LONDON, Sept. 28 (Xinhua) -- The large-scale tax cuts announced by the United Kingdom's (UK) government last week are feared by analysts to increase borrowing, drive up inflation, and disproportionately benefit the rich. One expert even called the move "an economic as well as a political gamble."
"What the British government has done, particularly in this package announced last Friday, is to take a big bet that you can improve things by maxing out the credit card," Professor Iain Begg of the London School of Economics and Political Science told Xinhua in a recent interview.
On Sept. 23, Chancellor of the Exchequer Kwasi Kwarteng unveiled his ambitious 45-billion-British-pound (48 billion U.S. dollars) tax cut package, the biggest since 1972, to boost economic growth.
"You borrow more to give a combination of tax cuts and support for households and businesses. If that doesn't work, it could cause further inflation, which would require a bigger reaction from the Bank of England, meaning higher interest rates, and it could also mean a fall in the exchange rate, which aggravates inflation even further," Begg explained.
The professor said it was all about timing. "What the UK government did might make sense, but in today's circumstances it looks like --and most market practitioners seem to agree with this --a very big gamble, which is why the financial markets have treated it with so much skepticism."
The UK consumer price index rose by 9.9 percent in the 12 months to August, as food and non-alcoholic beverage prices rose by 13.1 percent. To tackle high inflation, the Bank of England (BoE) has increased interest rates to 2.25 percent, the highest since 2008.
Following the announcement of the tax cuts on Friday, the British pound fell more than 3 percent to a 37-year low against the U.S. dollar as investors worried the policy would ramp up public borrowing, bring much fiscal uncertainty and push up already high inflation.
The UK will have to borrow more in financial markets and as a result will have to raise the interest rate and make the prospect of borrowing by the British government more expensive, Begg told Xinhua.
In knock-on terms, this means that the UK government will have to pay more of its revenue out in interest and less in services, he said.
Noting that the fiscal giveaway will likely look good in the short term, Begg said the consequences in months or years down the line are of more concern, when it could show up as a very significant increase in not just the budget deficit but the level of public debt, which then hangs over the economy for a relatively long period.
"And that's the sense in which it's a gamble," he noted, because while the government thinks the economy will grow and therefore the debt to gross domestic product (GDP) ratio will come down, critics are saying the debt is going to go up and they do not believe that is going to have the immediate effect on the ratio, which will worsen.
On Friday, the UK government set a target of 2.5 percent economic growth alongside the tax-cutting plans, and it was contested.
Highest-rate taxpayers will benefit more than the poorer ones, Begg said. "And let's face it, not everybody pays income tax," he told Xinhua. "This will have a distributive effect in favor of the relatively richer parts of the country."
What the government is betting on is that the effects of the measures will trickle down to everybody because the rich will spend, and as they spend, they will generate income and activities for others, but when the United States tried this in the 1980s, it did not really work, the expert noted.
Furthermore, the UK government wants to attract talents and investment with lower taxes, and "it might work, but it isn't going to work overnight," Begg said.
"And it's rolling against the fact that Brexit has made things more difficult. So, can we say with confidence at the moment whether it's going to work or generate more activity in Britain? I don't think we can," he said.
The new measures are also a political gamble for the government, the professor said.
"They will have cushioned the effects of the rise in gas prices for the average household and they would expect to be rewarded at the general election by people who are saying, okay, they faced a difficult start, but they did the right thing," Begg said.
The other side of this, however, is "if it exposes a bigger set of economic problems that result in a combination of higher interest rates and more public money being used to pay interest rather than buy services, the electorate will turn on them."
While some of the giveaways have been to well-off persons, who tend to reside in richer areas, it is not going to be that good for those in what used to be called the Red Wall constituencies, where former Prime Minister Boris Johnson managed to win voters away from Labour towards the Conservatives, the professor said. ■
