Economic confidence improving again

Allister Heath
DON’T say it too loudly – but the economy appears to have gained traction again. An interesting new gauge suggests that confidence and activity are making a strong recovery. Coming a day before George Osborne delivers his Budget, this is decent news for the chancellor, though any rebound in GDP will most likely be modest.

YouGov’s Heat index – based on thousands of interviews every month – has surged from the consistently low levels seen during 2011. The first two weeks of March saw it record its highest reading since June 2010, though it still has some way to go before achieving the post-recession highs of the Spring of that year.

Nearly all measures are performing better than they have for some time with most at their highest level since summer 2010 or earlier. Homeowners and the employed are finally feeling better. The overall index reached just shy of 99, its highest level for over 18 months; it is 11 points higher than in December, seven points better than in January and six points better than in February. The improvements include perceptions of current job security (at a three year high), future job security, current business activity in their workplace (which has strongly increased) and future expected activity. Their propensity to make major purchases is at its highest level since late 2009.

It’s not all good news, of course: homeowners appear excessively upbeat about increases in the value of their house, while improvements in their perceived current financial position appear to have peaked. As to the government’s handling of the economy, readings are marginally better than for most of 2011 but well below the post-election levels in 2010, during the coalition’s honeymoon period.

It is hard to predict accurately what the number crunchers will put overall growth at during the first quarter. Oil output has tumbled, which could depress GDP. But it does seem that consumers and firms are feeling more confident. Long may that continue.

This is what I expect to hear in the Budget: the top 50p tax rate will be cut to 45p starting in 2013. It may eventually be eliminated completely, perhaps during the following year – but only if some conditions are filled. Child benefit will be withdrawn from those on £50,000 (hitting fewer people than previously thought); the personal allowance will be hiked to £10,000 by 2014, one year early.

But I suspect Osborne will also introduce a new, higher band for stamp duty (this will be entirely different to the avoidance crackdown, which has been well-trailed and is relatively uncontroversial). At present, all houses above £1m are hit by a five per cent duty payable by purchasers. This new rate would be higher (perhaps six per cent) and start on even more expensive homes (perhaps £2m).

I hope I’m wrong about this. Saying high earners are entitled to keep more of their income, but not if they want to spend it on an expensive home, would suggest that Osborne remains wedded to Brownonomics. The supply-side case for taxing those on higher incomes less is that they will be happier to base themselves in the UK and create more jobs – not that one tax cut should be compensated by a tax hike. This would be a case of new Labour-style triangulation. The left says one thing; the free-marketeers say another – so let’s find a third way to keep everybody on side. We’ll find out tomorrow.
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