Liz Truss: Our Chief Economist’s view on the proposed policies

There are, of course, concerns that lower taxes may worsen inflation. However, UK’s inflation is mostly global and supply-driven, a mix of high energy prices and post-pandemic sluggish supply chains, which feed into the prices for all goods. This is exacerbated by a very tight labour market, a consequence of the pandemic and Brexit. There is very little evidence that UK inflation is linked to exuberant consumer demand. A little more money in the pockets of taxpayers, for whom there’s no evidence that they will go on a spending spree enough to bring up prices, is probably a growth-positive and probably not an inflation-inducing measure. In fact, as the UK’s biggest trading partner, the EU, is preparing for a significant blow to growth due to energy shortages, prioritising British growth seems sensible. 

Having said that, the budget shortfall will be addressed with more debt, without a prior study from the OBR.

The real question, then, is not whether the extra debt will cause more demand-driven inflation. It probably won’t. It is whether the extra debt will cause the Pound to drop significantly, raising the prices for imported goods and services.

The evidence does not suggest that the danger over the long term is high. For one, Britain’s debt may be more benign than advertised. The UK’s Debt-to-GDP is projected by the IMF to fall from 102% at a pandemic peak to 87% at the end of the year and 70% by 2027. If fiscally-enabled growth exceeds expectations, then, at these numbers, British debt should not become a problem in the currency market. Second, even if the Pound drops, the Bank of England can always raise interest rates further. 

To fight domestic inflation, the incoming UK government will probably not find solutions in tax policies but in the optimisation of a system of immigration that would address the labour market’s tightness. 

Additionally to these policies, Ms Truss has proposed to overhaul financial regulation and review the Bank of England’s mandate. Financial regulation in the post-Brexit era should, at the very least, seek to reap whatever advantages separation from Europe may bring. Or, at least, to be used as a bargaining chip in ongoing Brexit negotiations, many of which have yet to involve the financial sector. 

As for reviewing the Bank of England’s mandate, this ostensibly heretical proposition may be surprisingly timely. The Bank has vast powers to stop or accelerate growth. It can print large sums of money at will and then feed them into the asset market. And it can do all these without parliament, on a single mandate to fight inflation. In an era where globalisation renders inflation a global problem, some argue it is appropriate to question the capabilities of national institutions to fight it effectively and, possibly, consider modernising their basic mandate.

The global economic backdrop is difficult and there are no easy or painless solutions. All available options have an element of risk and precise outcomes are uncertain. However, we are fairly optimistic that the incoming PMs proposed policy mix could help Britain navigate choppy international waters. 

Our tax experts will be sharing their thoughts on the announcements ahead of the expected Budget. You can follow our analysis here or via our LinkedIn page here.