Ahead of a major support package from the chancellor designed to break what it called the economy’s “cycle of stagnation”, Threadneedle Street said the UK economy was heading for a second straight quarter of falling output, with gross domestic product to shrink. 0.1% in the quarter to September. But with energy and food bills still soaring and inflation not expected to peak until October, the Bank of England raised borrowing costs for a seventh successive meeting of its monetary policy committee (MPC) and made clear that the plans of the new government were in danger of being detonated. more rate hikes. The MPC – which raised interest rates by 0.5 percentage points to 2.25% on Thursday – said it would carefully assess the impact of energy price caps and the government’s growth plan ahead of the committee’s next decision in November . In a letter to the chancellor explaining why inflation is running at almost five times the 2% target, Bank governor Andrew Bailey said: “If the outlook suggests more persistent inflationary pressures, including stronger demand, the committee will respond strongly . as required.” Kwarteng will announce on Friday 30 separate measures – including tax cuts, new investment zones and speeding up infrastructure projects – in a bid to boost the economy’s growth rate to its stated target of 2.5% a year. One of the main elements of the package – the reversal of a £13bn rise in national insurance contributions, introduced in April to fund the health and social care levy – will come into effect on November 6, three days after next interest rate of the Bank. decision. While nearly 28 million people will keep more of their earnings as a result of the move, the Resolution Foundation think tank said that on average the poorest 10% of households would earn £11.41 in 2022-23, while the richest 10% of households would earn £682. The mini-budget is expected to contain significant further interventions to boost growth beyond reversing the rise in NICs and a planned rise in corporation tax next April, Treasury sources confirmed, with a Whitehall source describing the package as “more rabbits than Watership Down”. A key element of the budget event will be new investment zones for 38 local and borough authorities in England – including the West Midlands, Tees Valley, Somerset and Hull – which will have major planning liberalization to free up more land for housing and commercial development. growth and tax cuts for business. The investment zone plans include a number of controversial measures, including removing the need for developers to meet affordable housing targets, as the Guardian first revealed. Environmental regulation will also be cut in these zones. Kwarteng will defend plans to lift the cap on bankers’ bonuses and ban fracking, saying the government will be “bold and unabashed in our pursuit of growth – even when it means making tough decisions”. He will also announce measures to speed up the delivery of around 100 major infrastructure projects across the country, which he says have been needlessly delayed by red tape. The chancellor will tell MPs: “Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring higher taxes. This cycle of stagnation has meant that the tax burden is projected to reach its highest levels since the late 1940s. “We are determined to break this cycle. We need a new approach for a new era focused on growth. This is how we will deliver higher wages, greater opportunities and sufficient revenue to fund our public services, now and in the future. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. “This is how we will successfully compete with dynamic economies around the world. This is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.” Pat McFadden, the shadow chief secretary to the Treasury, said the sums involved were extraordinary without any consideration of how they would be financed, other than borrowing. “Their choice to finance all of this through borrowing and not attempt to finance even part of it through a windfall tax on energy companies making the most of the current crisis increases the risk and leaves the British taxpayer paying more for longer “, he said. Announcing its latest interest rate decision, the Bank of England said the energy price guarantee, which caps household bills, would mean inflation would peak just below 11% this autumn rather than surpass the 13%. Although the consumer price index eased slightly from 10.1% in July to 9.9% in August, it remains at a level not seen since the early 1980s. But Bailey said in his letter to Kwarteng that the government’s support measures risked increasing pressure on the cost of living. “All else being equal … this will increase inflationary pressures over the medium term,” Bailey wrote. After GDP fell 0.1% in the three months to June, the Bank said a further 0.1% decline was now expected in the third quarter amid falling consumer spending and weaker activity for manufacturing and construction. It said the drop also reflected a smaller-than-expected recovery from the extra bank holiday for the Queen’s platinum jubilee, as well as the impact from businesses closing their doors in deference to the state funeral this week. An economy is technically in a recession if it experiences two consecutive quarters of negative growth. Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The first whistle blew on the economic tug-of-war between the Bank of England and Liz Truss’s government. “Team Bailey at the Bank of England wants to take demand out of the economy, to try to stop the price spiral, while Team Truss wants to stimulate it, risking prolonging the pace of rate rises.”
