29 August 2025: Britain’s fiscal watchdog is under pressure to reform

It seems that the Chancellor, Rachel Reeves, is obsessed with National Insurance. Having increased employers’ National Insurance Contributions in last year's Autumn Statement, a measure which came into force in April this year, she is apparently contemplating adding a National Insurance supplement to landlords.

This “landlord bashing” will undoubtedly be passed on to tenants, making private renting even more expensive and having the knock-on effect of making it even tougher to get onto the property ladder.

In much the same way as other proposals have been leaked recently, this proposal has come into the public domain as a way of judging public reaction.

Her actions have been labelled as part of the “Baldrick effect”, named for the Character played by Sir Tony Robinson in the Rowan Atkinson comedy Blackadder.

He was famous for coming up with cunning plans, then seeing them crushed due to an obvious flaw.

The Property market is being carefully scrutinised by Treasury Officials, who are also looking at adding property valued at in excess of £1.5million in estate calculations for capital gains purposes. This will likely be as unpopular as adding an inheritance tax to farms passed on between generations that were part of last year’s budget.

Employees pay national insurance contributions at a rate of 8 percent on earnings between

£12,570 and £50,270, and 2 percent on earnings above £50,270. The self-employed pay 6%

on profits over £12,570 and up to £50,270, and 2 percent on profits above that.

Applying national insurance contributions to landlords would come after a challenging decade

for the private rental sector. Investors have had their profit margins squeezed by higher borrowing

costs, cuts to tax relief and stricter regulation.

Confidence in the strength of the economy among British businesses waned last month, new data suggests. The closely-watched Lloyds Business Barometer showed 'economic optimism' among businesses fell for the first time since April, dipping three percentage points in August to 44%. However, it remains well above the long-term average of 19 percent, Lloyds said.

Inflation, at 3.8%, has reached its highest level since January 2024, amid spiralling airfare and food costs. The Bank of England expects interest rates to top out at 4 percent in September. As a consequence of higher inflation, its pace of interest rate cuts is expected to slow.

The pound has seen an increase in volatility following this week’s Bank Holiday as traders return to their posts following the Summer. Yesterday it climbed close to the top of its recent range, reaching a high of 1.3530 and closing at 1.3512.

President Trump’s personal campaign to see interest rates lowered to counter the short-term effect of his economic policies is facing more resistance from the Federal Reserve than he probably expected.

Fed Chairman Jerome Powell has remained stoic throughout the past two quarters, keeping his thoughts to himself, other than through official channels like press conferences following FOMC meetings. His colleagues, however, have been far more vociferous in the support of the Central Bank’s monetary policy decisions.

This week, John Williams, President of the New York Federal Reserve, a role which sees its occupant also given the position of Vice-Chair of the FOMC, spoke on two topics, both of which have a great deal of relevance in today's climate.

First, he stressed the importance of central bank independence as President Donald Trump looks to exert control over monetary policy.

In a CNBC interview, the influential policymaker avoided commenting directly on Trump’s efforts to fire Fed Governor Lisa Cook, but did note the important economic role the central bank plays in maintaining a stable economy.

“Personally, I have worked with Lisa Cook as she’s been a member of the Board of Governors, and she’s always brought integrity and commitment to the central bank’s mission,” Williams said during the interview. “I think Federal Reserve independence is very important. We know from history that independent Central Banks can deliver low inflation, economic and financial stability.”

During the first year of his second term, Trump repeatedly has pushed against the traditional barrier that has stood between the quasi-governmental Fed and influence from the White House and Capitol Hill.

The president has berated Fed Chair Jerome Powell and his fellow officials for not lowering interest rates. Previously, he has toyed with the idea of sacking Powell before eventually deciding to take on Cook, who faces accusations that she committed mortgage fraud before she became a board member.

Williams said that the battle will have to play out in the courts.

He went on to consider the possibility of lowering interest rates at the September meeting of the FOMC.

