The victorious Labor Party in the UK may have celebrated too early: there are delicate economic decisions to be made. Where will the Government get over £10 billion?
The British Labor Party returned to government for the first time since 2010 and promised to hit the ground running with its plan to fix the economy. And this is the first big problem to face.
Many crises are so acute that there will be no choice but to address them immediately. In particular, we face a series of difficult short-term decisions on public sector wages, fuel excise taxes, and funding for healthcare and prisons.
Unraveling these knots would cost up to £10 billion, according to official forecasts and think tank calculations. Fixing public services in the long term will require another £20 billion or more, according to the International Monetary Fund.
Analysts wonder how the new Chancellor of the Exchequer Rachel Reeves will be able to do this when the debt/GDP ratio is close to 100%, trend growth is weak and the tax burden is the highest in decades.
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The Labor Party won a near-record number of seats, while the Conservatives achieved their worst result ever.
In addition to facing enormous problems that have worsened over the years, Starmer and Reeves must figure out how to overcome the additional challenge of keeping on their side all the citizens who voted for change and who have little tolerance for bad news.
During the election campaign, the think tank Institute for Fiscal Studies accused both parties of a “conspiracy of silence” on the painful decisions that must be made on the economic and fiscal levels.
The situation facing Reeves, Britain’s first female chancellor, is bleak according to observers. Depleted finances, enormous costs to fix declining public services, and exhausted taxpayers.
The ability of markets to fund further spending may be limited, with the UK already planning to raise more than £277 billion from bond investors this financial year, one of its biggest targets on record. The memory of Liz Truss’s disastrous tenure as prime minister in 2022 and the bond market fallout of her unhedged budget plans is still fresh and repeating it would be disastrous.
Strategists at UBS Group AG expect continued pressure on UK government bonds, particularly longer-dated debt, given persistent fiscal concerns.
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The Labor Party’s difficulties are all economic
In the absence of a growth surprise or a sharp fall in interest rates, it will be necessary to find more money somewhere to ensure the debt burden falls, a goal the Labor Party has said it wants to achieve: this is how Dan Hanson, Ana Andrade, Niraj Shah, analysts on Bloomberg summed it up.
Whatever Reeves does, he’ll have to find a lot of money in that first budget. A big initial decision will be on public sector pay, as the Labor Party attempts to end the strikes that have plagued the country.
Then there are the overall needs: a 3.6% above-inflation increase in NHS funding to beef up staffing and start clearing patient waiting lists, additional funding for Ukraine, additions to the affected local authorities, and compensation for the victims of the contaminated blood scandal and the Post Office Horizon scandal.
Ben Nabarro, chief economist at Citigroup, said the party may have to raise up to £15 billion in taxes in the budget to cover essential spending pressures, possibly through a reduction in relief on pension contributions and an increase capital gains and inheritance taxes.
Alternatively, Barclays and Citi have suggested changing accounting rules relating to the Bank of England’s quantitative easing program to save up to £20 billion a year in debt interest.
Whatever Reeves decides in his first budget, “the weakness of the underlying fiscal framework implies difficult choices in the near term”, analysts concluded.
The bet on the stability finally found in the United Kingdom will immediately be put to the test in the coming months. The British economic challenges are, in reality, those that all the state coffers of the Western powers have in common.
Original article published on Money.it Italy 2024-07-06 15:43:48. Original title: Uk, un buco di oltre 10 miliardi di sterline è il primo problema del nuovo Governo
