An economist has issued a dire warning about Liz Truss' plan to drastically cut taxes, saying they could lead to a 1970s-level financial crisis. The UK government is set to unveil a major fiscal plan worth billions of pounds this morning which will include rumoured cuts to National Insurance, income tax and corporation tax as well as removing a cap on bankers' bonuses.
The moves are part of a mini-budget being billed as a 'fiscal event' designed at curbing the current cost crisis which has seen inflation rise to a 40-year high and the UK set to fall into a recession. On Thursday the Bank of England raised the base interest rate from 1.75% to 2.25%, the highest it has been at since November 2008 during the financial crash.
Former Bank of England policy maker Martin Weale said the UK government’s radical tax cutting plan to boost growth will “end in tears” with a run on the pound and a crisis similar to that of the 1970s, when the UK had to be rescued by a loan from the International Monetary Fund.
Bloomberg reports that former Bank of England policy maker Martin Weale said the UK government’s radical tax cutting plan to boost growth will “end in tears” with a run on the pound. Weale, who previously served on the UK central bank’s Monetary Policy Committee and as director of the influential National Institute for Economics & Social Research, said stimulus for the economy at a time when inflation was so high would end in a crisis.
Asked whether Kwarteng would deliver his target of 2.5% annual GDP growth, Weale told Bloomberg Television: "Past history suggests not. Other experiences where the chancellor has gone for growth ended in tears. I expect the same sort of thing will happen with Kwarteng’s policy. There will probably be a clear run on the pound, and then the bank will be forced to put up interest rates to stabilize the exchange rate.”
Weale said he would have voted for a three-quarter-point increase in the benchmark interest rate and compared the situation to the 'Barber Boom' of the early 1970s when the government set a 5% annual growth target that overheated the economy and led to soaring inflation, and the 1976 crisis when the UK was bailed out by an IMF loan. He also criticized the economic models used by central banks to predict inflation. “The problems is that the sort of models that central banks have used for the last ten years proved no good at anticipating the persistence of inflation we have got at the moment,” Weale said.
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