1 September 2025: Tax reforms, not tax rises, are needed

Among the many unpalatable choices currently being considered by Rachel Reeves as she prepares her Autumn Statement, in which she will confirm her plans to raise sufficient funds through taxation to cover the nation's daily expenditures, is a rise in VAT.

Income tax, national insurance and VAT were the three areas that Reeves vowed not to increase the burden on individuals when she became the first female Chancellor of the Exchequer last year, but since growth has remained anaemic, and she does not wish to either cut public spending or increase her self-policed borrowing ceiling, an increase in sales tax may be her most palatable option even if she will be breaking one of her most important pledges.

Since VAT is only payable at source on purchases, consumers have a choice of whether to make purchases or not and therefore whether they pay the increased level of VAT.

The breaking of her pledge on taxation will be considered to be the thin end of the wedge as far as the Opposition parties are concerned, and she will need to tell a convincing story to justify her actions, since she will want to avoid the kind of uproar which followed her decision to means test the pensioner’s winter fuel allowance and lower the threshold for farmers to pay inheritance tax.

While the changes to winter fuel allowance were the subject of the first of several U-turns, farmers are still up in arms over the changes to inheritance tax.

Over the longer term, during the life of this Parliament and beyond, Reeves is apparently looking at a complete overhaul of personal taxation to make it fairer and easier to understand.

This Government can so far be characterised as being long on promises, but short on delivery of any meaningful change. There is a great deal of “tinkering" taking place, but so far, of the five or six pledges the Prime Minister made, none have been achieved.

The issue over small boat crossings, over which Starmer promised to “smash the gangs”, the situation has gone from bad to worse, with no real plans being considered other than the status quo, which means that asylum seekers are housed in hotels at a cost of £2.6 billion a year.

According to this morning's newspapers, as Westminster returns today from the summer recess, Keir Starmer is entering what is likely to be a defining period of his term as Britain’s prime minister.

His biggest rival, Reform UK’s Nigel Farage, is in the ascendancy, while his Chancellor could be going in the other direction. Starmer must also juggle an array of foreign policy conundrums that distract him while his domestic agenda flounders.

The pound ended August on the back foot, falling to a low of 1.3496 and closing at 1.3517.

The politicisation of monetary policy is becoming a real threat to the U.S. economy. As President Trump continues his blinkered approach, in which he cannot understand that perhaps the most important plank of managing the country’s economy is beyond his control, his efforts to gain control via the back door are both obvious and possibly illegal.

He already has two Fed Governors willing to do his bidding, with one now favourite to become Fed Chair when Jerome Powell eventually comes to the end of his term in the middle of next year, while he is actively working on having two more “puppets” as he considers the replacement of Adrianne Kugler, who resigned earlier this year, and Lisa Cook who he unceremoniously sacked last week for alleged mortgage fraud. However, she is taking her case to court.

Were Trump to succeed in his proposal to have at least one member of the FOMC coming from the Administration's inner circle, it would be considered a very dangerous precedent since, at the very least, the Cabinet would have advance knowledge of who said what during the consideration of changes to monetary policy.

There is no nation in the developed world where monetary and fiscal policy are subject to the same authority.

Any watering down of Fed independence would lead to rate cuts being made for political reasons, and this would almost certainly lead to higher inflation. Trump sees growth and inflation as totally separate, while the Fed and other G7 Central Banks see them as opposite sides of the same coin.

The French Prime Minister made a visit to Nuuk in Greenland towards the end of last week and gave unequivocal support to the Government in the face of continued overtures being made regarding its annexation by the U.S.

Greenland is an autonomous territory within the Kingdom of Denmark. The governance structure of Greenland is defined by the Greenlandic Self-Government Act, which came into effect in 2009.

Greenland has a high degree of self-governance. The Greenlandic government is responsible for most domestic affairs, including education, health, and natural resources. This self-government allows Greenland to make decisions on many issues without direct interference from the Danish government.

While Denmark remains outside the Eurozone, it is still part of the European Union and, as such, can rely on Brussels to help defend should Trump’s overtures become more serious.

Real GDP increased at an annual rate of 3.3% in the second quarter, according to the second estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP decreased 0.5%. Real GDP is the economic measure that reflects the value of all goods and services produced in a country over a specific period, adjusted for inflation or deflation. This adjustment allows for a more accurate comparison of economic output over time by removing the effects of price changes.

The increase in Q2 GDP was larger than the market expected, although the dollar index barely reacted. Last week, the index fell to a low of 97.69 and closed at 97.86.

Increases in unemployment and inflation cast a shadow over the outlook for Europe’s largest economy, which joins the wider EU bloc in bracing for the full impact of newly implemented U.S. tariffs.

German inflation rose by a higher-than-expected 2.1% in August, preliminary data showed Friday, exceeding the 2% expectations of analysts. Inflation, which is harmonized for comparability across the Eurozone, had risen by a cooler-than-expected 1.8% in July.

Germany’s core inflation, which excludes food and energy prices, was unchanged from the previous month at 2.7% in August, the country’s statistics office Destatis said.

The broader Eurozone inflation reading, due tomorrow, will offer further insight into the economic impact of U.S. President Donald Trump’s tariff policies, which have hit various European sectors in recent months.

The U.S. and EU struck a trade agreement in July, including a 15% tariff rate on many EU goods exported to the U.S. Fresh details released late last month suggested that this blanket rate will also be applied to some hotly contested sectors like pharmaceuticals, but crucial questions remain unanswered, leaving businesses on edge.

The fact that Brussels has chosen to defer the implementation of its own measures for a year while the U.S. tariffs have been put in place immediately is a significant advantage and shows that Trump may have shown his greater expertise than Ursula von der Leyen in negotiation skills.

France's economy grew slightly in the second quarter, final data from the statistics office showed on Friday, confirming the preliminary reading of 0.3% that showed the Eurozone's second-largest economy gaining momentum.

The result was in line with an average forecast of 0.3% in a poll of economists.

Exports rebounded moderately to +0.5% after -1.2% in the previous quarter, boosted by a strong rise in exports of pharmaceutical products, the statistics office said.

Household consumption, the traditional driver of French growth, rebounded slightly to 0.0% from -0.3% in the previous quarter, as an increase in spending on food and services offset a sharp drop in energy spending (-2.4% in Q2 after +0.8% in Q1).

ECB Governing Council member Olli Rehn told a Finnish newspaper on Sunday that uncertainty surrounding the inflation rate calls for a more flexible monetary policy, signalling new rate cuts in case of inflation slowdown.

"The strengthening of the euro, cheaper energy and the weakening of underlying inflation, together with the damage caused U.S. by trade policy to the global economy, increase the downside risks to inflation," Rehn said, noting that if the downside risks to inflation materialise, the ECB may be in a position to lower its interest rates again.

"Economic shocks in the euro area are now more complex than before, and uncertainty about inflation is high, which is why we need to be agile in responding to changes in the economy," he added.

The Euro traded in a narrow range between 1.1651 and 1.1709 on Friday, closing at 1.1685. There appear to be significant sales orders lodged above the 1.17 level, which has capped the single currency for now.

Have a great day!