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Over the past 15 years, the UK economy has been hit by three external shocks – the financial crisis, Covid-19 and now the Russian-Ukrainian war – as well as one domestically induced shock, the Brexit shock. We are subject to unexpected shocks that are unknown and even unknowable.
For example, it took a long time to realize that the financial crisis marked a sharp turning point in trend productivity growth.However, as Resolution Foundation Notes in its Spring Statement Rishi Sunak, Chancellor of the Exchequer, said: “In the period 2007-19, labour productivity grew by only 0.4% per annum, one of the slowest among the rich countries and well below the rate of about 12 years in the previous 12 years. 2% growth”.
This in turn explains the almost stagnant real disposable income of households. Unusual tightening expected this year. But why this happens is still unknown.Likewise, it is foreseeable that Brexit will Trade openness is low.TonTo what extent it will also eventually permanently reduce the productivity of the economy is unknown.
Again, we know that today’s shock comes after a massive post-COVID-19 inflation surge. We know that it will squeeze the real incomes of the poor especially brutally. But the full economic consequences of the war are unclear.
This Office of Budget Responsibility However, he made a heroic guess. This helps us clarify some painful possibilities. The new shock will push inflation closer to 9% this year, which would be the highest in 40 years, OBR forecasts. Other high-income countries have seen similar inflation spikes. The increase was primarily driven by higher natural gas and fuel prices and higher global manufactured goods prices. The OBR also expects that excess demand from the domestic economy will ensure that these increased costs will be passed on to consumer prices. But it assumes that they will only be partially matched by higher nominal wage growth: in short, real wages will fall significantly.
Crucially, this inflation spike is expected to be temporary. The OBR forecasts a sharp drop in inflation next year as current high prices become the benchmark for future calculations. However, this result depends on the belief that nominal wages will lag far behind inflation. However, this assumption is made despite beliefs that the labor market will remain strong and unemployment will remain low. Additionally, bank rates are expected to peak below 2%, implying highly negative real rates throughout. All in all, we will see a decline in real wages combined with a strong labor market and expansionary monetary policy.
The economy could easily end up being far weaker than the OBR envisions. Monetary policy could be much tighter; for example, if inflation hadn’t fallen. Alternatively, a contraction in real incomes could drastically reduce demand and output without raising interest rates. Either option would mean a much weaker economy. An embargo on gas exports to Russia would make that outcome more likely. The economy will then suffer from stagflation.
What role should policy and policy makers play in all of this? The Bank of England’s job remains what it was meant to do: to bring inflation back to target, thereby stabilizing expectations. It must do so. The prime minister’s job is much more complicated. He is right to want to preserve his own financial leeway. But policy changes so far have offset only one-third of the income shock that will hit half of the poor in 2022-23, according to the Resolution Foundation. Given what’s going on right now and the contraction in real incomes ahead, he certainly needs to cushion the short-term hit to poorer households more effectively than he has so far.
However, a bigger point can be seen. In tough times, a country needs trusted leaders. The question about the prime minister is obvious. At the start of the pandemic, Sunak and the Treasury Department responded impressively. More recently, however, especially in his spring statement, he has claimed that taxes will be cut when they are raised (in part by freezing the nominal tax threshold). He has also been replacing a better tax (income tax) with a bad tax (National Insurance).Sunak, asserted Paul Johnson of the Institute for Fiscal Studies“has proven to be a financial visionary”.
Indeed, he has more than just a “thing”. People will notice the level of fantasy in their pay package and actual disposable income. He is burning his credibility. It’s not good for him, it’s not good for the country.
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