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Hamish McRae: Prime Minister must play a long game on fiscal policy

Hamish McRae: The bumpy fall will cost government money, but it would be wrong for the prime minister to base fiscal policy on the basis of short-term turmoil.


What will Rishi Sunak do for his next budget in 10 days? The background is extraordinary. Large-scale and worsening trade turmoil. Empty shelves in the supermarket. Fuel shortage. Gasoline price from the roof. Inflation is heading towards 5%, the highest since 1991. Still, home prices set the highest new record and stock prices since the pandemic on the London Stock Exchange.

I have a puzzle. A major problem in the world economy that has hit Britain hard. Still, the market shows solid and rising confidence between homebuyers and investors here and elsewhere. Which is more important?

We already have some of the Prime Minister’s plans. We know that taxes are rising and have risen to the highest level of GDP since at least the early 1980s. We know that the amount of national insurance contributions will increase from April next year. But I’m not very sure how government spending will be curtailed or increased in the rest of this parliament. Also, no one knows what will happen to one important component of public spending: what you have to pay interest to provide services. Government bonds.

Question: What will Prime Minister Rishi Sunak make for his future budget?

For those who want to delve into the numbers, the Institute for Fiscal Studies creates a thorough and independent report called the Green Budget just before the event. It came out last week. With 428 pages, it is not ideal for bedside reading. Sure, the basic message will keep you awake.

The important points are as follows.

First, spending has settled at 42% of national income, more than 2% above pre-pandemic levels and the highest “peacetime” levels since 1985. This is the result of an aging population rather than the pandemic itself. ..

Second, “always inevitable tax increases have been smuggled behind the pandemic.”

Third, if the prime minister returns to his current budget budget, he will need to increase spending less than planned, “may need to implement some budget cuts over the next two years. “.

However, there are gaps in the light. Hopefully better than expected, IFS believes that the £ 28 billion tax increase package announced in the March 2021 budget may prove unnecessary, and Rishi Sunak could reverse them. There is a great deal of uncertainty about being sexual or reducing other taxes. Of course, if they get worse, something else has to give.

So what matters is what happens to the world economy. And that is a positive view of what drives the global market. They are backed by ultra-low interest rates and a flood of funds from central banks. Anyone with history will be worried, and stock prices may change significantly over time. But the positive story has two powerful impetus.

One is that technology is advancing. Once the current turmoil is eased, we will end up with a stronger global economic system. To be sure, the turmoil has forced businesses to find an easier way to do things. If you’re having a hard time finding someone to work with, you’ll try to figure out how to use fewer people. Automated warehouses save labor. Save executive time by reducing travel. You can save time for kitchen staff by simplifying restaurant meals.

The other is less obvious. It means that there is a global business cycle. With the monster recession just happening, we are in the early stages of what may prove to be a long expansion. Recessions appear to have occurred in the early 1980s, early 1990s, 2000s, since 2009, and every decade last year. Therefore, if this cyclical pattern holds, it is possible that expansion will continue for most of the last decade.

It will not be a straight line. The world doesn’t work that way. But I think the market is focusing on this long perspective. Indeed, their current optimism only makes sense if they are.

Return to the Rishi Sunak dilemma. This bumpy fall costs government money. Very strong tax revenues will be hit. If you cannot purchase the item, your VAT income will decrease. If a company cannot get the job done, it pays less income tax and national insurance to the Treasury.

But it would be wrong for the prime minister to make policies based on short-term turmoil. If the market is right and this is a multi-year expansion, the numbers will look much better in a few years.

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Hamish McRae: Prime Minister must play a long game on fiscal policy

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