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ENGLAND’S ATTEMPT TO IMITATE PARTIAL REAGANOMICS

Harvest Global Markets :

“Reaganomics” is an economic recipe invented by Ronald Regan- the 40th president of the U.S. Ronald’s presidency was welcomed by a critical economic crisis-stagflation in 1981. Stagflation is a deadly combination of surging inflation rates and a contracting economy. Inflation of the U.S economy was at its peak, and the inter-banks rates had surpassed 19%. Ronald aimed to increase the economy’s output without increasing the general price levels in the economy because traditional economic theory states that given the current level of national productivity, any increase in aggregate demand will lead to soaring prices. Consequently, Ronald Regan picked up several appropriate economic tools to introduce an innovative approach to restrain the spreading virus of the stagflation. Ronald proposed increasing the aggregate supply by increasing the economy’s productivity; he introduced tax cuts, decreased government spending, and deregulated the market. Ronald believed a drop in marginal tax rates would have a trickle-down impact. He was of the view that by lowering the taxes, he could stimulate economic growth by attracting investments from the producer community.

Lizz Truss, England’s new Prime Minister, is trying the follow the path set by Ronald Regan. Due to Russian-Ukraine War, infuriating inflation, and aggressive monetary policy, the world is severely suffering from excruciating stagflation. England’s current inflation rate is hovering around 9.9% (a four-decade high), and its interest rates have hiked to 2.25%.

Soon after the fiscal policy announcement, Great Britain Pound slumped to its ever lowest level of $1.0324, and the Bank of England had to take an emergency move to buy back the pound from the market to save its currency from losing its value.

The market anticipates that the new fiscal policy of England is unsustainable as England documented the last two of its budgets in deficit, and decreasing its primary source of revenue may force the country to take on undesirable debts. Moreover, Truss’s policy may doom because the economy has no room to expand its productive capacity. Reaganomics was successful to some extent because during 1980’s, there was space in the labor market, and if one glances at the current labor market of the U.K, it is already jam-packed. The current unemployment rate of the U.K stands at 3.60%, i.e., lower than the healthy rate of 5%. Any increase in investment due to reduced taxes will lead to an increase in demand for labor; therefore, given the tight labor supply, wage rates may boom, resulting in enhanced cost-push inflation. Furthermore, the U.S had a fierce dollar at its back, and the country could afford to lose some of the value of its currency; however, GBP doesn’t hold the same level of strength.

The new fiscal policy may soon become a headache for the U.K, and the government may need to amend its fancy move.

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