The latest uk budget is bad news. This is my opinion on the matter; people that know what they are talking about, like mainlymacro or ifs can produce better assessments and forecasts.

Unfortunately it is a gamble that affect most people in the country. A gamble which most likely outcome is that recession is accompanied by extreme inflation, and the next few years are dominated by paying national debt.

From my point of view, it is hard to see how while:

  • there is a contraction of the economy because of the increase of energy prices
  • there is no room for central banks to lower rates further; instead they are increasing it because of the inflation
  • there are previous extra debt from covid that hasn’t been fully paid yet

borrowing extra to pay for tax cut for the wealthiest could possibly have any positive effect for the economy.

If my understanding is correct:

  • issuing debt: it is the equivalent of financing a company with liquidity issues with payday loans. The economy needs to grow more than the interest rate that the national debt issued to finance the shortfall.
  • Tax increases: it works with present activity rather than future activity.

During a recession and fiscal tightening, chances are that the future economy will be smaller than current economy, making the proportion of production to pay interest higher.

I would like to think that there is a (better) plan behind it, that perhaps the government is anticipating the central bank increasing the rates too much. Maybe that they want to devaluate the currency in a predictable way and they can’t do it without the central bank.

However I don’t believe on either of these options, less so with no evidence to support it. I believe the central bank rates will increase further and the mortgage costs will be significant.