Recession Warning From The Bank Of England Highlights UK Budget Plan

Recession Warning From The Bank Of England Highlights UK Budget Plan

Recession Warning From The Bank Of England Highlights UK Budget Plan

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Representative Picture

The Bank of England warned this week that Britain could experience a two-year recession, underscoring the seriousness of the situation facing Prime Minister Rishi Sunak and his finance minister, Jeremy Hunt, as they get ready to announce significant tax rises and budget cuts.

According to the BoE, if interest rates increase as much as the financial markets have been anticipating recently, Britain’s economy will contract for eight consecutive three-month quarters, the longest such run in at least a century.

Compared to the ones that followed the COVID-19 lockdowns and the 2007–2009 global financial crisis, that one would be both deeper and longer. However, this time’s high inflation is restricting the government’s range of policy alternatives.

The BoE’s projections nevertheless portray a bleak image of an economy contracting in five of the following six quarters under the burden of a tight cost-of-living squeeze, even if borrowing prices do not increase at all.

The central bank’s officials emphasize that their goal is to reduce inflation, which is presently running at 10% and more than five times their target of 2 per cent and that doing so will require some short-term economic hardship.

“The real economy is ultimately not our aim. Because we are implementing monetary policy, containing inflation is necessarily our goal, according to BoE Chief Economist Huw Pill in a media interview on Friday.

He continued, “We anticipate that the slowdown in the economy would be necessary to control internal inflationary pressures and accomplish our aims.

In light of this, Sunak and Hunt must present a strategy for fixing the public finances that both assuage investors who were alarmed by former prime minister Liz Truss’s unfunded tax cut proposals and minimizes the economic blow.

Following Truss’s mini-budget, the pound plunged to a record low versus the dollar, and the Bank of England was forced to act to stop a firesale of assets by British pension funds by purchasing 19 billion pounds’ worth of government bonds.

As he gets ready to present the first budget programme for the new administration on November 17, Hunt has issued a warning about difficult choices about taxes and spending.

Typical recessionary solutions, according to Jagjit Chadha, head of the National Institute of Economic and Social Research, won’t work because the underlying issue in Britain and many other wealthy economies is an inflationary energy price shock.

It is not a recession that should be countered by lowering interest rates and expanding the budget, according to Chadha. Despite this, we must assist the poorest families who have endured very trying times.

According to media sources, Hunt and Sunak may adopt that strategy by considering hiking taxes on capital gains and dividends as well as imposing a windfall tax on energy companies to close a 50 billion-pound budget gap. Analysts also anticipate further restraints on government expenditure.

The ruling Conservative Party has learnt from its own austerity experiments a decade ago, according to Luke Bartholomew, senior economist at fund management firm abrdn, that spending cuts hurt the economy more than tax rises.

The real test for Sunak and Hunt will come the following year when the projected 2024 election will be on the horizon and the economy is bound to experience a recession, and their ability to maintain the support of their own parliamentarians for their fiscal medicine.

Voters are far behind the Conservatives in the polls. In a YouGov poll taken between November 1 and 2, the opposition Labour Party led the Conservatives by 26 points, up from an 8-point margin on the eve of Truss’s mini-budget.

According to Bartholomew, “there’s not much they can do” to stop a recession. The challenge is to make it as brief as possible and end it by 2024 so they can claim we are in a recovery going into an election.

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