The UK economy has faltered since the financial crisis more than a decade ago, in 2008, with weak productivity and low wages. Recently, it lost its place as the world’s fifth largest economy to India.
While the global economy faces a slowdown, Britain faces many unique challenges. Brexit has erected barriers to Britain’s largest trading partner, the European Union, deterring business investment and disconnecting a large pool of workers. The overburdened National Health Service, pushed to the brink by the pandemic, has a huge backlog of patients in need of care, leaving many of them out of work. And now inflation, which has been high for nearly 40 years, is putting pressure on household budgets.
This is the dilemma that has forced Britain’s Prime Minister Liz Truss to make “controversial and difficult decisions” to put Britain on the path to higher growth. Within weeks of taking office, she and Kwasi Kwarteng, the Chancellor of the Treasury, made their big pitch, which was heavy on tax cuts and deregulation and echoing the policies of Margaret Thatcher and Ronald Reagan.
On Monday, following a backlash from investors, economists and members of his own party, Mr. Kwarteng reversed one of the government’s proposals and decided not to abolish the 45 percent tax rate for the highest earners. That plan had been widely criticized, but proposals for other tax cuts worth tens of billions of pounds remain intact as the government insists it is on the right track.
“I know that the plan put forward just ten days ago has created some turbulence,” Mr Kwarteng told Conservative Party members at their annual conference on Monday. “I get it. We’ve listened and we’ve listened, and now I want to focus on delivering the most important parts of our growth package.”
Rolling back the cut to the highest income tax rate has “limited fiscal significance,” Paul Johnson, the director of the Institute for Fiscal Studies, said in a statement, adding that the government will need to do more to restore its credibility after such a “sunset.” a tumultuous start. Bigger turnarounds will be needed to avoid major cuts in government spending, he said.
Many economists, including the International Monetary Fund, have condemned the government’s plans as misguided at a time of high inflation and rising interest rates, especially as billions of pounds of additional debt will have to be raised to fund tax cuts on top of a previously announced pledge to to reduce rising energy bills.
Markets also gave their verdict, leading to a severe sell-off in UK government bonds and a plunge in the value of the pound, which briefly hit a record low against the dollar. The Bank of England had to step in to bring order to the markets as pension fund portfolios faltered and mortgage lenders withdrew loans from bewildered borrowers.
In recent days, the opposition Labor Party has held far ahead of Mrs Truss’ Conservatives in the polls, leaving its leadership on shaky ground from the start.
On Sunday, Ms Truss told the UKTN that, in hindsight, she “should have laid the ground better”. But she stood by the plan as urgent and necessary to jump-start the economy. “To make the economy grow, we really have to do it differently,” Mr Kwarteng told members of his party on Monday.
Many are not convinced that ‘Trussonomics’, as some call the prime minister’s economic approach, is the right mix of policies.
The unrest began on September 23, when Mr. Quarteng stood before Parliament, announcing sweeping tax cuts and easing rules, including the abolition of a cap on bankers’ bonuses. He also waived a proposed increase in the corporate tax rate and a reduction in taxes on home purchases. The policies were delivered without an independent assessment of their economic and fiscal impact – a typical step when making major policy announcements. That scared investors off.
“It’s quite a bold hypothesis to say that the reason our productivity performance is so dismal compared to other countries is that we just haven’t gone low enough on taxes and regulations,” said Diane Coyle, a public policy professor. at the University of Cambridge. “There’s no evidence it’s going to work.”
If the government is to reverse Britain’s low productivity and sluggish economy, it must find ways to increase the supply of workers, change the rules governing how residential and commercial spaces are built and used, and commit to investment in public health, education and infrastructure, economists say.
Critics have argued that Mrs. Truss’ plans are little more than a return to the so-called trickle-down economy of the 1980s, the belief that tax cuts for corporations and the wealthy will ultimately benefit those with lower incomes. Worse, the amount of loans planned to fund government policies raises the specter of spending cuts to ease fiscal pressures.
“Nobody denies that the private sector is ultimately the source of productivity,” said Jagjit Chadha, director of the National Institute of Economic and Social Research, a think tank in London. But the UK economy suffers from a poor and unequal supply of public goods, such as education and transport.
“If you don’t implement policies that provide the necessary initial conditions, as we say in economics, then the private sector cannot necessarily thrive,” he said.
The government’s overarching goal is uncontroversial: to increase Britain’s trend economic growth to 2.5 percent, much higher than what has been achieved in the past two decades. More controversial is the belief that lowering taxes could generate that growth, which would ultimately increase government revenue to spend on public services.
Lower taxes and less regulation are guiding principles for Ms Truss, who was elected to parliament in 2010. She and Mr. Kwarteng co-authored a book with other newly elected lawmakers, “Britannia Unchained,” warning that “inflated state, high taxes and excessive regulation” were holding back the UK economy. The authors wrote that they “were not embarrassed brought” by their “support for the business, profit motive and individual drive of the wealth maker.”
But the evidence that higher income tax cuts create incentives for broad economic growth is weak. A recent study by two researchers from King’s College London, who examined 50 years of tax cuts for the rich in advanced economies, found that those cuts had no significant effect on economic growth or unemployment and increased income inequality. Studies of former President Donald J. Trump’s tax cuts in 2017 suggest they failed to deliver the hefty investment and productivity gains promised.
“It’s actually an odd leap of faith to say that lowering taxes on the rich will somehow transfer” to large investment in public services, said Josh Ryan-Collins, head of research at the Institute. for Innovation and Public Purpose from University College London, which advises governments.
There is a risk that Ms Truss’ policy choices in a period of high inflation will lead to an undesirable increase in demand rather than an increase in the supply side of the economy.
The experience – including the “dash for growth” in 1972, the last time a British government cut taxes as much as Mrs Truss has suggested – suggests that the plan “will face the boom that the Bank of England will face, stoked” by having higher interest rates than usual,” said Mr Chadha of the National Institute of Economic and Social Research. In the long run, that will be “more damaging to the economy,” he said.
The chief economist of the Bank of England said government policy would receive a “major” response from monetary policymakers. Markets expect the central bank to raise its key rate to about 5 percent from the current 2.25 percent early next year, raising borrowing costs, driving the mortgage market into a frenzy and mitigating the likelihood of a short-term shock to the economy.
“It’s a package that was relatively poorly conceived in the first place,” Andrew Goodwin, the chief British economist at Oxford Economics, said of government policy. “And then I think they compounded that by delivering it incredibly poorly.”
In an effort to calm markets, the government said it would flesh out its policies, including changes to financial regulations, childcare and immigration, and would publish “soon” a “medium-term budget plan” with an independent analysis. of the impact on the economy and details of how the government planned to reduce the country’s debt burden.
This goes against a global slowdown in growth. The Organization for Economic Co-operation and Development recently said economies are slowing more than expected, lowering forecasts for this year and next. The institution predicted that the UK economy would not grow next year.
“I think they would want to be radical,” Mr Goodwin said of Mrs Truss and her government. But, he added, “they have to do with the world they live in, not the world they would like to live in.”
... Britain’s economic experiment stumbles at the start Read More on ... New York Times.