UK’s Spending and Tax Cut Plans

LBS’s Richard Portes gives views on the UK economy

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Simultaneous declines in bonds, stocks and in Sterling could produce continued rising borrowing costs and a stubborn period of inflation.

This is the environment which sets the scene for a discussion in the New York Times’ Britain’s Spending and Tax Cut Plans Worry Investors in Its Debt.

“Bonds, equities and the pound have declined simultaneously in recent weeks — an unusual and foreboding confluence that could set the stage for escalating borrowing costs and stubborn inflation,” observes New York Times business journalist Eshe Nelson.

London Business School’s Professor Richard Portes describes Britain’s economic background as “very disturbing,” citing the wide current account deficit, labour unrest, a likely recession and the Truss government’s decision to remove from office Sir Tom Scholar, the experienced permanent secretary at the Treasury.

“The capacity now of the system to deal with crisis should it materialize is not very strong,” Professor Portes said. “The governor of the Bank of England is in a very weak political position. The Treasury is headless. Where are the grown-ups?”

While few people expect a repeat of 1976 when the then Labour government was forced to apply to the International Monetary Fund (IMF) for a loan of nearly $4 billion, followed by deep cuts in public expenditure, greatly affecting economic and social policy, some of the similarities are hard to ignore.

Ms. Truss and her Chancellor of the Exchequer, Kwasi Kwarteng, have said they will aim to generate economic growth of 2.5 percent.

However, remarks the New York Times, that goal may be hard to achieve anytime soon. Analysts say the economy could tip into a recession this quarter. The size of the economy has hardly changed this year, and last month the Bank of England forecast that the economy would shrink 1.5 percent next year.