8 April 2026: Starmer’s welfare spending has cost our defence

The UK economy is struggling to grow at all, as businesses of all sizes strive to cope with the additional tax burdens imposed by the Chancellor of the Exchequer, Rachel Reeves.

Many business owners, particularly in the SME sector, feel that too much emphasis has been placed on individuals, especially the lower-paid and those relying on the welfare state, with their companies expected to foot the bill.

The exponential rise in business rates may well have been overdue, but making the necessary adjustments in one fell swoop has led to several companies, which were struggling to survive in any event, going under. If the previous Government allowed businesses to thrive to the detriment of individuals, the present one has swung the pendulum too far in the opposite direction by trying to fix voters’ issues while allowing the middle class to pay for them.

Britain’s manufacturing sector faces a £939 million hike in business rates this year due to changes implemented by Chancellor Rachel Reeves.

The move now puts an estimated 25,000 jobs at risk, according to new research from Make UK.

The trade organisation, which represents thousands of manufacturers nationwide, released its analysis yesterday, warning that the tax burden will further strain an industry already facing what it calls existential challenges.

With the Chancellor’s revised rates coming into force at the start of April, Make UK stated that many firms will find it difficult to absorb the added costs in a fragile economic climate.

The local, municipal and devolved elections due to take place next month will be the first true “acid test” of the government’s performance after close to two years in power.

The changes to welfare payments that were announced in the budget and came into force at the start of each month will have shored up Labour’s support, but at the expense of the economy.

Growth is stagnating, while inflation, mostly but not exclusively, driven by events in the Middle East are seeing it rise to such an extent that the Bank of England will be unable to support the economy by lowering interest rates.

The Bank of England’s Governor, Andrew Bailey, has told markets that he would like to be instrumental in supporting the economy, but he needs to ensure that a balance is struck between growth and inflation.

Keir Starmer’s commitment to raising the UK’s defence budget from 2.5% eventually to 5% has been signposted by economists as a way in which to drive the economy forward, but one stumbling block will be the availability of funding to create the infrastructure changes that will be necessary.

The Prime Minister’s reckless spending on welfare to appease his backbenchers, amounting to £334bn in 2025/26, has come at the expense of the UK’s defence, with the Chancellor’s Treasury officials reportedly blocking the so-called Defence Initiative Plan.

Every part of the economy, whether state or privately owned, is currently waiting to find out what the total effect of the war in Iran will be. Another Trump deadline came and went overnight, and if the Iranian regime is to be believed, it seems that the U.S. President is negotiating with himself, although it does appear that some progress has been made with a two-week opening of the Strait of Hormuz, even though the American military bombed Iran’s oil facilities at Kharg Island immediately following the announcement.

The Prime Minister has again “pandered” to the left wing of his Party by confirming that he will not allow UK bases to be used for attacks on Iran’s non-military infrastructure.

The pound has been bolstered overnight by the announcement of a ceasefire in Iran. It has risen in Asian trading, reaching a high of 1.3415 following yesterday’s slump as Trump’s warlike rhetoric drove it down to a low of 1.3159.

The 1970s and early 1980s established a benchmark for what high US inflation looked like, lasting for decades. Now, the reference point is the surge in the cost of living in 2022.

That was when Covid supply-chain issues, coupled with the Russia-Ukraine conflict and what many see as excessive fiscal stimulus, pushed consumer prices up by over 9% at the peak in June of that year. That high point seems unlikely to be reached again soon, but the similarities with what happened four years ago are starting to increase.

The latest US non-manufacturing sector data, published on Monday, showed a measure for prices paid for services and materials rose in March to the highest since October 2022.

Even before the US-Israeli war with Iran, the cost of imported goods jumped by the most since 2022, driven by tariffs, strong demand for capital goods during the AI boom, and a depreciating US dollar.

Excluding petroleum, import prices in February increased by 1.2% month-on-month. The sub-category for capital goods, such as semiconductors and industrial machinery, experienced the largest rise since the data series began in 1988.88.

