High hopes for a feel-good 2021
TORY MPs are daring to dream that the nation’s stricken economy will soon be on the mend. Rishi Sunak’s Budget this week calmed nerves across the party that Treasury resources were running thin. Optimism is spreading that better times are ahead for the country and their party.
“There was a lot more support for businesses than we expected,” one backbencher from a “Red Wall” former Labour seat in the north of England told me. “It feels like we are finally on our way out of the nightmare.”
Hopes are growing that the elusive feel-good factor that governing politicians crave could return when hundreds of thousands of businesses start to reopen and Britons enjoy reclaiming their freedom.
Even before the Chancellor’s spend now, tax later Budget on Wednesday, polls suggested optimism was growing in line with the super-speedy vaccine rollout.
Ipsos Mori’s monthly Political Pulse showed over a third of Britons say the country is heading in the right direction, up from 24 per cent in January. Another opinion poll gave the Tories a massive 13 per cent lead over Labour.
Some MPs are even beginning to speculate about an early general election in 2023 to capitalise on the recovery before the Chancellor’s delayed tax rises start to bite.
Yet in politics, every silver lining has a cloud. One potential threat that could dampen the return of the feel-good factor is a significant rise in the cost of living. The Bank of England has warned that a rise in inflation may be on the horizon.
With many households ready to spend savings built up during months of lockdown, a surge in consumer demand can be expected once the economy fully reopens. Yet supply chains have been scarred by the Covid crisis, with many firms permanently closed, workplace skills have deteriorated for many workers on furlough and Covid measures have increased costs.
Inexpensive credit due to emergency rock-bottom interest rates along with new US President Joe Biden’s promise of a near $2trillion stimulus package in his country are also set to increase the flood of cheap money into the world economy. Consumers already seeing price rises in supermarkets should brace themselves for more of the same when they return to nonessential shops and pubs, restaurants, cafes and takeaways.
Some economists believe a degree of inflation would be welcome for the UK economy. The current 0.7 per cent level of the Consumer Prices Index is way below the Bank of England’s target.
Julian Jessop, an economist at the Institute for Economic Affairs, told me: “If stronger demand pushes up prices, that would also push up wages and unemployment would fall back sharply.
“After a year when it has been too low, inflation at around three per cent might be a good thing.”
Not everyone benefits from inflation. Households dependent on fixed incomes such as those living on retirement savings would suffer under a major price surge.
Many older voters, relatively more inclined to vote Tory than their younger counterparts, could feel the squeeze. Ministers will think carefully about any changes to the “triple lock” that guarantees aboveinflation rises to the state pension. Mr Sunak’s Budget was carefully drafted to begin repairing the overstretched public finances to protect the country against possible future economic shocks. The Chancellor pointed out in his speech that even a small rise in interest rates would have a huge impact, given the eye-watering levels of Government borrowing through the pandemic.
Senior Tories can be expected to start paying more attention to inflation rates than at any time since the early 1980s. If they are beginning to talk about the next general election, a cost of living crisis could be a threat to their plans.