Now that politicians seem to understand that fiscal policy has an immediate effect on the money markets, will the next government resort to a clamp down on government expenditure to avoid any further, large-scale borrowing?
Will we see a return to austerity?
If we do, it is highly unlikely that industry will resort to increased investment or to make improvements in productivity; two areas where UK businesses have fallen behind the rest of Europe and other western economies.
Far from seeing a relaxation in taxation, tax increases may be added to the austerity mix.
Our new government will have a tough time squaring a desire to reduce government debt whilst reducing inflation, interest rates, energy cost and other cost sensitive items that affect the Retail Prices Index.
Professional advisers will find themselves drawn into recue scenarios as clients’ businesses struggle to balance rising costs and falling demand for their products and services.
The notion that individuals and businesses can somehow replace the liquidity removed by austerity policies has always proved to be illusory. Sources of investment funding will hoard cash as returns on investment drop, and businesses that need the funds will likely have no reserves due to the other challenges of the past three years.
Hopefully, there is enough evidence from recent experience to guide the hand of the Treasury to manage a softer path than that determined by outright austerity. The UK economy desperately needs investment and improvements in productivity otherwise we will slip further down global rankings.
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