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Hammond must make call on growth and debt

Terry smiling headAnyone passing the east end of Princes Street in Edinburgh at the weekend may have noticed the long queue of shoppers eager to get their hands on the latest iPhone.

At £999 it is the most expensive handset ever. No matter. Some waited all night, braving the cold and taking time off work to be among the first to own one.

So much for the internet. If nothing else it proves there’s life left in the high street.

What does this one burst of excessive consumerism also tell us about the state of the economy?

Two things: firstly, there is a two-speed economy at work. While the cash-rich have the confidence to splash out on a gadget they don’t need, the so-called JAMS (just about managing) are struggling to make ends meet. A report out today from the Child Poverty Action Group, noted by the SNP,  points to a decade of cuts to tax credits and Universal Credit which has slashed family incomes and pushed children into poverty.

Another from Scottish Labour reveals that the average weekly wage has been trimmed by £14 a week since the Tories came to power. The median weekly wage has fallen from £561 a week in 2010, to £547 in 2017, or about half the cost of an iPhone X.

Second, and this is where the haves and the have-nots become conflated, there is a growing personal debt problem. Among those queuing for the latest must-have gadget at the weekend will have been a fair few who were sticking the cost on their already bulging credit card.

Inevitably, Chancellor Philip Hammond is coming under pressure to do something about living standards for the lower paid while reining in the runaway credit problem, lest we repeat the errors of the financial crash when everyone overdosed on debt.

The problem is the slow rate of wage growth (2.1%) against the rising cost of living (3%), as highlighted by the Opposition and the trade unions. Spending on credit, debit and charge cards is growing at the fastest rate since 2008, rising more than five times faster than earnings. Credit card purchases are up 9.3% in the year to June, against 7.2% last year.

No wonder the Bank of England raised the interest rate last week in a bid to curb this soaring rate of borrowing. Whether the hike from 0.25% to 0.5% will do the trick is questionable. It merely reinstates the rate as it stood until August last year when the monetary policy committee panicked in the wake of the Brexit vote.

Those expecting the decision to signal the start of a series of rises that would boost sterling were left disappointed as Bank governor Mark Carney (right) indicated they would be only gradual.

The Bank’s concern is that the economy is just not growing fast enough to merit an aggressive ratcheting up of interest rates to a more ‘normal’ rate of perhaps 2-3%.

This all points to a need for two courses of action: an improvement in productivity and some hastening of clarity on the Brexit talks as demanded today by CBI president Paul Drechsler.

Boosting output and providing some clear guidance on the shape of post-Brexit Britain will encourage employers to increase wages.

It is important that Scottish Finance Secretary Derek Mackay does nothing to detract from these key goals when he presents his own Budget next month.

His government’s priority is protecting public services and its first instinct is to hike income taxes, mainly on the higher paid.

Despite the evidence of a squeeze on household budgets, Mr Hammond will be armed with data including a record number of people in work. Edinburgh, according to a report at the weekend, is bursting at the seams and struggling to meet demand for office space and new homes.  Today, there is further good news that employment in the important salmon industry is up by 13% and – significantly – wages increased by 5%.

Even so, he will face demands for more action to boost the economy which is showing anaemic growth, though as this column has argued previously, without access to the key economic levers – mainly monetary policy – there is not much Mr Mackay can do.

He should just avoid getting carried away with the new tax-raising powers and introducing changes that will do more harm than good.

 

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