UK correcting course

Liz Truss served as Prime Minister of the United Kingdom for 45 days, making her term the shortest in UK history.

However, in those two weeks Liz Truss will also go down in history for having been the last Prime Minister to be received by Queen Elizabeth II and, more importantly, for having unleashed chaos in the financial markets with her ill-advised economic policy decisions. .

As we discussed in our October 4 issue, the beginning of the end for Truss began on Friday, September 23, with the presentation of an ambitious plan to stimulate the economy (setting a medium-term goal of 2.5% annual growth) based on a reduction of taxes and an increase in subsidies to energy prices.

The package would be financed in its entirety with an increase in the fiscal deficit and greater indebtedness. In addition to being unfeasible in the current context, the plan was presented without first generating a consensus within the Conservative Party itself and without being accompanied by a feasibility study by the Office of Budget Responsibility.

We already know the consequences, the pound sterling depreciated to its lowest level in modern history, reaching almost parity with the dollar. The rate on UK long-term government debt soared from 3% to 5%, a level not seen since 2008.

This abrupt movement in long-term rates, which has been the most violent since 1957, implied a brutal handicap for pension fund investments, generating total chaos in the market that required the decisive intervention of the Central Bank of England (BoE, for its acronym in English).

Truss tried to right the damage by calling for the resignation of his finance minister, Kwasi Kwarteng, and rolling back the most controversial aspects of the stimulus plan.

The new finance minister, Jeremy Hunt, eventually scrapped virtually all of the tax cuts and markets stabilized. Rates have eased from their peak of 4.5 to 3.6% while the British pound has appreciated from $1.03 to $1.15 per pound.

However, the political damage had already been done and Liz Truss was forced to resign from her post, giving rise to a search for a new Prime Minister. This Monday, the Conservative Party named Rishi Sunak as its new leader and after a meeting with King Charles on Tuesday, he became the new Prime Minister of the United Kingdom.

In his acceptance speech, Sunak acknowledged the deep economic crisis and promised to work to resolve the problem. After the Truss debacle, which attempted the madness of implementing a fiscal stimulus plan financed by an increase in the fiscal deficit and debt levels when inflation exceeds 10% (its highest level in decades), Sunak’s economic mandate is clear: implement a responsible and orthodox fiscal policy.

This implies that if the United Kingdom insists on the implementation of subsidies (focused on reducing inflation), these will have to be financed with increases in taxes and reductions in other areas of spending.

Rishi Sunak is a political figure who breaks the traditional UK mould.

First of all, Sunak is the son of immigrants of Hindu origin but based in East Africa (his parents emigrated to the United Kingdom in the 1970s). Second, Sunak and his wife are multi-millionaires.

Sunak got his MBA from Stanford and worked at Goldman Sachs and a couple of investment management funds before becoming a politician. As a politician he has held popularly elected positions as a member of Parliament.

Additionally, the new Prime Minister served as finance minister in the Boris Johnson government from February 2020 to July 2022. During this period, Sunak was responsible for the implementation of stimulus measures to cushion the economic crisis generated by the arrival of the Covid-19.

joaquinld@eleconomista.mx