A an obscure prime minister, a mysterious chancellor – and a plan reminiscent of a 1980s masquerade party.

It’s back to the future in Downing Street for the third reboot of UK politics in a decade.

UK Government Mini-budget 2022 cuts taxes and aims to stimulate growth, even as the Bank of England holds back elsewhere.

Which is not to say that PM (and ever royal understudy) Liz Truss and Chancellor Kwasi Kwarteng are not doing the right thing by cutting taxes now and putting off the bill for later.

Time will tell. But the UK economy has hardly moved according to previous plans, and there is reason to try something different.

Specifically, performance has been in a rut for ten years:

Source: LSE/ UNS

Grief indeed, and there will be something for everyone when it comes to apportioning blame.

The LSE paper looks at Britain’s impact on financial services during the 2008-2009 crisis, subsequent austerity measures, under-investment in infrastructure and the ongoing hurdle of Brexit.

The right-wing point of view would be at the forefront of the state’s incessant expansion.

Others may accuse UK PLC of depending on cheap labor rather than investment in technology.

More recently, the pandemic has not helped.

Pick your poison. There is clearly some disease here.

As for the medicine, I’m sure there is a political dimension to the bottle that Prime Minister Truss reached for. But at least I am flattered by her statement willing to be unpopular. Her admission – six years after Brexiters said it would be an easy prize – that there would be no US-UK trade deal in the near future this is the beginning.

Populism has done a lot of damage in recent years. The spell cannot be broken soon enough if we are to make the best of what it has left us.

Highlights of the 2022 mini-budget

Which brings us to the tax cuts and repeals and other measures just announced.

Here is a summary of Friday’s mini-budget from BBC:

– The basic rate of income tax will be reduced from 1p to 19p from April 2023

– The 45p tax rate for those earning over £150,000 will also be scrapped from April next year.

– The level at which home buyers start paying stamp duty doubles from £125,000 to £250,000

– First time buyers will pay no stamp duty on homes priced at £450,000 compared to £300,000

– The planned increase in corporate tax from 19% to 25% is cancelled

– The increase of the national insurance by 1.25% will be canceled from November 6

– The cap on bonuses for bankers, which limited remuneration to twice the salary level, is reduced

– The cost of subsidizing electricity bills for both homes and businesses will be £60 billion over the next six months

– Strike: Unions will have to make offers to members during wage negotiations

– The UK will introduce sales tax-free shopping for overseas visitors

Expect more to come as journalists and jerks dig into the details.

Just one example is the controversial IR35 legislation be revoked.

The overall picture is that the UK government is cutting its revenues even as spending rises due to inflation and higher debt servicing costs.

Oh, and the rich just got richer.

It looks bad in the short term, but it’s not completely crazy. One could even argue with his usual counter-cyclical Keynesian economics.

But balancing will be difficult.

Singapore sling

The stated goal is growth. To resort to the toxic B-word is to take a step towards a simplified Singaporean model of a ‘business first’ post-Brexit UK.

Lower taxes, looser regulation and smaller staff (/safety net) were traded for higher growth.

Leaving aside whether this is anything like what the majority of disgruntled working-class Brexiteers voted for. If you add up any small upsides and take away the huge downsides, I see no economic benefits to Brexit. But in purely economic terms, I have long said that moving away from the European model towards a more rigid American-style capitalism is the closest thing to eliminating economic deficiencies.

Again, this is not what I voted for. But there is an economic logic in this.

However, I am skeptical about how far Britain can go in this direction.

We are not Singapore – neither demographically, nor culturally, nor geographically. We don’t live in small apartments in the same city with our elderly parents. UK politicians can turn on wastewater to be discharged the sea, but the EU will not allow low-quality goods to be dumped on the continent. We will have to meet the standards of our largest trading partner, and it will naturally resist regulatory arbitrage at its borders.

What about government spending? We get old and sick. The National Health Service is the UK’s closest thing to a religion. And I would argue that the public’s sense that government should solve its problems has only grown over years of populist magical thinking.

It’s hard for me to see growth coming wide and fast enough to offset the pain of actually taking the ax to public spending if that’s the next hit.

Elections in 2025. I guess then we will get the verdict.

Interest rates can spoil the party

Life is further complicated by the macroeconomic backdrop, which is (mostly) not created or controlled by government.

