UK heading for recession on BOE view even with Liz Truss tax cuts

Tory leadership favourite has pledged $47-bn tax giveaways

The UK economy is still heading for a recession on Bank of England projections even if Liz Truss becomes prime minister and pushes through her aggressive tax-cutting agenda, according to Bloomberg Economics.

The £39 billion ($47 billion) of tax giveaways proposed by the favorite to succeed Boris Johnson would reduce the depth of the slump expected by the central bank but still leave the economy smaller than it is now. 

The analysis published Tuesday calls into question Truss’s claim that a recession isn’t inevitable. She made her comments hours after the Bank of England warned the UK is facing almost two full years without a quarter of growth because of a deepening cost-of-living crisis.

The BOE forecasts, which anticipate a five-quarter recession beginning in the final three months of 2022, are based on the government’s cu­rrent tax and spending plans. 

Truss has said she’ll extend help immediately if she triumphs in the Conservative leadership race over Rishi Sunak. 

She’s pledged to reverse a payroll tax increases that took effect in April, suspend the green levy on energy bills and cancel a planned rise in corporation tax set to take place in 2023.

Bloomberg Economics, using its SHOK model of the UK economy, estimates her plans would see GDP shrink by 1.3 per cent between the end of 2022 and the end of 2023, slightly less than the 2.1 per cent assumed by BOE’s Monetary Policy Committee. A package of direct support similar in scale to the £15 billion announced by Sunak in May when he chancellor would limit the damage to 1.1 per cent.

“The cuts are unlikely to be enough to change the committee’s view that the UK is headed for a recession, and, as we explained here, will give the MPC reason to lift rates further in order to offset the inflationary consequences of higher government borrowing,” wrote Dan Hanson, who covers the UK for Bloomberg Economics.