The Allianz Group’s chief economic adviser, Mohamed El-Erian, said the UK should backtrack on promises to cut taxes.
Referring to another market intervention on October 11 by Bank of EnglandAl-Arian said in an interview with BBC Radio that the United Kingdom is “in a very fragile situation”, especially when the Bank of England talks about financial stability, according to what Al Arabiya.net has seen.
It comes after the Bank of England warned of “material risks” to the UK’s stability due to lower prices for government bonds – a key tool in which the government raises funds, which are usually seen as among the safest investments.
The concern led the bank to announce a program to buy up to 5 billion pounds of government bonds linked to the index daily until next Friday, October 14. The day before, the bank had already doubled the total daily amount of bonds it could buy to £10 billion after it announced its bond-buying program on September 28.
The instability was initially caused by the UK’s mini budget. Former Bank of England Governor Mark Carney said markets are sending a clear message to the UK government “that there is a limit to unfunded spending and unfunded tax cuts in this environment”.
El-Erian explained that when the yield, or interest rate on government bonds, becomes unregulated, the mortgage market begins to run into problems, causing people to worry about their economic future.
“So they start changing their behavior, and if you’re not careful, the average person will not only worry about whether their children can be better off in the future, they will worry about whether they can maintain their standard of living now. And then you can unleash The beast of economic decline is self-reinforcing and labor-reversing, which is very difficult to reverse.”
El-Erian added that the UK needed to “go back to the first reason”, because the main cause of instability in his view was the government’s announcement of very large unfunded tax cuts.
He said, “What they got back only affects about 5% of what has been announced. I don’t see an alternative, but the government says ‘we will not lower taxes now and we may lower them in the future.’ The alternative that has been talked about – spending cuts to make up for the tax cuts – is this alternative. It would actually cause a lot of damage and the markets would not swallow the alternative of spending cuts. The government needs to backtrack on its promises to cut taxes.”
In addition, El-Arian suggests restoring the basic income tax cut, because “that’s a really expensive price.”
He said: “The Bank of England intervened, and this contradicted their anti-inflationary policies in order to stabilize the markets. It did not take long for market turmoil to return, but the government, should return to the basics of the problem.”
El-Erian is not so confident that people generally believe that tax cuts in and of themselves will encourage growth, “certainly not stimulating growth in the midst of financial turmoil.
What spurs growth are structural reforms aimed at increasing productivity and aiming for a more efficient economy.” The economist said: “These should stay and the government should not threaten them with something else that will cause financial turmoil.”
El-Erian expected the markets to remain “tense” with the continued rise in interest rates, and turmoil in mortgage markets amid a decline in consumer and business confidence. “All of this in the end means not only lower actual growth, but lower potential growth as well. This goes against what the government is trying to do.”