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Liz Truss’ bold economic plan could keep UK out of recession

The Truss plans to offer £40bn to reduce energy bills for companies

Therese Raphael: All of this would require more borrowing in the short term, given Truss’ tax cut pledges. Proponents of the Truce, or “tersion” as we call them, hope the markets will receive it with a quiet reception. Meanwhile, former finance minister Rishi Sunak warned that markets could lose confidence in the British economy. What is your view?

Dan Hanson: As a former Treasury official, it won’t surprise you to hear that I agree with Sunak about the tax cuts. These cuts will support the economy in the future, but I think they will fail miserably to cover their “costs.”

Ultimately, if you want to boost public finances with tax cuts, you need a plan for how to borrow on a sustainable path. Compounding the problem for markets is that the UK is also running a huge current account deficit, meaning it is borrowing money from the rest of the world, relying on the “mercy of strangers”, as former Bank of England governor Mark Carney once put it. The recent trend of higher gilt yields and currency depreciation may continue for some time if the lack of a plan to control the fiscal deficit persists.

Therese Raphael: One of the problems with Truss’ plans to boost growth is that business investment in the UK is lower than it was at the end of 2019. Do you think raising corporate tax from 19% to 25% would significantly improve this picture? ?

Dan Hanson: There is certainly some scope for catching up, and by eliminating the corporate tax increase, the TRS has removed one of the biggest barriers to capital spending next year. But there will be other important disruptions that could slow this momentum: higher interest rates, potential Brexit uncertainty and a weaker economic environment – ​​the picture looks bleak at the moment. According to our projections, corporate investment will not pick up until the economy begins to recover in the second half of 2023.

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However, there is room to try something new. Sunac’s radical tax break – generous tax breaks for investments in plant and machinery – has not worked as expected, but I still believe something can be done to reduce the overall tax burden on corporates and increase capital formation rules. Investments.

With the economy in shambles, Britain is electing a prime minister who is not afraid to face problems

Therese Raphael: We can’t talk about economic growth without talking about the unfortunate pace of labor productivity growth in the UK – you’ve mentioned that it averaged 1.8% between 2000 and 2007 and has only risen by 0.7% since 2010. What Prime Minister Truss Can Announce Will Future Productivity Growth Be Strong?

Dan Hanson: Those expecting the economy to perform have been waiting for some improvement in productivity growth over the past decade, which has not happened. It is also true that these policies take a long time to bear fruit. So it will be very difficult for Truss to achieve its target of 2.5% growth overnight.

This does not mean that they cannot focus their efforts on policies that will help the economy in the long run. One of the most interesting things about the UK, pointed out by former UK Chief Economist Andy Haldane, is the wide spread of productivity performance across firms. In some cases there are some very productive companies that are global innovation companies, but you have a large segment of companies with very low productivity.

One idea lies in the principles of encouraging exchange of ideas between downstream and upstream organizations scattered across similar sectors and regions. This could move the needle on UK productivity performance.

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