(Bloomberg) — Brexit has left the UK economy 5.5% smaller than it would have been and added to the squeeze on public services that’s behind strikes crippling the railways and National Health Service, a prominent research group concluded.
The Center for European Reform said that slower growth is also weighing on the Treasury’s revenue and that the tax increases announced in the autumn fiscal statement wouldn’t be necessary if the UK were still in the European Union’s common market.
The findings are the latest to highlight the costs of Brexit, which are limiting Prime Minister Rishi Sunak’s effort to pull the UK economy out of a recession that may last until the next election. Sunak is holding firm in his determination to limit pay increases for nurses, ambulance drivers and railway staff, who are walking off the job in protest.
“The Brexit hit has inevitably led to tax rises, because a slower-growing economy requires higher taxation to fund public services and benefits,” John Springford, deputy director of the CER, said in the report.
The CER said departing the EU single market reduced investment by 11% and goods trade by 7% in the second quarter of 2022. That has contributed to Britain trailing behind almost all other major economies since the end of the pandemic.
His comments follow assertions from Michael Saunders, a former Bank of England policy maker, who said that without Brexit, “we probably wouldn’t be talking about an austerity budget — the need for tax rises, spending cuts wouldn’t be there.”
Springford said that had the UK economy grown in line with his model, tax revenues would have been about £40 billion higher on an annual basis, lessening the need for the £46 billion tax hikes announced by Chancellor of the Exchequer Jeremy Hunt in mid-November.
Instead, government borrowing in November was almost triple the level of a year ago and well above the rate economists had expected, according to official figures released Wednesday.
The shortfall in the first eight months of the fiscal year climbed to £105 billion, the fourth highest on record. The Office for Budget Responsibility expects the total to reach £177 billion for the full 12 months.
The CER used an algorithm that draws on the economic performance of 22 other countries that were closely matched to the UK pre-Brexit. It used this to create a hypothetical model — a ‘doppelgänger’ — to show the economic trajectory of the UK had the country not departed the EU.
Springford said that the UK had not suffered a greater economic impact from Covid than other countries, making the Brexit effect easier to distill.
“As measured by excess deaths through the pandemic, Britain ranked in mid-table globally,” he said. “So there’s little reason to believe the long-term scars on the economy are larger than in other countries, on average.”
The report said that services trade was around the same under both scenarios, indicating the smoother transition of firms within this sector.
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(Updates with quote in final paragraph. Previous version was corrected to fix spelling of a name.)
Bond correction coming: What an economist and an investor say about inflation – Financial Post
Freeland meets with provincial, territorial finance ministers in Toronto
TORONTO — Deputy Prime Minister and Finance Minister Chrystia Freeland is hosting an in-person meeting Friday with the provincial and territorial finance ministers in Toronto to discuss issues including the current economic environment and the transition to a clean economy.
The meeting will focus on the economic situation both domestically and globally, according to a federal source with knowledge of the gathering, including discussions on how to provide incentives and supports to be competitive with the U.S.’s Inflation Reduction Act.
U.S. President Joe Biden’s Inflation Reduction Act includes electric-vehicle incentives that favour manufacturers in Canada and Mexico, as well as the U.S.
The incentives, which were already revised to include Canada and Mexico after originally focusing on the U.S., are now facing criticism from Europe about North American protectionism.
The source, who spoke on the condition they not be named to discuss matters not yet made public said the ongoing challenges with health care in Canada will also come up at the meeting. More substantive discussions on that will be held next week when the prime minister meets with premiers on Feb. 7.
In her opening remarks, Freeland said it’s essential for Canada to have its rightful place in the transition to a clean economy, calling it one of the biggest challenges of the moment.
We are in a situation with a lot of economic uncertainty globally, said Freeland, adding that later in the day, the ministers will have a discussion with Bank of Canada governor Tiff Macklem.
“I think that conversation with the governor will be useful and important for all of us,” she said.
Despite the need to address health care challenges, Canadian jobs and the transition to a clean economy, Freeland said the government recognizes it also has to contend with real fiscal constraints.
Freeland will hold a closing news conference at 3:30 p.m. local time.
The meeting comes at a tense time for many Canadian consumers, with inflation still running hot and interest rates much higher than they were a year ago.
The Bank of Canada raised its key interest rate again last week, bringing it to 4.5 per cent, but signalled it’s taking a pause to let the impact of its aggressive hiking cycle sink in.
