Following today’s dramatic news of tax cuts and new incentives for businesses, George Lagarias, Chief Economist, Mazars has some warnings as he commented:
“In a steep departure from the previous government’s truly conservative fiscal approach, Liz Truss is choosing a markedly riskier path in a bid to revive growth. Echoing the 1980s, the ‘Great British Pivot’ includes a mix of tax cuts, consumption and business boosting, de-regulation, union weakening and unemployment disincentives. Whether it will succeed remains to be seen and the danger lies not in the course taken, but in the difficulty of implementation. There are several factors that must be overcome for growth to take hold:
- The markets might not give Mr Kwarteng the time necessary for his plan to succeed. Traders, most of whom have never experienced such radical fiscal action in the UK, already reacted negatively. Two hours after the announcement, the Pound was losing 3% to the Dollar.
- Inflation could grow as the Pound loses ground.This could wipe out consumer savings from taxes.
- The Bank of England may decide to hike interest rates faster,to defend the Pound and stop imported inflation. Higher interest rates would mean that savings from taxes would end up being paid in higher mortgages.
- Global growth could continue to drop, affecting the demand for British exports and the prices for British imports.
The de-regulation announced, as well as plans to prop up the British financial sector, could be hamstrung as Brexit negotiations which may determine access to European markets have yet to take place.”