Raising immigration would quickly solve the labor shortage, and removing restrictions with the EU would help trade, but they go against the logic of Brexit
Unsurprisingly, Kwasi Kwarteng, the British finance minister, on Friday reversed a planned rise in social security rates. He also repealed the Companies Law, cut taxes on home purchases and, surprisingly, reduced the maximum rate of income. The complete package will cost 51,000 million euros until 2027; and the Government will spend 68,000 million to limit the energy bills of homes and businesses.
The well-to-do voters who make up Liz Truss’s base will like the tax giveaways. To investors in debt no. Two-year bonds posted their biggest one-day rise since 2009 on Friday, with the pound falling to $1.11, a new 37-year low.
Part of the problem is that the cost remains unclear. The Institute for Fiscal Studies estimates that the UK’s debt will rise to 262,000 million this year, before stabilizing at about 113,000 million in 2027. It is 3.5% of GDP, a third more than the 74-year average. And what is worse, the cost of energy rescue can skyrocket.
Truss’s big bet is that tax cuts will unleash animal spirits. But Citi expects the economy to grow 0.9% a year over the next five years, a far cry from the 2.5% that London aspires to. According to the IFS, to stabilize the debt situation, growth should be an additional 0.7%.
Truss could be lucky, if the war ends quickly and the supply chain recovers. If not, he will have to find the extra through real politics. Raising immigration would quickly fix labor shortages, and lifting restrictions with the EU would help trade. Both things go against the logic of Brexit. Truss may have promised to revamp urban planning regulations, but for that to work he will have to ease restrictions on building in leafy areas around city centers.
The alternative is that Truss avoids the tough decisions, growth fails to materialize, and the debt headache worsens. That is the scenario that the markets seem to be assuming.
