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Now Not The Time for U.K. to Raise Taxes, LSE’s Shafik Says

Now Not The Time for U.K. to Raise Taxes, LSE’s Shafik Says

Governments should not be raising taxes or cutting spending but investing in the economy to boost growth, according to former Bank of England Deputy Governor Minouche Shafik, in an apparent criticism of the U.K.’s plans to shore up its public finances.  

Speaking to Bloomberg TV, the director of the London School of Economics said it was still too early “to look at spending cuts and tax rises.” 

“The government shouldn’t withdraw economic stimulus prematurely,” she said. “This is a moment for investment. The best way to get out of a debt burden is to grow.”

Shafik added that the government’s “immediate challenge” is to provide economic support to help households, particularly the poorest, through the looming cost of living crisis. 

Higher energy bills and taxes, both of which hit in April, will cost the typical household 1,200 pounds ($1,600) a year, and officials have to “find out who’s going to be most adversely affected” and make sure the benefit system works to support them, she said.

Part of the hit to incomes comes from Chancellor of the Exchequer Rishi Sunak’s plans to raise 12 billion pounds from a 1.25% increase in national insurance contributions in April, which some in the Tory party have suggested should be scrapped. 

Shafik said the tax rise was “very particular”, as the revenues will be used to pay for health spending, but argued that “it’s fine to announce future tax rises … I just wouldn’t start worrying about that now.”

She added the Bank of England can do little to prop up economic growth right now because it has to focus on inflation, which is at a 30-year high.  The BOE, which hiked rates in December and is expected to move again next month, is “clearly entering a tightening cycle,” Shafik said.

©2022 Bloomberg L.P.