Amid unprecedented public outcry and the looming market meltdown, Britain’s new government has been forced into a humiliating about-face, reversing the huge package of tax cuts it recently announced to benefit the top 1 percent of income earners.
The government – led by Prime Minister Liz Truss and following economic policies shaped by Chancellor Kwasi Kwarteng – had announced the tax cuts just over a week ago, on September 23. This must surely count as one of the fastest and most politically devastating reversals at the heart of government policy in British history.
The Truss-Kwarteng Package, which plunged the UK economy and political system into crisis and was not subjected to the rigorous scrutiny that adult households are subject to, had eliminated the top tax rate for high earners. Backed by government bonds, it was touted as the UK’s biggest tax cut package in half a century. Meanwhile, Kwarteng and Truss announced that the package was just a precursor to even more tax breaks for the rich amid their zealous pursuit of a low-tax, low-regulation and social-network model for the Brexit-era economy.
The tax cuts totaled £45 billion. But any benefit to the country’s economy that could have accrued from this giveaway was immediately offset by the enormous economic damage it caused.
Last week, markets reacted to Kwarteng’s mini-budget with a meltdown, and the British currency plummeted, at one point appearing to fall below par with the US dollar. The Bank of England was forced to announce it would embark on “shocking” rate hikes if necessary to protect the pound, and then had to launch a £65bn bond-buying spree to maintain the liquidity of it pension funds and other large institutional investors. For a couple of hours, It looked as if the entire UK pension investment system, worth trillions of pounds, was in crisisa catastrophic outcome that could potentially have sparked the kind of cascading global financial crisis that was unfolding when the US financial system collapsed 14 years ago.
£10bn of value wiped out of government bond investments overnight; and those traveling overseas suddenly found their vaunted pounds sterling far shortest at the end of September than a month earlier. At its low point, the value of the pound fell to the equivalent of $1.03 in US currency and it looked for a moment like it would soon be worth less than the US dollar, a massive national humiliation, which, if it had happened, could have happened, brought down Truss’s government just three weeks after it was formed. As it was, despite the Bank of England’s massive intervention, the pound ended the week at a near-historic low of just $1.11, some 20 percent lower than a year ago.
The mortgage market has been so uncertain about Britain’s financial future and the cost of borrowing over the coming months that some of the country’s biggest lenders suspended new mortgage lending in the middle of last week and many borrowers were stuck in the middle of securing their home loans.
The Bank of England told Kwarteng that the country was already in a recession. And after the mini-budget and chaos unleashed on UK markets, things are likely to get a whole lot uglier in the coming months. Analysts are now predicting a collapse in the UK property market as borrowing costs soar. Because unlike in the US, where most mortgages are now 30-year fixed-rate loans, most mortgages in the UK are short-term and either need to be refinanced after two or five years or, for nearly a million mortgage holders, on an around-the-clock basis fully adjustable rates. As a result, the UK housing market and those with mortgage loans are particularly vulnerable to rapid shifts in the cost of borrowing.
As all of this unfolded, the International Monetary Fund issued a warning, as it more often does to deeply corrupt, insolvent nations, that the government’s moves were both inflationary and pumping far too much money into the economy at just a moment when The one she’s been in is an internationally coordinated attempt to contain inflation by tightening monetary policy – and likely to fuel rampant economic inequality.
That financial times compiled a table showing that the Truss government had the most right-wing economic policies in the world out of 275 political parties in more than 60 countries that garnered at least 5 percent of the vote in the last election. On a scale of 1 to 10, based on a range of economic policy indicators, the US Republican Party gave it a just over 8 – about where the Brothers of Italy, Italy’s new neo-fascist government, sat on the scale – and the Brazilian far-right Leader Jair Bolsonaro’s Social Liberals got a 9. Truss’s Conservatives in the UK landed a 9.5, about as right-wing economically as they do financial timesAnalysts say it’s possible, and far to the right, of Boris Johnson’s government ahead of Johnson’s political demise.
That Washington Post prominently published an opinion piece denouncing Truss’s government as “crazy.” El Espanol, in Spain, blared the news that “Britain appears to have imploded”. And across Europe, newspapers, already furious with Britain’s Brexit theatre, have fallen upon themselves by berating Truss’s leadership of business.
Meanwhile, support for the Conservative Party continues to wane and the UK government’s legitimacy crisis is accelerating. Recent polls had shown Sir Keir Starmer-led Labor Party ahead of the Conservatives by 17 points. Late last week, a YouGov poll showed Labor is up a staggering 33 percent, one of the biggest clues ever released in UK polling history. Hardly one in five voters surveyed stated that they would vote conservatively in the next election.
It’s hard to imagine a more inopportune opening show for Truss and her team of right-wing zealots over the past few weeks. Truss was not elected by the general electorate, but by a vote of the 160,000 members of the British Conservative Party. She is the third leader of the Conservative Party in as many years, and having failed to lead her political party to victory in a general election, her personal mandate is minimal at best.
Rising to the post of Prime Minister, Truss has shown a penchant for emulating the Iron Lady, Margaret Thatcher. Instead, now that she’s in power, she looks a lot more like the Wizard of Oz. She talks all the big talk, but at the end of the day it’s all smoke and mirrors. Last week, the imploding markets drew back the curtain on Truss and her team. If the latest polls are any indication, the British public was absolutely repelled by what they saw.
Truss and Kwarteng’s humiliating policy retreat today, at a tax cut they said just days ago was vital to the future growth of Britain’s economy, is unlikely to appease angry British voters. If anything, it will only make Truss and Kwarteng look even more inept and their management of Britain’s economy even more haphazard.
