Thanks to the minutes, published for the first time yesterday, we now know. The day's events had no influence on policy at all, not because the Bank thought it might panic markets if it reacted, but because at the time the decision was made, there was no reliable information on the extent of the explosions, or their cause. Policy was instead determined solely on economic grounds, and no committee member argued that it should be changed to reflect the enormity of unfolding events. Sure you can put up tax rates but then you clobber growth, as Germany has discovered, and you may not even get in any additional revenue.It is too early to panic, but the fact that the Government has had to borrow nearly half its stated annual allocation in the first three months of the fiscal year is not good news for anyone.. So the bombs were hardly discussed at all. By coincidence, the Bank of England's Monetary Policy Committee had an interest rate decision to make on the day of the terrorist atrocities in London. It is also prudent, given the way tax revenues are falling short of plans, not to promise to spend more until it is clear you have the money to do so.
We will be all right this year but next could become really difficult, notwithstanding this rewriting of the fiscal rules. The Treasury is postponing the review of its longer-term spending plans - the other announcement this week.This has been spun in political terms as a change of plan to chime in with the orderly transfer of power from Tony Blair to Gordon Brown But there is also an economic element here. They are, but not terribly so.But the word "yet" is the operative one. If the economy does not pick up after the interest rate cuts, or if it takes a while to do so, then government revenues could become very soft indeed. Given the fact that the economy will be pushed to grow at 2 per cent this year instead of the 3-3.5 per cent announced by the Chancellor in his pre-election Budget, you would expect taxes to fall short of plans.
But if these come in soft, then the Government does have a problem, for the others - corporation tax and the like - just aren't growing: these will little higher last year than they were in 1999/00.Pull all this together and also what are these figures trying to tell us? I suggest that while revenues are a bit soft, the situation is not as serious yet as you might expect. Last year was good, after little growth from 2000/1 to 2003/4. The monthly run so far this financial year is a bit above last year but not a lot. We will learn more in the current month, for July is always the second best month for income tax revenues after January. The largest single revenue raiser here is VAT, and there are also excise duties and the like. So if we spend money on more or less anything other than food and public transport we give the Government money As the economy has slowed so too has the growth in revenues They don't look bad, just a bit flat. Pay has continued to rise by about 4 per cent a year but private sector employment is falling.Income tax revenues do bounce around.
