Comment: Osborne must look beyond inflation figures

FOR the first time in ten months, Sir Mervyn King has been able to put his pen aside and avoid the need to write to Chancellor George Osborne explaining why inflation has missed its target.

King only has to send a letter if inflation is more than 1 per cent above the 2 per cent target set by the Treasury; so at 3 per cent he’s not only saved himself a job: he’s looking at a rate of inflation now at a 26-month low.

Official reasons for the bigger-than-expected fall of 0.5 per cent were falling prices of cheaper booze, clothing, flights and non-seasonal food.

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The unofficial reason (or at least a contributor) was the weather, in particular the rainy April that kept shoppers away from the high street. The rain was also a factor in the weak trading figures from the Scottish Retail Consortium.

Even though inflation is not expected to fall much below 2.5 per cent for some time, King may claim it has been tamed; and it does give him and his colleagues on the Bank’s monetary policy committee scope for increasing quantitative easing to help nudge the recovery along.

But an economic strategy that depends on some sort of umbrella index is a bit dodgy. King and Osborne need to turn their attention to instigating measures that will give the recovery some traction with a programme aimed at stimulating confidence and demand.

The economy needs something, and quite soon, to avoid stagnation. Christine Lagarde, managing director of the International Monetary Fund (IMF), backs the UK government’s deficit reduction programme while also suggesting a further cut to Britain’s already record low interest rates.

A zero or near-zero rate might give a further stimulus to the housing sector and encourage more businesses to expand, though the marginal benefit is tiny. It would be catastrophic for savers and the savings industry at a time when Britain needs to encourage more of us to put money aside.

The IMF’s experts also favour temporary cuts to VAT and employment taxes, and more spending on infrastructure.

Some of these ideas were tossed around in the run-up to Osborne’s last Budget but got short shrift.

He may have to think again.

VAT is rated one of the highest among leading industrial nations and the cost of employing people is still too onerous.

It’s probable that pressure will build for a selective cut in VAT, particularly as the current rate encourages avoidance. A cut in employers’ national insurance contributions would be expensive – given that it contributes £60 billion a year to the Treasury – but would help ease unemployment and should be targeted at the young.

Clarke’s example bids to forestall rebellion

AFTER the shareholder spring comes the bosses’ reaction. And Tesco boss Philip Clarke may have helped set the right tone by foregoing his £372,000 bonus.

Clarke will still take home more than £1 million in salary so he won’t be going hungry, but the gesture will please the firm’s shareholders who have a history of rebelling.

Two years ago the company was forced to review its pay policy after 47 per cent of the grocery giant’s shareholders refused to support the remuneration report, though the subsequent changes failed to satisfy activists who last year advised shareholders to repeat their resistance. Earlier this year Clarke took responsibility for the poor performance of the UK business, putting himself in charge and yesterday announcing his decision on pay.

He will be mindful, of course, that the firm’s rebellious shareholders won’t have gone away and may be reinvigorated by the recent activities elsewhere.

Marc’s spark splutters but doesn’t quite go out

MARKS has lost its sparks, declared one analyst after Marks & Spencer revealed a subdued set of year-end figures.

But in the current climate these figures aren’t too bad and chief executive Marc Bolland is probably only guilty of being a little more optimistic than he ought to have been.

He’s having to learn that the M&S shopper is more fickle than he may have expected.