Yael Selfin, the chief economist at KPMG UK, says momentum should be maintained for the rest of the year as wages rise faster than prices. The performance is all the more impressive when you consider that much of the rest of Europe appears to be struggling. Germany’s industrial woes continue and a tourism-driven boom in southern economies threatens to come to an end in the autumn.
Business surveys suggest Britain can maintain its outperformance. The purchasing managers’ index, an influential report from S&P Global, shows UK businesses growing at a modest but stable pace even as the private sectors in France and Germany contract and the wider eurozone stagnates.
Investors are also backing Britain: Bank of America’s tracker of fund managers shows increasing enthusiasm for UK assets.
All of this undermines Reeves’ attempts to justify what increasingly look like certain tax rises in the autumn. Her argument that the dire state of public finances requires action begins to look less convincing as the economy improves rapidly.
The Chancellor argues that such action is necessary to repair the foundations of the economy, setting it on a path to sustained growth.
Yet, ironically, tax rises could imperil growth, warns Holger Schmieding, the chief economist at Berenberg Bank.
“On trend, the UK economy could grow 0.3 to 0.5 percentage points per year faster than the eurozone, not least due to a higher potential labour supply.
“However, whether the UK can achieve this potential depends, in part, on government policy. Raising taxes on the working population could curtail labour supply.”
The Government has ruled out taxes on “working people” but there is mounting speculation of an autumn wealth raid, which could include changes to capital gains tax. A higher rate could deter entrepreneurs and encourage people to sell businesses and assets ahead of any changes.
One of Labour’s five “missions” set out in its manifesto was to “secure the highest sustained growth in the G7”, suggesting the administration will be wary of such risks. Yet there is no sign so far that Reeves is changing course.
Schmieding says: “Although Labour put unusually strong emphasis for a Left-wing party on economic growth in its election manifesto, there is a risk that it will reach for inefficient tax hikes that would make the UK a less attractive place to work.”
If the economy continues to improve as expected, the Chancellor will have better numbers to contend with at the time of her Budget in October. With any luck, it could kill off the prospect of such dangerous tax rises.