The war’s impact has, of course, pushed up US petrol prices, which are now over £4 a gallon on average nationwide for the first time since 2022. Higher energy costs are already affecting other areas, such as broader transportation expenses, from airfares to trucking.

Trucking operators were already facing the challenge of a shrinking pool of drivers in the US before the war in Iran, and they are now confronting a 50% rise in diesel prices. Hauliers have responded by increasing the weekly per-mile fuel surcharge paid by shippers to its highest level since 2022.

Although transportation costs represent a relatively small portion of the final price consumers pay for goods, the surge in shipping expenses risks adding to inflationary pressures. The March Data due this Friday is expected to show a sharp rise in headline consumer prices.

Observers expect March CPI to show the largest month-over-month increase in headline inflation since June 2022, with a 0.9% rise. While their projection for the core, which excludes food and energy, is a modest 0.2%, that’s not the case for their forecast for the other main US inflation gauge.

It makes little real difference to consumers whether something is included in the data or not; in the real world, higher living costs are simply that, regardless of their source.

The core PCE index for February, due out on Thursday, is likely to show a 0.4% increase, Bloomberg Economics says. That will keep the year-over-year rate above 3.0%, and “suggests underlying inflation pressures were already building” before the war.

Regional Fed Presidents' and Fed Governors’ comments lean toward a hawkish outlook for rates, pushing back against near-term easing expectations. Rising energy-driven inflation risks could keep yields elevated, weigh on equities via valuation pressure, and support the USD, particularly if markets reprice Fed cuts further out.

The dollar index has slumped overnight as markets reprice risk appetite. The dollar index fell to a low of 98.85 earlier this morning after another non-event of the day yesterday.

Eurozone data and European Central Bank (ECB) commentary point to rising downside risks for the euro as the war in Iran and the energy shock weigh on growth and sentiment. ECB officials Radev and Wunsch have both warned that the Eurozone outlook may be deteriorating and that rate hikes could start as soon as April if second-round inflation effects intensify.

Belgian Central Bank Governor Pierre Wunsch often leans hawkishly on monetary policy, and the current situation is causing him considerable concern.

In comments to the Wall Street Journal yesterday, he told reporters he feels uncomfortable saying: if this (the war) is not done by June, I think we're going to have to hike, but I don't want to exclude a hike in April. We need to move forward to control the indirect effects.

Last time, we were a little late before acting, so this is something we probably have to learn from now on.

I'm going to the meeting in April, open in both directions. Either this crisis ends quite soon, and you know if we hike, then we can probably undo that after a while. Or, this crisis is going to last, and then the first hike will only be the first hike of probably a series.

Meanwhile, the Governor of the Bulgarian National Bank, a newcomer to the Governing Council, warned that the Eurozone outlook could be worsening more than previously expected, citing increasing risks from the war in Iran and the related energy shock.

Dimitar Radev said the likelihood of a more adverse scenario has increased, with heightened uncertainty and stronger transmission of shocks to inflation expectations potentially accelerating price pressures."

Radev warned that if the shock starts to influence wages, margins, and expectations, the cost of inaction would rise, making a timely policy response more appropriate. However, he noted it is still too early to determine whether enough data will be available for the ECB to make a clear decision at its April meeting."

Germany’s latest economic forecasts do not predict an acute recession but rather a very low-level recovery.

While economists anticipate some stimulus from new debt for defence, infrastructure, and climate protection, this is insufficient to offset the weakness in industry and exports.

Domestic demand is being primarily supported, while foreign trade is barely progressing. Thus, Germany remains dependent on costly government stimulus, even though the underlying structural problems persist.

The common currency continues to be driven by events in Iran and the (almost daily) changes to risk appetite.

Yesterday, it gained marginally, while overnight it witnessed significant buying interest rallwying to a high of 1.1697.

Have a great day!