Growth and Activity
Will the UK government’s gamble on growth actually deliver?
The aim is admirable – boosting the UK’s long-term real GDP growth rate is something that all politicians should be striving to achieve. The problem is the manner in which the new government has gone about it. They've put in place sizable tax cuts, but not really matched them with sizable and significant increases to the supply side of the economy. And the timing is odd because usually you want to stimulate the economy when it's operating below capacity but we're in a situation where demand is above supply at the moment, mainly because supply has been restricted. So the end result, is not going to be significantly higher real GDP growth, but more inflation, and as a result, more interest rate hikes. There is a scenario where it does pay off, but we think the most likely scenario is that the extra boost to demand is temporary and is offset by higher interest rates. That then causes an issue with public finances where, at some point, this government or the next government has to put in place a period of fiscal tightening with either higher taxes and/or spending cuts and that would then weigh on the economy over the medium term.