The economy is showing signs of slowing, but inflation was still high at 6.3 per cent in December, with food prices in particular remaining elevated year over year.
Interest rates have put a damper on the housing market, sending prices and sales downward for months on end even as the cost of renting went up in 2022.
Meanwhile, the labour market has remained strong, with the unemployment rate nearing record lows in December at five per cent.
— With files from Nojoud Al Mallees in Ottawa and James McCarten in Washington
This report by The Canadian Press was first published Feb. 3, 2023.
The Canadian Press
Pakistan PM warns of IMF bailout conditions
Pakistan’s Prime Minister Shehbaz Sharif has said that the government will have to agree to International Monetary Fund (IMF) bailout conditions that are “beyond imagination”.
Sharif’s comments on Friday came after an IMF delegation landed in Pakistan this week for last-ditch talks to revive vital financial aid which has stalled for months.
The government has held out against tax rises and subsidy-slashing demanded by the IMF, fearful of a backlash before elections due in October.
“I will not go into the details but will only say that our economic challenge is unimaginable. The conditions we will have to agree to with the IMF are beyond imagination. But we will have to agree with the conditions,” Sharif said in televised comments.
The global lender has set strict conditions before resuming the bailout programme for Pakistan, such as asking the government to allow a market-determined exchange rate for the local currency, ease fuel subsidies, and control circular debt in the power sector.
Pakistan’s economy has been in dire straits, stricken by a balance of payments crisis as it attempted to service high levels of external debt, amid political chaos and a deteriorating security situation. On Wednesday, year-on-year inflation had risen to a 48-year high leaving Pakistanis struggling to afford basic food items.
Before the IMF visit, Islamabad began to bow to pressure with the prospect of national bankruptcy looming and no friendly countries willing to offer less painful bailouts.
The government loosened controls on the rupee to rein in a rampant black market in US dollars, a step that caused the currency to plunge to a record low. Artificially cheap petrol prices have also been raised.
Letters of credit are no longer being issued, except for essential food and medicines, causing a backlog of thousands of shipping containers at a Karachi port stuffed with stock the country can no longer afford.
Sajid Amin, a senior official at the Sustainable Development Policy Institute, a research institute in Islamabad, said Sharif’s statement revealed the depth of the challenges facing the economy.
“Without any doubt, the economic situation is tough. Pakistan is facing multiple crises, including balance of payment crisis, political instability – issues which have delayed decision making from government,” he told Al Jazeera. Amin further said that the delays in the last few IMF reviews have led to increased uncertainty and panic in the market.
“Two of the major IMF conditions, market-determined exchange rate and petrol price increase, are majorly met already. The talks are now more focused on how to meet Pakistan’s circular debt target in the power sector. The fund has not accepted the government’s plan and has asked for a revised plan to deal with the circular debt problem,” he added.
Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Center said that the major hurdle in the IMF negotiations seemed to be the scale and pace of actions required to reduce the fiscal deficit and circular debt. He noted that the IMF’s terms did not seem unreasonable, especially considering the number of times Pakistan has reneged on promises.
“A key issue that remains is the increase in electricity prices and a credible plan to reduce the circular debt. Pakistan has paused these increases for several months, citing floods and other challenges. The IMF wants a rapid increase in rates to reduce the circular deficit, but the government wants to stagger these increases,” the Washington, DC-based analyst told Al Jazeera.
It was no surprise that the IMF was not eager to agree to a staggered approach, given that Pakistan did not have much credibility left when it comes to following through on its agreements, Younus added.
Amin said that given the precarious economic situation in the country, the government must do whatever it takes to get the IMF on board.
“The government must understand, and I think it does understand to some extent, that inflationary pressure and other costs are much higher than the costs of IMF conditions. I think this statement, therefore, may be preparing ground and making people ready for tough measures that the government is going to take to meet the IMF conditions.”
The tumbling economy mirrored the country’s political chaos, with former Prime Minister Imran Khan heaping pressure on the governing coalition in his bid for early elections while his popularity remains high.
Khan, who was removed last year in a no-confidence motion, negotiated a multibillion-dollar loan package from the IMF in 2019.
But he reneged on promises to cut subsidies and market interventions that had cushioned the cost-of-living crisis, causing the programme to stall.
It has been a common pattern in Pakistan, where most people live in rural poverty, with more than two dozen IMF deals brokered and then broken over the decades.
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