Inflation is rampant and the Truss has already (rightly) signed up to borrow billions to ease the energy crisis for individuals and enterprises.

We are more or less at war with Russia – and not much one hundred billion is the ultimate price of a win (or even a stalemate), then it will be cheap compared to the most expensive menu fees.

However, while the energy price cap is expected to limit official inflation figures in 2023, rising borrowing is putting more pressure on Britain’s creaking balance sheet. This could be long-term inflation.

Already the Bank of England went interest rates this week by another 50 basis points, to 2.25%.

This is the highest level since 2008. But this schedule is even more frightening (with permission Ed Conway from Sky News), showing how peak rate expectations have soared in just a few months:

The expected peak will increase by 2% to 4.75% in just a few weeks!

And while that may not seem like much to old timers, Conway is right to point out that we are far more in debt than when higher rates last prevailed.

Indeed, according to his calculations, if rates were to reach 6% – not expected, but then again look at the rate of change above – the mortgage burden would be similar to that which led to the housing market crash of the early 1990s.

Credit markets are also down

Then we can see the contours of the economic struggle.

The Truss government decided to go for growth, as we used to say. Today’s tax cuts take tens of billions a year out of the public purse and back into our hands.

But the UK government has a lot of debt. And the cost of maintaining this debt is already rising rapidly with rising interest rates.

Indeed, the 10-year gold yield jumped almost 0.5% after Kvarteng’s mini-budget:

Source: MarketWatch

Lower taxes and austerity means less fiscal tightening — perhaps even tax relief — just when we’re facing huge inflationary pressures.

Which, given the Bank of England’s inflation target, in turn means higher interest rates. And this will worsen the balance of households and even threaten the collapse of housing construction.

It creates an impetus for me to pull you between the Chancellor and the Bank of England.

Politically, it takes some pressure off the Trail. Her government will cut taxes, leaving more money in people’s pockets. The Bank of England can be the bad guy by taking money back at higher rates.

It is hoped that faster growth will – among other things – calm capital markets and contain borrowing costs.

The risk is not.

Sterling is down almost 2% this morning as gold yields rise.

I wouldn’t say it’s a huge vote of confidence, although to be honest it’s more a reflection of growing uncertainty.

Giving Peter to pay Paul

One can only guess how the push will resolve itself, pull me.

Similar Thatcherite direction in the 1980s did bring a growth spurt. I also argue that it helped Britain break out of secular decline.

But inflation was a fading threat by the time the Thatcher boom really got going. We also had windfalls from North Sea oil to plug the cracks.

Perhaps the best way to conclude is to ask what it means to the typical person Maneuver a reader who saves diligently and strives for financial independence?

Well, first of all, I don’t think it should change anyone’s long-term strategy.

Then again, UK governments are coming in like buses these days. The 2025 general election could easily change the situation.

But in general terms, I would say that it is tactically advantageous for us, but strategically less certain.

From a personal perspective, it’s hard to argue with lower taxes. More money in your pocket means more savings and investing.

I also believe that ISAs and SIPPs are safe under Truss and Quarteng. Perhaps savings – especially Lifetime support for pensions – may even begin to grow again.

In the best-case scenario, the UK avoids the underperformance trap, GDP grows and we manage our rising public debt with greater cash flows from a larger base.

But there is certainly a reverse scenario of this steady accumulation of debt coupled with more polarizing economic outcomes. (Besides, I don’t see much infrastructure here).

Be careful what you wish for

The UK FIRE movement is also a kind of two-headed beast.

We will benefit from laissez-faire policies in the accumulation phase – especially our favorable tax havens like MSA.

But we rely indirectly on government support as we maintain a low level of tax on devolution and – crucially – assume that the NHS will be there to look after our health needs.

Very different from the US FIRE– searchers. They may earn and save more, but face higher health insurance costs. This could keep them in the workplace long after their British brethren think so.

You should also remember about the state pension. This is a big boon for a typical British FIRE-ee.

Therefore, most of us will not benefit from an excessive rollback of the state and its services. Not to mention the darker possible scenarios, which I won’t dwell on today.

Of course, there’s not much we can do about it individually – other than save more, invest wisely, pay attention and hope for the best.

But what do you think? Let us know – focusing on the economy, not the politics, as much as possible – in the comments below.

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