Tax cuts set up uncertain future

Kenneth Clarke may dust his hands with satisfaction after quelling a backbench mutiny over Europe. But how stellar was his handling of the main business of the week?

It could be argued that Clarke’s budget had – in current circumstances – two somewhat contradictory aims: doing well by the economy and getting the Conservative Party re-elected. The tension between the two and how Clarke managed it will have important implications for marketers in the coming year and beyond.

Most economists and City pundits believe the last thing the economy needs is further stimulation. On the contrary, the retarded feelgood factor, so elusive these past few years, has been coming through of its own accord. Retail sales have at last exceeded their Eighties record, the housing market is picking up and recently we even had an unexpected trade surplus. Unfortunately, this does not amount to a virtuous circle. Accompanying growth and confidence are some worrying signs of an overcooking economy: the pound is riding high, undercutting international competitiveness; inflation is creeping above three per cent; and interest rates are heading north.

Clarke’s tax cuts will no doubt swell the feelgood factor in the run-up to Christmas. But what of the murky period beyond? Additional discretionary income from tax cuts will not feed through to pay packets until April. And business will be wary of serious decisions ahead of the general election, which is likely to take place in mid- to late May. In the meantime, the delicate balance of consumer confidence could be severely upset if the Chancellor muffs his calculations. The only way to rein in runaway inflation will be to raise interest rates. This is a particularly invidious option ahead of an election, since a further interest rate rise will almost certainly trigger higher mortgage payments and make the pound still dearer.

In view of these uncertainties, marketing activity is likely to be muted for at least the first half of next year. What happens thereafter depends to an extent on who gets into power. Labour has yet to prove itself on the all-important issue of economic management. But it has already created a degree of sympathy in business circles through its willingness to consider policy initiatives unencumbered by the baggage of the past.

In particular, Nigel Griffiths, Labour’s spokesman on advertising and consumer affairs, has broached some normally taboo subjects with surprising free-market vigour. It is a matter of open record that he disapproves of excessive advertising regulation. Less well known is his determination to do something about the vexed issue of lookalikes.

Out Heroding Herod? We’ll have to see.

Budget, page 10; Griffiths, page 9; Poor marketing, page 36

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