Economy
The British government cannot win with next week’s budget – the economy is too far gone
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Britain has been in managed – or mismanaged – decline since its costly victory in the Second World War, a quarter-century after the British Empire reached its peak. That decline seems to be accelerating as Brexit, the pandemic, the energy crisis and seemingly endless political turmoil work their dark magic.
Every decade or so since the war ended, a currency or economic crisis or an epically bad political decision has pushed Britain’s economy – and global stature – ever lower. The pound’s devaluation in 1949 ensured the rise, and ultimate dominance, of the U.S. dollar. The chaos of the 1970s – strikes, social unrest, gaping budget deficits, soaring oil prices and inflation – intensified the country’s tribulations and triggered a bailout by the International Monetary Fund.
Then came another currency crisis – “Black Wednesday” of 1992 – that pushed Britain out of the European Exchange Rate Mechanism, which had been designed as the warm-up act to the euro. In 2007, the collapse of mortgage lender Northern Rock was instrumental in launching the global financial crisis a year later. After that, Britain was convulsed by Brexit, nearly flattened by the pandemic and, lately, shocked by the fallout of the war in Ukraine – an energy crisis and another bout of crippling inflation.
If that were not enough, Liz Truss, the country’s fourth prime minister since 2016, took a bad situation and made it worse with a mini-budget anchored by unfunded tax cuts that would have made the rich richer, widened the deficit and stoked inflation. The reaction to her “growth” plan was swift and cruel: the pound tanked, government bond yields soared and the Bank of England responded with emergency government bond purchases to stop pension funds from unloading financial assets at fire-sale prices.
Ms. Truss did not survive the budget catastrophe. After only 44 days in office, she was replaced late last month by Rishi Sunak, who had served as chancellor of the exchequer in the shambolic government of Boris Johnson. Jeremy Hunt, a former health minister, is Mr. Sunak’s Chancellor. They will present the fall economic statement on Nov. 17 – another budget revamp.
Mr. Sunak and Mr. Hunt cannot win with this budget – all the more so since indicators point to a long recession that seems to have started already. On Friday, the Office of National Statistics reported that GDP sank by 0.2 per cent in the three months to September, the first decline since early 2021, when Britain was still under tight pandemic restrictions.
No budget of any shape or form will quickly restore growth, bring down inflation, plug the deficit and heighten investor confidence – Britain is too far gone on those fronts.
There are no attractive options for the government. If the Chancellor unveils an austerity budget to try to slow the financial deterioration, the market will take the view that the economy will never grow, potentially making the country’s debt unsustainable. But a more relaxed budget risks delivering a signal that the government is fiscally irresponsible, again potentially making the debt unsustainable as interest rates rise (the government’s average borrowing costs have climbed to 3.8 per cent from 1.1 per cent at the start of the year). Ms. Truss’s fatal budget will spook chancellors for years.
A compromise that pleases no one will probably emerge, a mixture of light tax increases and spending cuts designed to prevent the £50-billion-plus budget hole from getting horribly deeper during the recession. At the same time, the budget authors will have to say how they will bring the debt burden down once the recession ends.
They will find little consolation in knowing that their dilemma is not unique. Government finances everywhere are deteriorating as growth stalls, tax revenues fall, borrowing costs rise and subsidies for families and businesses with crushing energy bills need to be funded.
Britain has no wiggle room – the government has effectively run out of money as the deficit deepens and most economic indicators point in the wrong direction. The Economist magazine recently compared Britain’s economy with Italy’s, an unflattering analysis but one that was undeniably valid.
Italy has always been held back by a lack of investment and poor productivity growth. Real per-capita GDP has not climbed since 2000, a remarkable non-achievement for a G7 and G20 country known for its manufacturing and design prowess. Italy is also burdened by the dead hand of excessive regulation and a rapidly aging population.
Britain’s growth is better, but not by much, and is falling behind that of Germany and the United States. Since the financial crisis of 2007-08, the economy has expanded at an average annual rate of 0.9 per cent, one-third the precrisis level. Only Italy’s growth rate is lower among G7 countries. Investment and productivity growth are almost as poor as Italy’s.
It is no exaggeration to say that Britain, lauded in the pre-Brexit years as one of the most innovative, freewheeling and entrepreneurial economies in Europe, is in crisis. Next week’s budget might be able to put a small bandage on the open wound, nothing more. The Conservatives are on a Titanic run in the polls, with the opposition Labour Party on course to dismantle Mr. Sunak’s government in the next election, scheduled for 2024, though it could happen earlier. He and Mr. Hunt may decide that a bold budget is not worth the effort: why not let Labour endure the pain of lifting Britain out of recession and filling the budget hole?
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
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The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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