As inflation returns, here’s a plan to keep the UK economy feeling good

Prices are starting to rise again but a package of sensible reforms can keep Britain growing happily

With the economy strong, but inflation creeping up, what can responsibly be done to maintain a feelgood factor in Britain’s economy? Jeremy Corbyn’s plan to ban zero-hours contracts would, perversely, hurt low income families the most. In contrast, the Conservative Government has several levers it could pull to cut the cost of living – but they all mean tough choices. Having confounded the economic pessimists, Britain can embrace the challenges ahead with a bit of self-confidence. The UK was the fastest-growing industrialised economy in the world last year. The FTSE 100 and UK employment are both at record levels. Real wages have been rising since September 2014.

Forecasters began their retreat last year, abandoning their hair-raising predictions of an immediate economic shock if Britain voted to leave the EU. Still, many of them didn’t give up the game, just shifted the goalposts of gloom: most still predict a Brexit stumble, in 2017 and 2018, with the economy rebounding after that. Yet in a further U-turn, the Bank of England has now even revised up its 2017 GDP prediction – to match 2016’s strong performance – a quiet humiliation for its Governor, Mark Carney, and fresh evidence of Britain’s stubborn optimism.

This week inflation on the CPI measure crept up to 1.8 per cent, spurred by the devaluation of the pound, prompting a fresh bout of Eeyorish despair. Yet inflation remains below the BoE’s target rate of 2 per cent. Even the most melancholic forecasters suggest it will peak below 3 per cent next year, before coming down again. In reality, as former Bank Governor Mervyn King argues, a modest short-term rise in inflation is the cost of a much-need paradigm shift – away from an economy fuelled by consumer spending, and towards one powered by exports.

In the meantime, what can we do for families feeling the pinch?

First, we need to stick to the plan. The most sustainable way to boost wages is by driving up Britain’s underperforming productivity. Chancellor Philip Hammond’s Autumn Statement package of £23 billion investment in housing, roads, broadband and wider infrastructure may be dry stuff. But, that’s what will pay off over the longer term. Likewise, Theresa May’s vow to make Britain the “great meritocracy of the world” catches headlines because of the plans for new grammar schools, but the depth of our ambition for vocational training will be just as important, especially when it comes to driving up earnings.

Second, there must be no pandering to Corbyn’s socialist delusions. Take that woefully ignorant call to ban zerohours contracts. In practice, that would inflict a dangerous economic double whammy, costing jobs and harming some of the most vulnerable in the labour market. A review in December 2015, by the Chartered Institute of Personnel and Development, found a high proportion of students, working mothers and older workers using these scalable working contracts. Some 88 per cent of those, classifying themselves as part-time workers, stated it was their personal choice; 62 per cent reported having a good work-life balance – higher than other types of employee. Far from being strung out for weeks without work, those on zerohours contracts were in fact working an average of 25 hours each week, and 59 per cent didn’t want to take on more hours. These flexible arrangements are valuable. They help many businesses, and those workers who don’t want or need full-time employment, to meet their individual needs.

Third, as the Prime Minister warned last October, the Bank of England’s quantitative easing (QE) programme has exacerbated divisions between the haves and have-nots. If you invested £2,000 in a FTSE 100 tracker at the end of 2008, you would have doubled your money by now – with QE giving that investment a massive steroid injection. The same money, put into a bank or building society cash ISA, would have yielded a meagre 15 per cent return. Likewise, those already on the housing ladder with a mortgage have enjoyed an appreciating asset, and a diminishing debt, while the growing number left off it find that the first rung of the ladder remains well beyond their reach. The pause in QE since August needs to become the new normal.

Fourth, in the short-term, having introduced the National Living Wage, the optimum way to boost take-home pay for those on low and middling incomes is to cut their National Insurance contributions. Raising the threshold for employee National Insurance to £11,000 (in line with income tax) would save the average full-time employee £350 each year.

Fifth, with the 20 per cent on lowest incomes coughing up over 12 per cent of their disposable income on VAT, it would be a good time to bring VAT back down to 17.5 per cent. These last two measures could be funded by a further consolidation of the sprawling number of Whitehall departments and agencies, and means-testing of “grey welfare” for wealthier pensioners.

Sixth, a bolder approach to competition policy could save consumers hundreds of pounds each year on their banking charges, energy bills, broadband and mobile phone deals. The best bargains for customers come from levelling the commercial playing field, which allows start-ups and innovators to challenge the stifling grip of big business.

Finally, as we wrest back control over UK trade policy from the EU, there is a huge opportunity to cut prices for consumers on the UK high street. Some even argue for the UK government to unilaterally remove tariffs and other trade barriers to help cut the cost of living. This would, however, rob the UK of any leverage in bilateral trade negotiations. A more balanced strategy would be to offer “geared reciprocity”, rewarding our international trade partners generously, across the board, for opening their markets to key UK export sectors.

It’s time for a new wave of economic reform, to steer Britain through any Brexit buffeting, and make our free market work even better – for small businesses, savers, low-income families, and the many consumers tightening their belts.