The British economy is at a turning point. Growth is slow, recession prospects are rising, inflation is at a 40-year high and is expected to hit 11% this fall as the country grapples with an earlier and more painful economic storm than other countries.
It was big news for the Bank of England governor to say those uncomfortable budget truths this week, perhaps surprising given the periodic economic pains that have hit consumers hardest since the 1970s. sent faith.
The important question, however, is how we react. And therein lies a problem. For the government, the issue is not so much about Britain leading as it is about what can be done to salvage Boris Johnson’s flagging leadership.
Much of Britain is grappling with rising living costs while rival Conservative factions push their own agenda. A long laundry list of ideas was drawn up, often with conflicting demands: tax cuts should be a priority, yet funding for increased military spending is sought; Despite promises of upward mobility, as well as more teachers, nurses and police officers, there are cuts in the public sector. Last fall, Johnson wanted a higher-paying economy, now he’s warning of big wage increases.
All of this reflects the lack of a coherent economic plan, which is bad enough for a government in normal times, but represents a dangerous denial of responsibility amid the biggest blow to living standards since the 1950s.
Johnson and Chancellor Rishi Sunak are expected to resume their economic policies in a joint speech this month. After announcing £37bn in grants for families this year, the focus is likely to be a long-term cost-of-living plan.
Topping the list should be a plan to rejuvenate the UK economy by insulating homes, investing in reliable green energy and increasing productivity, the latter being crucial to raising living standards and the country in the long term. can help to avoid permanently high rates. of inflation.
The problem is that Conservatives have had little success in improving productivity over the past decade.
Any gains were left behind by other major economies, widening Europe’s largest regional divisions.
Maintaining productivity growth in the UK before the 2008 financial crash would have generated an extra £5,000 per worker each year, according to the National Institute of Economic Social Research. Meanwhile, London has overtaken the rest of the country with productivity 50% above the national average, compared with 40% in 2002, according to the Resolution Foundation, pointing to deeper structural problems.
All of this testifies to a futile decade of penance that has made our condition even more painful to the stomach and harder to escape.
Targeted investments are essential to escape the inflation trap and increase productivity. The good news is that Sunak recognized this, using his May presentation at Bayes Business School in London to illustrate his approach to investing in “capital, people and ideas”. Three things, the economist agrees, will help. It is unclear where these investments come from and how they are aimed.
Sunak’s priority is to harness the power of the private sector and offer companies tax breaks for investing in productivity-enhancing projects. He is expected to announce plans to build on his $29 billion “super withdrawal” scheme launched last year.
The Treasury Department completed a consultation last week examining ways to amend the plan, including paying for the investment in full. This would allow companies to deduct the full cost of qualifying expenses from their tax bills and cost the Treasury £11bn in lost revenue.
Sunak is believed to prefer to wait until the fall budget to finalize his plan but will likely come under pressure to announce something in a joint speech with Johnson. Business leaders know this and are lobbying vigorously.
Allowing such tax breaks must be carefully crafted to avoid abuse of the system and the possibility of the government supporting questionable business priorities. However, after a decade of failing to increase business investment, a rethink is needed.
Unlike his predecessors, Sunak believes lowering the corporate tax rate to encourage investment won’t work. Despite corporate tax cuts from 28% to 19% in 2010, business investment has barely grown and billions in revenue have been lost to the public purse.
Amidst the madness, it plans to raise the corporate tax rate to 25% next spring while offering investment breaks to companies, in a carrot-and-stick approach to boosting investment.
Holding on to that position can be difficult as sections of the Tory party have been pushing for attention-grabbing corporate tax cuts to restore favor with business leaders while also reaching the highest level since Clement Attlee. To prevent an increasing tax burden. Prime minister.
However, companies seem to understand the Chancellor’s point of view and are instead demanding generous investment relief.
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Incentivizing investment is only part of the picture. Despite last year’s super-cuts, worries about the pandemic, Brexit, rising costs, supply chain disruptions and chronic staff shortages have weighed heavily on corporate investment plans.
Official figures show that business investment fell again in the first quarter of this year, while overall levels remain 10% below pre-pandemic levels.
To have any serious clout behind a productivity-boosting plan, the government needs to show that the state is also willing to invest. A coherent economic plan, including support for businesses and households, will help Britain survive our inflationary, low-growth economic crisis.
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