{"id":21604,"date":"2022-07-08T15:59:42","date_gmt":"2022-07-08T14:59:42","guid":{"rendered":"https:\/\/ounews.co\/?p=21604"},"modified":"2022-07-08T15:59:42","modified_gmt":"2022-07-08T14:59:42","slug":"inflation-recession-fears-and-tax-cuts-any-new-uk-chancellor-faces-an-unenviable-in-tray","status":"publish","type":"post","link":"https:\/\/www.open.ac.uk\/blogs\/news\/arts-social-sciences\/inflation-recession-fears-and-tax-cuts-any-new-uk-chancellor-faces-an-unenviable-in-tray\/","title":{"rendered":"Inflation, recession fears and tax cuts: any new UK chancellor faces an unenviable\u00a0in-tray"},"content":{"rendered":"

Alan Shipman<\/a>, Senior Lecturer in Economic at The Open University <\/a>and Phil Tomlinson, Professor of Industrial Strategy at Bath University, talk about the range of ministerial resignations in Boris Johnson’s government and the unenviable job of the new chancellor.<\/p>\n

The flood of ministerial resignations from UK prime minister Boris Johnson\u2019s government in recent days started with Rishi Sunak\u2019s resignation as UK chancellor of the exchequer on July 5 2022, alongside health secretary Sajid Javid\u2019s. His resignation letter<\/a> cited differences of opinion over the economy, saying that a \u201clow-tax, high-growth economy and world-class public services\u201d could only be \u201cresponsibly delivered if we are prepared to work hard, make sacrifices and take difficult decisions\u201d.<\/p>\n

Nadhim Zahawi: ‘Nothing is off the table’<\/h2>\n

Sunak\u2019s swift replacement, former education secretary Nadhim Zahawi, joined<\/a> a growing group of ministers calling on Johnson to quit within days. But in his first interviews as chancellor, he immediately teased the idea of tax cuts, saying \u201cnothing is off the table\u201d.<\/p>\n

Johnson has since bowed to pressure and resigned<\/a>. The tax cut strategy, which was clearly off the table for Sunak, could underpin a potential leadership bid<\/a> by Zahawi – and perhaps other Conservative hopefuls. But are tax cuts a reasonable way forward for the economy and, if so, will it be an effective measure as the UK faces a cost of living crisis?<\/p>\n

Two experts explain the challenges facing the chancellor and whether a programme of tax cuts could work:<\/p>\n

Phil Tomlinson, Professor of Industrial Strategy, Deputy Director Centre for Governance, Regulation and Industrial Strategy, University of Bath<\/strong><\/p>\n

The dramatic political events<\/a> in Westminster have left Nadhim Zahawi<\/a> currently holding the reins at the Treasury. But any honeymoon period for the new chancellor is likely to be short-lived. The UK\u2019s economic circumstances are dire \u2013 the worst in living memory (at least since the early 1970s<\/a>).<\/p>\n

Consumer confidence at a record low<\/h2>\n

Zahawi inherits an unenviable in-tray with a cost of living crisis<\/a> (fuelled largely by high energy prices<\/a>, Brexit disruption<\/a> and ongoing supply chain bottlenecks), rising interest and mortgage rates<\/a>, and the highest tax burden<\/a> and public debt to GDP ratio<\/a> in over 70 years. No wonder consumer confidence has plunged to record lows<\/a>, raising fears the UK is already in recession<\/a>. The UK is forecast to be the worst performing economy<\/a> \u2013 bar sanctions-hit Russia \u2013 in the G20 next year.<\/p>\n

Recent falls in the stock market and the value of sterling<\/a> only add to the gloom, with the latter likely to stoke further inflationary pressures.<\/p>\n

Also, the government\u2019s political gesturing with the EU over the Northern Ireland protocol<\/a> could jeopardise the EU-UK trade and cooperation agreement. The UK\u2019s latest trade figures are the worst on record.<\/a>\u00a0So a new trade war with the country\u2019s biggest trading partner is the last thing British exporters need.<\/p>\n

