By Geoffrey Smith
Investing.com -- For the last two years, Prime Minister Boris Johnson and his team have been partying in Downing Street. However, it’s his voters who are going to feel the hangover.
But while the British press may prefer to dwell on the scandal about Downing Street breaching its own Covid rules, there is a real economic storm brewing that will be an even sterner test for the country. By May, it is safe to say, many voters – especially poorer ones – will be feeling nostalgic for the times when they only had to worry about a party here and there.
None of the looming issues are unique to Britain. It is only the public rage at the government’s hypocrisy and disingenuous maneuvering to escape the consequences of its actions that really distinguishes the country’s experience of the post-Covid hangover from elsewhere. And, as with other elements of the pandemic, what happens in Britain tends to happen elsewhere in Europe, with a certain time lag.
The first of those economic shocks is already here. Inflation is at 5.2%, its highest since 1992. As a consequence, the Bank of England has already raised its key rate once, by 15 basis points, in December, and is expected by many to raise it again at its meeting on Wednesday.
Interest rate hikes may not have quite the dramatic effect on the economy as they once did – too many homeowners now have fixed-rate mortgages for that. But they will still make credit – especially consumer credit – more expensive. This is important now that U.K. consumers, having run down their pandemic-era savings, are again borrowing in large amounts again – despite a six-month run of deteriorating consumer confidence.
After the Bank of England, it will be the turn of the U.K. energy regulator Ofgem. On February 7th, it’s due to announce the new price cap on retail energy bills, which will come into force from April. Given the extraordinary combination of factors that have pushed wholesale market prices higher, this is likely to rise by as much as 50%, adding hundreds of pounds a year to the average household’s energy costs.
Ofgem had already raised its price cap by 12% in October.
Consumers at least tend to use less energy as spring arrives. However, there will be no avoiding a separate hit in April from the government’s planned tax increases.
National insurance contributions, a levy on earned income, are set to rise by 1.25 percentage points from April to fund a new and long-overdue scheme to provide social care for the elderly. Despite a revolt from the low-tax wing of the ruling Conservative Party, who point to better-than-expected government borrowing statistics in recent months, Prime Minister Boris Johnson and his Treasury chief Rishi Sunak wrote at the weekend that they are determined to push it through.
The tax on dividend income will also rise by 1.25 points to 33.75% for higher-rate taxpayers.
The above combination of factors would test the popularity of any government. In Britain, however, they come on top of damaging revelations about how Johnson and his team partied their way through the pandemic while tens of thousands mourned, sickened and stagnated alone.
It may not matter to global markets which of Johnson’s many scandals ultimately bring him down. But it will be an interesting test case for Europeans to see what parts of Johnson’s program gets abandoned and what is kept as the Conservative Party scrambles to keep its 12-year grip on power.