My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Don't be Fooled: CV19 Fiscal Measures Aren't Free

Updated: Nov 2, 2020

Taxes will go up in the U.K. once we are on the other side of the CV19 crisis, so be prepared. This morning, the U.K. government released 1Q20 GDP which declined 2% Q-o-Q to £513.3 billion. March GDP was down 5.8% vs February, the first indication of the negative trend that lies ahead. This dire release follows on the heels yesterday of Chancellor Rishi Sunak’s announcement that the furlough scheme in the U.K. would be extended from the end of June to the end of October (80% of monthly salary up to £2,500/month), which is costing an estimated £14 bln/month. The U.K. government, as many around the world, continue to balance on the knife’s edge between slowing the spread of CV19 and risking prolonged damage to the economy. The rolling 4-quarter GDP for the U.K. is £2.081 trillion, and the deficit for the year 2020-21 released on March 11th was projected to be £50 bln, or 2.4% of GDP. Through a combination of lower tax receipts and significantly higher expenditures to address the CV19 lockdown, estimates are that the deficit could increase to £275 bln or more, meaning a deficit-to-GDP (unrevised) of 13%. However, it’s worse. GDP will drop significantly from the projection used in the March 11th budget, with the Bank of England now expecting GDP to decline 14% in 2020 (to around £1.8 trillion). Factoring this in, the deficit-to-GDP in the U.K. could rise to around 15%. The U.K. proved responsible following the Great Recession by quickly raising personal and corporate taxes and slashing government expenditures, entering a difficult period of austerity in an attempt to reduce the deficit. Don’t be fooled – we are heading down that same path again, quite rightly. The programmes put in place to blunt the effects of CV19 aren’t free.

The U.S. has proven less responsible in this respect in the past, but rest assured that – whether the U.S. electorate chooses a Republican or Democratic President later this year – the enormous amount of fiscal stimulus will likely lead to higher taxes, lower government expenditures, or likely, both. This, or course, assumes that the President and Congress are responsible, collectively working together to bring down future deficits. The stakes are significantly higher in the U.S. because of the overall size of the economy (the largest in the world), the incredible amount of fiscal stimulus being unleashed to combat CV19, and the huge federal deficit, which was already at record levels before CV19. As painful as it will be, let’s hope that the President – whoever it may be – and Congress, do the right thing once that CV19 is a distant memory, and get the U.S. back on firmer fiscal ground.

Just don’t be fooled into thinking all of this aid is free, not matter where you live.


#UK #deficits #COVID19 #US #government #economy #rishisunak

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