Amid an unprecedented public outcry and the threat of market meltdown, the U.K.’s new government has been forced into a humiliating U-Turn, inverting the huge package of tax cutsIt recently announced that it will benefit the 1 % of income earners who are the most wealthy.
The government — led by Prime Minister Liz Truss and following economic policy shaped by Chancellor Kwasi Kwarteng — had announced the tax cuts a little over a week ago, on September 23. This is undoubtedly one of the most political and devastating reversals in U.K. history of a key government policy.
The Truss-Kwarteng package that plunged the UK’s economy and political system into crisis, and which was not subject to the rigorous scrutiny applied to full-blown budgets, had abolished the top rate of tax for high earners. It was promoted as the largest tax-cutting package in Britain for half a century, and was backed by government borrowing. Kwarteng and Truss, however, announced that the package was only for a limited purpose. a precursor to still more tax giveaways to the wealthyThey are pushing for a low tax, low regulation, and low-social safety net model of the Brexit-era economy.
The tax cuts reached a total of £45 billion. But any benefit to the country’s economy that might have been followed from this giveaway was instantly obliterated by the vast economic damage unleashed by it.
Last week, the markets responded to Kwarteng’s mini-budget by melting down,The British currency plunged and it looked like it would crash below parity against the U.S. dollar at one point. The Bank of England was forced to announce that it would, if necessary, embark on “shock-and-awe” interest rate increases in order to protect the pound, and it then had to commence a £65 billion bond-buying spree to preserve the liquidity of pension funds and other big institutional investors. It took a few hours for the announcement to take effect. it looked like the entire pension-investment system in the U.K., worth trillions of pounds, was in crisisThis could have led to a catastrophic outcome that could have triggered the same global financial crisis that occurred 14 years ago when the U.S. financial sector collapsed.
Tens of billions of pounds of value were wiped out of government bond investments overnight;People who traveled overseas suddenly discovered that their cherished British pounds had gone a lot farther in September than they had a month ago. At its nadir, the value of the pound fell to the equivalent of $1.03 in U.S. currency, and it looked for a moment like it would soon end up worth less than the U.S. dollar, a massive national humiliation that, had it occurred, could have brought down Truss’s government just three weeks after it was formed. The pound ended the week at an all-time low of $1.11, despite the massive intervention by the Bank of England. 20 percent lowerIt is now much more than it was a year ago.
So uncertain was the mortgage market about Britain’s financial future and the price of borrowing over the coming months that some of the country’s biggest lenders suspended the issuing of new mortgagesMany borrowers were left stranded in the middle last week as they attempted to secure their home loans.
The Bank of England has told Kwarteng that the country is already in a recession. In the aftermath of the mini budget and the chaos in U.K. market markets, things will likely get even worse in the coming months. Analysts are now anticipating a housing market crashThe U.K. is seeing rising borrowing costs. Contrary to the U.S., which has a lot of fixed-rate 30-year loans for mortgages, most British mortgages are not long-term. needing to be refinanced after two or five years, or, for nearly a million mortgage holders, based around entirely adjustable rates. As a result, the U.K.’s housing market, and those with mortgages, are particularly vulnerable to rapid shifts in the cost of borrowing.
As all of this unfolded the following: International Monetary Fund issued a warning, of the kind it more often issues to deeply corrupt, insolvent nations, that the government’s moves were both inflationary — pumping far too much money into the economy just at a moment when there is an internationally coordinated effort to rein in inflation by tightening up on monetary policy — and likely to fuel rampant economic inequality.
The Financial Times ran a chart detailing that, out of 275 political parties spread over more than 60 countries that secured at least 5 percent of the vote in recent elections, Truss’s government was pursuing the most right-wing economic policy on Earth. On a scale of 1 to 10, based on a series of economic policy metrics, it awarded the U.S. Republican Party just over 8 — about where the Brothers of Italy, the new neofascist government of Italy, were on the scale – and Brazilian far right leader Jair Bolsonaro’s Social Liberals a 9. Truss’s Conservatives, in the U.K., ended up at 9.5, about as right-wing economically as the Financial Times’s analysts say it is possible to be, and far to the right of where Boris Johnson’s government was prior to Johnson’s political demise.
The Washington Post prominently ran an opinion piece denouncing Truss’s government as “bonkers.” El Español, in Spain, blared the news that, “The UK Seems To Have Imploded.” And across Europe, newspapers, already furious at the U.K.’s Brexit theatrics, have fallen over themselves lambasting Truss’s stewardship of the economy.
Meanwhile, the Conservative Party’s support continues to erode, and the U.K. government’s crisis of legitimacy accelerates. Recent polls showed that the majority of people support the Conservative Party. Labour Party, led by Sir Keir Starmer, was 17 points ahead of the Conservatives. . YouGov pollLabour was up by astonishing 33 percent, the largest lead in polling history in the U.K. Only one fifth of the voters polled said that they would vote Conservative in next year’s election.
It’s hard to imagine a more inept opening act than that put on by Truss and her team of right-wing zealots over the past few weeks. Truss wasn’t chosen by the electorate, but by the 160,000 members who voted for her in the British Conservative Party. She is the third leader in the Conservative Party in the same number of years. Her personal mandate is minimal, as she has not led her party to victory in general elections.
Truss has a tendency to imitate Margaret Thatcher when she ascended to the premiership. Now that she is in power, Truss is much more like the Wizard of Oz. She talks the big talk, but at the end of the day, it’s all smoke and mirrors. Truss’s team was exposed by the imploding financial markets last week. If the latest polls show, the British public was disgusted at what they saw.
It’s unlikely that Truss and Kwarteng’s humiliating policy retreat today, backpedaling on a tax cut that only a few days ago they had said was vital to the future growth of the U.K. economy, will appease the infuriated British electorate. If anything, it will only make Truss and Kwarteng look more inept and their stewardship of the U.K.’s economy look even more haphazard.