Sunak must seize the moment before we are blown off course

‘A temporary cut in VAT would bring inflation down with a single measure and put off the rise in rates’

Prices are rising rapidly. Retail sales are stagnant. The Bank of England is about to put up interest rates, inflicting huge potential pain on companies and homeowners, while chaotic supply chains are snarling up the economy. There are of course chancellors who have faced a worse backdrop to their big set-piece speech than Rishi Sunak has to contend with next Wednesday. Denis Healey amid the IMF bail-out of the 1970s, and Norman Lamont after the ERM crisis of the early 1990s, faced circumstances every bit as difficult. But there are not many.

Sunak needs to be bold, and change course. We need to bring inflation back under control, but we shouldn’t kid ourselves that the Bank of England can do that by simply tweaking up interest rates by a quarter of a point. And we should give growth a boost. That should involve a mix of deregulation, scrapping tariffs and lowering taxes. Most of all, the Chancellor needs to take control of events – because if he doesn’t, both he and his Government will be blown off course by them.

In the summer, Sunak was probably expecting to deliver an upbeat Budget. All the horrible stuff – a rise in corporation tax, a hike in National Insurance and ending the triple lock on pensions – was out of the way. With the economy rebounding from the pandemic and growing fast, he was no doubt hoping to cut a few fiddly taxes, unveil a big infrastructure project or two and sit down to pats on the back from his colleagues.

It does not look so good right now. Energy prices are soaring, wages are spiralling upwards, and stagnant retail sales suggest that demand is running out of steam before the recovery has really even started.

Worst of all, if anyone was in any doubt that interest rates were likely to go up soon then the last week should have convinced them. The Bank of England’s hawkish new chief economist Huw Pill said that a rate rise at the November meeting of the Monetary Committee was now a “live” option, while admitting that inflation could soon be as high as 5pc or very close to that level. The Bank’s Governor Andrew Bailey argued just a few days earlier that the Bank “will have to act” over rising prices. In the City, traders have already started to price in a rise in rates, and the cheapest mortgage deals are disappearing. It is simply a question of when it happens.

It is not hard to work out why. The CBI said this week that manufacturers were pushing prices up at the fastest rate since 1980 (and if you want to feel really scared inflation in that year hit 17pc). A mixture of supply snarl-ups, energy shortages, the recovery from the pandemic, massive stimulus programmes, and vast quantities of printed money, are creating inflationary pressures right across the world and the UK is acutely exposed to that.

The trouble is, we can’t cope with anything more than a minor tweak upwards on interest rates. Companies have too much debt, homeowners are too stretched and, most of all, it would bankrupt the Treasury.

Even rates of 1pc would add £40bn a year to the cost of servicing the national debt, more than the defence budget. Three or 4 per cent, the level that might be needed to crush inflation? Forget it. It simply can’t be afforded. In reality, what we need right now is a package of measures from the Chancellor that stabilises inflation, and reboots growth. What would that look like? Here are three places we could start.

First, deregulate. Companies don’t automatically pass on higher costs to consumers. With efficiency savings they can absorb the increase, or else they can accept lower profits. But that only happens if they are nervous of the competition. The solution? We should ease labour laws so that it is easier for start-ups to compete with established rivals, and we should scrap bonkers ideas such as the online sales tax because it is the internet that will provide the choices that will keep prices under control. With prices rising, we need more competition, not less.

Next, scrap tariffs. Now that we are out of the European Union, we have the power to set any tariffs we want, or none at all. We are inching towards that. This week’s trade deal with New Zealand, for example, slashed levies on a range of products (Who knew there was a tariff of 8pc on onions shipped in from the Kiwis? Anyway, thankfully it’s gone now.) But it is painfully slow. We could unilaterally suspend all import tariffs on food and raw materials, and at a stroke that would start bringing prices down.

Finally, lower taxes. With rising wage costs already feeding into higher prices, this is surely the worst possible moment to push up the amount of National Insurance that employers have to pay. The Chancellor should be big enough to admit that was a mistake, and at least postpone it for a couple of years.

Meanwhile, a temporary cut in VAT to 17.5pc would bring inflation down with a single measure, and perhaps allow the Bank to put off raising rates. Or we could make the 12.5pc temporary rate on hospitality – due to end next spring – permanent. That would help a sector struggling most with rising costs.

This is a difficult time to raise interest rates significantly. The recovery is still too fragile, and many companies are still too weak. We need to stop inflation spiralling out of control. Sure, a tweak upwards in rates may be necessary, but anything more than that will kill the economy. The best way to deal with rising prices is a package that includes more competition and lower taxes, and most of all accelerates growth – and the Chancellor needs to make a start on that this week.