District Matters

Unpredictable economy

October 2022

It is amazing how much can happen in a month. If anyone thought we did not live in unpredictable, unstable and volatile times, the last month will have been a ‘wake up call'.

The UK economy is in far from good shape. According to The Economist Intelligence Unit growth this year will be 3.3%, which includes a bounce back from Covid and may prove optimistic. The Government's budget balance is forecast to be negative 6.8% of GDP and the current account balance negative 5.2% of GDP. Interest rate on Government borrowing is now around 4.5% and is likely to rise further.

This picture has some very real impacts and consequences. The scale of the Government's borrowing needs (the negative budget balance) is causing concern amongst investors. Until this year, borrowing was very cheap and very easy. That has now changed dramatically and the increase in interest rates will push the deficit even higher. It has been easy to fund Government borrowing by debt. That is now over. So, the Government is now very constrained in what it can spend. Tax cutting is now likely to be off the agenda and cuts in spending almost certain. I would say at this point this will apply to any Government, regardless of party, for the next few years. What we are facing is the end of a long period where money has been far too plentiful and far too cheap. This has enabled both governments and individuals to enjoy debt fuelled spending. There is now widespread shock that this has come to an end. Individuals, governments and investors are all struggling to come to terms with the consequences. Interest rates will inevitably rise further.

One very obvious consequence is on mortgage rates which are now between 5% and 6%. They could go higher still. The impact of this is starting to feed through into the housing market. Builders are reporting that sales are slowing. There are reports that some developments have been put on hold and we are seeing estates agents advertising ‘new price' and ‘unexpectedly back on the market'. As yet, we have no reports of developments in the District being put on hold but we are monitoring the situation.

The impact of higher interest rates is also being felt in the commercial market where buyers now have the upper hand. We hear of deals being renegotiated or falling through. This directly impacts on some of the initiatives we have been pursuing.

At the District Council we are now faced with three issues:

• We are revising down our view of the funding that may be provided to us by central government, and we did not expect generosity in the first place.
• We have great uncertainty over the direction of travel of policy in the medium term which makes planning difficult.
• There is obvious pressure to do what we can to tackle the cost-of-living crisis. There has been a meeting between Warwickshire County Council and the Districts and Boroughs in Warwickshire to co-ordinate our approaches to ensure we deliver best ‘bang for the buck'. There are very real limitations on what can be done without cutting back on other services or jeopardising the Council's finances over the next few years. There are no easy options. There are people who appear to focus on the short term and attempt to ignore the longer term and the resultant negative consequences.

If there is one piece of better news, it is that our District Council finances are relatively strong as a result of sound decisions taken over the last few years.

Finally, I want to touch on the subject of economic growth. The limitations on the Government's capability to borrow cheaply will put even more emphasis on the need to grow the economy. It is the only way in which we will be able to maintain the level of spending on public services including health.

There was an interesting piece in the Financial Times on Saturday 15 October. It reported a survey of 10,000 people. Where people estimated their annual retirement income, they overstated the figure by 30%. The estimated figure was reported as £21,730, the actual £16,540.

Low economic growth may make this situation more challenging still. I think it is a stark illustration of the cumulative impact of the UK's poor economic performance.

It might make this Council's focus on supporting economic growth in the District much more understandable and, with our ageing population, extremely relevant to their future prospects and financial security.