What the UK should do instead of tax cuts




  • In Business
  • 2022-10-01 07:01:00Z
  • By Quartz
 

Prime Minister Liz Truss's tax breaks are supposed to get the UK economy out of the doldrums.

In addition to record-high inflation, the country is facing an acute labor shortage and lackluster private sector investment, problems Truss has said her plan will help fix. But so far, most economists-and the markets-believe its effects will be devastating and leave the economy in worse shape.

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"This is utter madness," said David Blanchflower, a former Bank of England official, said. "The markets prevent politicians from doing stupid stuff."

Why the UK's mini-budget won't work

The bulk of the proposed changes involve cutting taxes in a bid to jumpstart the economy, which has been lagging other European countries. "By lowering or not increasing taxes on workers' incomes and corporate profits, they think they will both encourage firms to invest more and encourage more people to enter the labor market, to work longer hours, and boost the supply potential of the economy," said independent economist Duncan Weldon.

Here's what included in the mini-budget rolled out last week:

✂️ Income tax for individuals, especially top earners

???? Corporate income tax

???? Taxes to fund the National Health Service

???? Taxes on property purchases

???? Removing a limit on bankers' bonuses

????️ Creating "investment zones" that would liberalize planning rules for housing.

???? Increasing the allowance that companies can invest tax free

Assuming the policies work as the Truss government expects, the plan would take two to four years to show its effects, Weldon said. In the near term, all of these changes would stoke consumer demand and push up prices, while putting a permanent dent to the UK's future revenue.

So what should the Truss government be doing instead?

The UK needs to build more housing

High housing prices have been weighing down on UK households. That's because, like the US, the UK has restrictive zoning laws that limit the number of houses that can be built in certain areas.

The UK economy already experienced the benefits of lifting some of these restrictions. After the World War II Blitz bombings, the housing boom that ensued increased London's annual GDP growth by 1% to 2%, according to a 2018 paper published by the Centre for Economic Performance.

Boris Johnson had planned on liberalizing housing in 2021, but backed away after constituents in the Conservative Party's strongholds in the southern part of England complained. Carrying out those reforms would help Truss boost the economy and fight inflation.

The UK needs more immigrants

During the pandemic, the UK had an outflux of immigrants, mostly Europeans heading back to their home countries. That is one of the reasons behind the UK's labor shortage.

There are reports that Truss plans to lift immigration restrictions to get workers to come back. It won't be easy to get that past her the far right members of her cabinet, and an increase in workplace discrimination in the UK will also make it difficult to convince immigrants to come back.

The prime minister should nevertheless try in order to begin to address labor shortages.

The UK needs to fund the National Health Service

Britain has also seen an unusually sharp rise in the number of people who stopped working because of chronic sickness, with long covid being a significant contributor.

That's partly because of delays in getting treatment due to backlogs at the National Health Service, says Weldon. "The waiting time for elective procedures and non urgent procedures has shot through the roof," he adds. In a research note, the Bank of England's Jonathan Haskel suggested that nearly all of an 88% rise in economic inactivity since the start of the pandemic is due long-term illness.

The UK needs to invest more in renewables

The conservative answer to the energy crisis has been to lift a fracking ban that was put in place in November 2019 after a small earthquake at a fracking site generated public outcry. Fracking would be expensive, take years to actually address the energy crisis, and be harmful to the environment.

Instead, the UK should pursue wind, solar, and offshore water power generation as well as nuclear power, said Jo Michell, associate professor of economics at the University of the West of England. That will also take time, but puts the UK-and the world-in a better position to meet climate goals.

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