There are a couple of editorials today from the Wall Street Journal - wsj.com/articles/the-u… & @Telegraph that suggest financial markets do not understand the policy pivot now being undertaken in the U.K. A 🧵from someone who actually writes sell side economics research (1/n)
There are quite a number of pro supply side initiatives in #minibudget2022 worthy of positive appraisal. Accelerating key infrastructure planning approval, abolishing bonus cap & increasing work search conditionality/work coach engagement. 👍
On personal & corporate tax changes - the evidence that these (that are largely reversals of recent increases) can improve the performance of the U.K. supply side is unproven. Hard to argue (credibly) to clients that this helps support a trend growth uplift to 2.5%.
Running a much larger primary deficit to fund these tax changes will require (short term) higher Gilt yields & a lower Pound to clear the market of new issuance. Seeing that outcome does not make one a “Doomster” - it is an entirely logical reaction.
Now “Boosters” will say “why can’t the market look through to stronger trend growth?”. And here three factors are important. First, U.K. growth will (for some time) hinge on an exogenous factor - energy prices. So whether inflation & debt comes down is not in U.K. gov control
Second & a pet topic of mine: Credibility. Some of those advocating supply side reforms are same voices who promised a v different Brexit outcome. This damages credibility of those voices, ex ante, even if they are eventually prove correct. That is rational - track records matter
Third, this pivot has take place amidst a flurry of attacks on OBR, HMT & BoE. These institutions are definitely not above criticism & no macro framework is forever. BUT independent institutions matter for market sentiment (see Turkey for details) whether we like that, or not.
Overall, I would be delighted to see this week’s #minibudget reforms (& some good tax reform stuff suggested in todays papers) lean into slowing trend growth in the U.K. But the idea that financial markets are receiving imperfect information/acting irrationally does not stack up
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