It is likely that interest rates can fall at some point, but policymakers will need to see what upcoming data indicate about the economy to decide if it's appropriate to make a cut at the September 16-17 meeting. "Every meeting is, from my perspective, live" for a change in the benchmark policy rate, Williams said. "Risks are more in balance. We are going to just have to see how the data plays out."

The Fed will get another jobs report and new information on consumer price inflation before its next meeting, data that could now weigh heavily on a decision to cut rates by a quarter of a percentage point from the current 4.25% to 4.5% range the central bank has kept since December. Powell said last week that the current economic outlook, coupled with rising risks to the labour market, "may warrant adjusting our policy stance."

Powell's language led markets to bet heavily on a September rate cut, though comments by other officials since then, including Williams, a permanent voter on interest rate policy, have leaned more on coming jobs and inflation data to confirm whether a rate cut is appropriate now.

The dollar index has been under pressure since Powell’s comments. Yesterday it fell to a low of 97.74 and closed at 97.87.

The Eurozone’s Q3 2025 growth story is a tale of two forces: a fragile but persistent resilience in key sectors and a shadow of risks that could derail the momentum.

While the Economic Sentiment Index (ESI) hit a five-month high of 95.8 in July 2025, driven by manufacturing and services optimism, the subsequent 0.5-point drop to 95.2 in August signals a tightening of uncertainty. The question remains: Is this momentum sustainable, or is it a house of cards built on temporary tailwinds?

The region’s manufacturing sector is showing surprising resilience. Defence and infrastructure investments under the "ReArm Europe plan, a 150-billion-euro German initiative, are fuelling industrial activity.

Meanwhile, the services sector, though tepid, has returned to modest growth, with a PMI of 50.5 in June 2025. Consumer spending, bolstered by a near-historic low unemployment rate of 6.2%, is another pillar of support.

With the European Central Bank’s rate cuts, including a 25-basis-point reduction in April 2025, easing financing conditions, a further propping up of demand has been seen.

All these actions appear to provide an illusory feel to the region's economy, which is not delivering organic growth outside these artificial supports.

As Q3 comes to an end, the full effect of the deal that was agreed by Ursula von der Leyen and Donald Trump will take full effect and manufacturing output, particularly in the automotive sector, which is already struggling, may see a significant hit.

The cracks are beginning to widen again. Inflation, though stabilised at 2% in July 2025, remains a double-edged sword. While services inflation has hit a three-year low and energy prices continue to decline, the ECB warns that lingering wage-price spirals in certain sectors could reignite inflation.

Energy volatility, exacerbated by geopolitical tensions in the Middle East and Russia’s war in Ukraine, remains a wildcard. A single spike in oil prices could undo months of disinflationary progress.

Geopolitical risks are exacerbating the problem.

U.S. tariff hikes on Chinese imports and the threat of further trade barriers are already dampening Eurozone exports. The OECD estimates that these trade frictions could shave 0.3 percentage points off Eurozone growth in 2025. Meanwhile, the European Commission’s Competitiveness Compass underlines the urgent need for structural reforms to offset these external shocks

Such reforms were touched upon by German Chancellor Friedrich Merz in a recent speech. He is just coming to terms with the enormity of the task he faces to re-establish his country at the forefront of global manufacturing output.

Europe’s recent growth owes much to migrants, but the political climate could choke off those gains. That was the warning from ECB President Christine Lagarde, who told global policymakers that foreign workers now form the backbone of the continent’s fragile recovery.

Speaking at the Fed’s Symposium last week, she told delegates that since late 2021, employment in the Eurozone has risen by 4.1%. Half of that came from foreign-born workers, even though they made up less than one-tenth of the labour force in 2022.

Should unemployment begin to rise in the region, there may be a backlash against such immigration, particularly from German far-right parties like AfD.

The Euro continues to profit from the weakness of the dollar since it became more likely that rates would be cut next month.

The common currency rallied to a high of 1.1697 yesterday but ran into significant selling pressure and fell back to close at 1.1657.

Have a great day!