to escalating costs and regulatory burdens. The report highlights a “perfect storm of costs” that threatens the Government’s ambitious target of constructing 1.5m homes during this parliamentary term.
The ONS reported that the unemployment rate has crept up from 4.5% to 4.6%, it’s highest rate since July 2021, and the number of payrolled employees fell by 78,000 over the last quarter while wage growth hit 5.2% in April, lower than expected and may seed hopes for more interest rate cuts this year.
Jack Kennedy, senior economist at Indeed said a “lower appetite” for hiring may have come as a result of higher employer costs coming into effect and hesitation over the government’s flagship Employment Rights Bill.
Jane Gratton, Deputy director of public policy at the BCC (British Chambers of Commerce) said, “Employment costs and pervasive skills shortages are a massive challenge for business, presenting big risks to investment and growth.”
UK firms dodge Labour tax raid with WFH roles abroad
The ONS also reported a 0.3% GDP contraction in April. City analysts were expecting GDP to contract by just 0.1% according to Bloomberg. Liz McKeown, director of economic statistics at the ONS, said: “The economy contracted in April, with services and manufacturing both falling. Both legal and real estate firms fared badly in April, following a sharp increase in house sales in March when buyers rushed to complete purchases ahead of changes to stamp duty. Car manufacturing also performed poorly in the first quarter of the year.”
The BoE (Bank of England) reported that the share of highly leveraged mortgages has reached its highest level since the 2008 financial crisis, with loans exceeding 90% of property value accounting for 6.7% of all mortgages in the UK during the first quarter. This marks an increase from 6.3% in the previous quarter.
USA
The Bureau of Labor Statistics reported US inflation rose by a less than expected 0.1% between April to May, putting the annual inflation rate at 2.4% as Trump’s tariffs have yet to show a significant impact on inflation.
The US and China held a second round of trade talks and Trump announced, “Our deal with China is done, subject to final approval with President Xi and me.” Commerce Secretary Howard Lutnick expects final details to be completed in the coming days, although the agreement is unlikely to be made public.
Bloomberg reported that US Treasury Secretary Scott Bessent is emerging as a top contender to replace Jerome Powell as Federal Reserve Chair in 2026.
The EU
As predicted, the ECB (European Central Bank) cut eurozone interest rates by 0.25% to 2%, though ECB President Christine Lagarde’s hawkish tone caught markets off guard. Lagarde emphasized that the ECB is nearing the end of its easing cycle, reinforcing the euro’s resilience despite May’s inflation slowdown to 1.9% y/y. ECB forecasts now project inflation at 1.6% by 2026, but Lagarde downplayed the revision, attributing it primarily to lower energy costs and recent euro strength.
Santos Cerdán, the third-highest official in Spain’s ruling Socialist Party, stepped down from his positions amid allegations of corruption. The resignation came after a judicial report implicated Cerdán in the alleged improper allocation of pandemic-related public contracts alongside ex-Transport Minister Ábalos and his former advisor Koldo García. Ábalos, who served from 2018 to 2021 and was dismissed and expelled from the party, is accused of corruption related to illegal commissions in these contracts. Prime Minister Pedro Sánchez condemned the case, demanded Cerdán’s resignation, pledged an independent audit, rejected early elections, and affirmed the government will complete its term until 2027.
Others
China’s consumer deflation continuing at -0.1% year-over-year in May. PPI (Producer Price Inflation) deflation extended its streak to 32 consecutive months, dropping 3.3% year-over-year.
In Australia, consumer inflation expectations jumped from 4.1% in May to 5% in June, the highest level since July 2023. Markets are currently pricing in a 0.25% interest rate cut at the July meeting of the RBA (Reserve Bank of Australia).
Stranger than fiction
Scientists in Japan have created a biodegradable plastic that completely dissolves in seawater within hours. Unlike existing bioplastics, it leaves no microplastics or toxins behind. The innovation could revolutionise marine packaging and fishing gear, two major contributors to ocean waste and is being tested for real-world use.
Quote
William A. Feather, an American publisher and writer, “A budget tells us what we can’t afford, but it doesn’t keep us from buying it”
