The UK Chancellor, Rachel Reeves, has faced criticism for the near-record increase in taxes imposed by her recent budget. However, Reeves remains focused on the long-term economic goals of her proposals, stating that this is not a game of speed chess. One of her most significant advantages is the fact that she has a large majority, allowing her to pass all of her policies through parliament with more credibility than her predecessor.
The contrast between the current chancellor and former Chancellor Liz Truss is one of the many differences in policy. During Truss’s mini-budget in 2022, the markets tested not only the economic credibility of the prime minister and chancellor but also their political credibility. This contrasts with the UK’s current government, which has a large majority and enjoys greater market confidence.
Political and financial credibility are critical assets for any new chancellor, something that the previous chancellor, Kwasi Kwarteng, lacked. The government’s decision to increase the sale of government bonds has led to a significant rise in interest rates, resulting in market repricing of the increased need for loans to the UK government. This is expected to impact the rate of mortgage and business loans.
Despite criticism, Reeves’s aides maintain that the majority of borrowing is for long-term UK investment in major capital projects, which could ultimately lead to better long-term economic growth. Reeves’s budget has seen £76bn a year in new spending, half funded by taxes and half by borrowing, increasing investment by £105bn.
This strategy is similar to that of US President Joe Biden, who has invested billions of dollars in government projects to stimulate economic growth. UK Energy Secretary Ed Miliband recently visited the key officials in charge of disbursing the subsidies and loans made available under the Inflation Reduction Act, which saw private companies respond immediately, although it took time for the state machine to scale up.
Reeves’s budget could be seen as a bet on the new government’s ability to kick-start high-productivity investments and generate growth. Although critics argue that such a strategy may be inflationary and ultimately harmful, Reeves maintains that this is a long-term strategy that requires taking political punches in the short-term
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