Director Weekly  Two new sets of official data shed fresh light on the complex calculations facing the Chancellor in the Budget run-up

1. Inflation isn’t as bad as expected

Inflation stayed at 3.8% in September – still far above the Bank of England’s 2% target, but, importantly, below the expected level of 4%.

Markets have judged that this creates more space for interest rates cuts. But when? The Bank of England publishes its latest inflation report in November, so that’s one option. My hunch is that December is more likely: rate-setters would surely prefer to make any move after the Budget.

In general, the lower-than-expected figure is good news for businesses as it increases the likelihood of a rate cut before year-end. When the cost of borrowing falls, it encourages business investment and consumer spending.

It’s also broadly good news for the Chancellor. Government borrowing costs fell to their lowest level in a year as the bond markets responded to the numbers.

However, it hasn’t all been good news this week.

2. The public finances look worse than expected

The latest data from the Office for Budget Responsibility underlines the challenge facing the Chancellor.

The current budget deficit for September was £13bn – £1bn more than markets expected. The monthly borrowing figure was the highest in five years; cumulatively, over the first six months of this year, borrowing has been £7 billion higher than expected.

In short: Rachel Reeves has a bigger fiscal hole to fill than previously thought.

How to weigh these dismal numbers against the inflation data? From an economists’ perspective, the two roughly cancel out: lower inflation is welcome, and presages lower interest rates, but the underlying fiscal picture remains bleak, and brings the risk of tax rises.

In fact, it’s best to think of these two sets of data not as sending conflicting signals, but as painting a consistent picture. The fact that there’s scope to reduce interest rates reflects the fact that economic confidence is low, and that public finance risk is high (and has been put on businesses’ and investors’ shoulders).

That’s why we’re calling for the government to revisit its manifesto commitments on tax at the Budget. It remains the best tax option for getting growth going – benefit reform is also necessary.

3. Progress on red tape is welcome – but only part of the picture

This week also saw the Treasury publish an update on the Better Regulation Action Plan, accompanied by new research on how businesses perceive regulation. Forty-seven percent report that it’s an obstacle to success, and emphasise concern that regulators lack a pro-growth outlook.

That echoes the IoD’s consistent finding that regulatory pressures are a top-four drag on growth (behind the state of the economy, employment taxes, and business taxes).

As well as updating on progress since March, the Treasury paper includes a tightened definition of the regulatory costs being targeted by government, and some helpful new announcements, particularly on small business reporting requirements.

Yet – as we continue to stress with the Treasury – there remains a glaring contrast between the pro-business rhetoric surrounding this Action Plan, and the looming Employment Rights Bill.

A more coherent approach would include sensible amendments to address businesses’ concerns about the Bill this autumn, before it becomes law and adds to the burden of workplace regulation.

If government is to resuscitate business confidence and achieve its ambitions for growth, a joined-up and pro-business approach across fiscal and regulatory policy will be essential.

Read the IoD’s full submission to HM Treasury here.