New PM Truss ‘faces tough choices over cost of living’
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NEW PRIME Minister Liz Truss has a mountain to climb over the economy with a bail-out the only option available, an economic expert has warned.
According to home.saxo/en-gb website, Head of Macro Analysis Christopher Dembik believes Liz Truss faces massive obstacles saving the national economy.
“They will have to follow only one path: opening up the door for a massive stimulus package and, once the crisis will be settled, increasing taxation. Actually, the debate on taxing big corporations could emerge sooner than expected in the UK.
“Over the weekend, Germany announced a massive €65 billion plan to fight inflation. Despite being initially reluctant to support the dipping economy, we believe that the next PM will have no other choice but to follow Germany and bail out the country with a similar style cash injection to combat the cost of living crisis. There is no other option in the short-term.
“Last week, Goldman Sachs’ CPI forecast above 20 per cent for 2023 was widely reported. Sadly, it is likely that UK inflation will reach that threshold in the coming months if the energy crisis intensifies. This would cause a massive drop in real income for UK households, not only the low-income households but also the middle-class and the upper-middle class will suffer a lot.
“On top of that, the recession is a done-deal. However, it is still uncertain how deep it will be and how long it will last. This puts the UK in a much worse position to face the winter months ahead than most other European countries.”
The economy expert further added that taxpayers will have to pay back a £20 billion bill if energy prices are frozen.
He said the UK government has “no other choice” than to increase support for lowincome households to help pay energy bills, though a £20 billion bill to freeze prices would be on taxpayers to pay back.
Christopher Dembik suggests Brexit and the Tory party’s lack of support for consumers have contributed to rising inflation levels.
Inflation hit 10.1 per cent earlier this month, a 40-year high, with the Bank of England warning this figure could be closer to 13 per cent by April next year.
Mr Dembik has compared the French government’s approach with the UK after Emmanuel Macron’s government froze prices at a four per cent increase earlier this year.
He said: “The United Kingdom is certainly facing as many economic issues as other European countries. But on top of that, there are disruptions related to Brexit too. This has accentuated severe inflation by increasing goods and labour shortage. Ultimately, this means much more inflation, which is likely to be double figures for many months.
“Inflation is also probably higher in the UK because the government’s support to limit the increase in energy prices is lower. In many European countries, the real rate of change in inflation is certainly undervalued because of the cap on energy prices. In France, inflation will likely peak close to eight per cent year-on-year. This is comparatively low. But the government capped energy prices this year, meaning there will be no increase on gas prices and electricity prices limiting the rise to four per cent in 2022. However, this is costly. To freeze prices, the UK government may have to commit close to £20 billion, as the French government have, which will likely be paid back in tax by the consumer in the long-term.”
More information from https://www.home.saxo/insights/news-and-research/authors/christopher-dembik website.