HAMISH MCRAE: Chancellor must play long on fiscal policy

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HAMISH MCRAE: Bumpy fall will cost government money, but Chancellor would be wrong to base fiscal policy on short-term disruption










What the hell will Rishi Sunak do with his next budget, now in ten days? The background is extraordinary. Massive and worsening trade disruptions. Empty shelves in supermarkets. Fuel shortages. Gas prices through the roof. Inflation is heading towards five percent, which would be the highest since 1991. Yet house prices are also setting new records and shares on the London Stock Exchange are the highest since the start of the pandemic.

Here is the riddle. Huge problems in the global economy, which are hitting the UK hard. Yet the markets are showing that the confidence of buyers and investors, here and elsewhere, is strong and rising. What matters most?

We already have some of the Chancellor’s plans. We know that taxes are increasing, reaching their highest level as a share of GDP at least since the early 1980s. We know that national insurance contributions are going to increase from April of next year. But we don’t know much about how government spending will be contained or increased during the rest of this Parliament, and no one knows what will happen to a crucial piece of public spending: what it will have to pay. in interest to service the national debt.

Questions: What the hell will Chancellor Rishi Sunak do with his next budget?

For anyone who wants to dig into the numbers, the Institute for Fiscal Studies prepares a comprehensive, independent report, called a green budget, just before the event. It came out last week. Since it is 428 pages long, it is not an ideal bedside reading. Indeed, the basic message would keep you awake.

The key points are:

First, spending will be 42% of national income, more than 2% above its pre-pandemic level and its highest “normal” level since 1985. This is more consequences of an aging population than of the pandemic itself. .

Second, tax increases “which have always been inevitable have been smuggled in under the guise of the pandemic”.

Third, if the Chancellor is to return to a balanced budget on current spending, he will have to increase spending less than expected and “may even have to cut some budgets over the next two years”.

However, there is a loophole in the light. The uncertainties are so huge that if things go better than expected, the IFS thinks that “it might even turn out that the £ 28bn package of tax increases announced in the March 2021 budget s ‘will prove unnecessary “and Rishi Sunak could end up reversing them. or by reducing other taxes. Of course, if they turn out to be worse, something else has to give.

What matters is what will happen to the global economy. And that’s a positive take on what drives global markets. They are backed by ultra-low interest rates and the influx of money from central banks. Anyone with a sense of history will be worried about this, and it may well be that we will get a sharp correction in stock prices before too long. But the positive story has two powerful drivers.

The first is that technology is advancing at full speed. Once the current disruption subsides, we will end up with a more robust global economic system. Indeed, disruption is forcing businesses to find simpler ways of doing things. If you are having trouble finding people to do a job, you are trying to think of ways to use fewer people. Automated warehouses save labor; reducing business travel saves managers’ time; Simplifying restaurant meals saves kitchen staff time.

The other is less obvious. It is because there is a global economic cycle. Since we just had a monster recession, we are in the early stages of what could turn out to be a long expansion. The downturns seem to happen every ten years – in the early 80s, early 90s, 2000s, from 2009 and last year. So if this cyclical trend continues, there could be an expansion for most of this decade.

It won’t be a straight line. The world does not work like that. But I think the markets are focusing on this long term view. Indeed, their current optimism only makes sense if they are.

Let us return to Rishi Sunak’s dilemma. This bumpy fall will cost the government money. Tax revenues, which have been very strong, will take a hit. If we cannot buy goods, VAT revenue suffers. If businesses can’t fill jobs, it’s less income tax and less national insurance going into the treasury.

But the Chancellor would be wrong to base her policy on short-term disruption. If the markets are good and it is an expansion over several years, the numbers will be much better in a few years.


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