UK: digging a deeper hole

Two really bad things happened to the UK in 2020: covid and Brexit, the self-inflicted economic wound of withdrawal from the EU.

It’s hard not to see similarities with politics in the US: a group of politicians capitalize on the sense of grievance of left-behind rural citizens by vowing to restore the country to its former glory. In this case, it’s by cutting economic ties with continental Europe, thereby shutting off the inflow of foreign workers at the same time. MUKGA, in other words.

Although the pandemic muddies the waters, this has worked out so far at least as badly as one might have expected–especially so for those who favored Brexit. So the recently minted prime minister, Liz Truss, turned this week to the neoconservative playbook for a way to stimulate growth. What she found there: tax cuts for the rich, on the idea that making them wealthier will eventually “trickle down” to gains for ordinary citizens.

Three issues:

–with no offsetting reduction in government spending, the cuts–$50 billion over the next five years–will presumably be funded by increased government borrowing

–as the world is trying to dampen high inflation, the last thing it needs is more stimulus

–the underlying economic malady is Brexit, not too-high taxation.

One market reaction was a sharp drop in sterling, part of which has since been reversed.

A second was a rise in interest rates, on the idea that the UK government would be forced to borrow a lot more to fund the tax cuts. An unintended result (I can’t see why Truss would have intended this outcome) has been a mad scramble by UK traditional pension funds to cover hedging losses that the sudden and unexpected rate rise generated.

Possibly the most damaging has been the highly-indebted, high-inflation emerging country look that Truss’s announcement conjured up for her country.

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