On top of all this, the UK\u2019s long-standing and perennial economic problems remain: low business investment, low productivity<\/a>, impoverished public services and the widest regional inequalities<\/a> among advanced economies.<\/p>\n

Tax cuts? Music to the ears for some<\/h2>\n

Initial musings from the new chancellor are that he will seek to prioritise tax cuts<\/a> for business and households to get the economy going again. This will be music to the ears of the Tory backbenches.<\/p>\n

But any such tax cuts are likely to be small and largely ineffective. The UK\u2019s economic model is fundamentally broken. Addressing the scale and deep-rooted nature of the economy\u2019s problems will require a radical reset<\/a> and a move away from the neoliberal model that has dominated policy since 1979. The new chancellor though is known to be a committed free marketeer<\/a> and so, overall, economic policy is likely to be \u201cmore of the same\u201d.<\/p>\n

Alan Shipman, Senior Lecturer in Economics, The Open University<\/strong><\/p>\n

Rishi Sunak\u2019s resignation letter<\/a> sums up the dilemma of all modern chancellors: people want a low-tax, high-growth economy and world-class public services.<\/p>\n

In the current economic environment, however, state-provided services led by the NHS<\/a> are pleading for more funds following a decade of cuts or unusually low spending rises in the wake of the 2008 global financial crisis. Defence is also demanding more money<\/a> to confront new threats from the east.<\/p>\n

Public debt has been pushed to record peacetime levels<\/h2>\n

The wider budget deficits<\/a> that have appeared as a result, alongside unusually slow economic growth, have pushed public debt<\/a> to record peacetime levels.<\/p>\n

Conservative economists have traditionally argued<\/a> that fiscal deficits raise inflation and undermine growth. So Sunak, even while continually restating his low-tax ambitions<\/a>, used his two years as chancellor to raise<\/a> the overall tax take. The prime minister\u2019s unease over this deficit-cutting strategy played a role in the chancellor\u2019s decision to quit, according to his resignation letter.<\/p>\n

Nadhim Zahawi arrives at Number 11 with a record similar to Sunak\u2019s. He views tax cuts<\/a> as key to an economic revival. The idea here is that people and businesses<\/a> work harder, invest more and innovate faster when government takes less of their income.<\/p>\n

It worked \u2013 electorally if not economically \u2013 the last time the UK encountered stagflation<\/a> (when high inflation meets low economic growth), propelling Margaret Thatcher to power on the promise<\/a> of lower income tax. Zahawi can draw on supportive economists<\/a> who blame the current high inflation on a wrong-footed Bank of England, and argue that debt is best curbed by making GDP grow faster. A tax cut might promote this, if it leaves cash-strapped households a bit more to spend.<\/p>\n

The risks for a new chancellor…<\/h2>\n

The risk for the new chancellor, if he sticks to the low-tax mantra, is that budget deficits mainly drive up prices, as production hits new supply-side<\/a> constraints. The government\u2019s borrowing costs could also rise more steeply<\/a> as investors start to wonder how much more debt the UK can take on if it won\u2019t impose more taxes. And unless tax cuts quickly unleash faster growth \u2013 reversing the present slide towards recession<\/a> \u2013 the loss of revenue might just make rising demands on the public sector even harder to fund.\"The<\/p>\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Alan Shipman, Senior Lecturer in Economic at The Open University and Phil Tomlinson, Professor of Industrial Strategy at Bath University, talk about the range of ministerial resignations in Boris Johnson’s government and the unenviable job of the new chancellor. The flood of ministerial resignations from UK prime minister Boris Johnson\u2019s government in recent days started […]<\/p>\n","protected":false},"author":19,"featured_media":21606,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,24,15],"tags":[860,869,1525,1640],"class_list":["post-21604","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-arts-social-sciences","category-business","category-society-politics","tag-faculty-of-fass","tag-fass","tag-news-home","tag-ou-home"],"_links":{"self":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/21604","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/comments?post=21604"}],"version-history":[{"count":0,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/posts\/21604\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media\/21606"}],"wp:attachment":[{"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/media?parent=21604"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/categories?post=21604"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.open.ac.uk\/blogs\/news\/wp-json\/wp\/v2\/tags?post=21604"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}