With less than a month as Prime Minister of the United Kingdom, Liz Truss has settled an economic and political crisis. Her electoral platform was based on the fact that she would pursue liberal policies like Thatcher did, such as tax cuts and deregulation to stimulate economic activity. With these elements she put together a radical economic package, making it known in a hasty way almost two weeks ago. Just four days after the announcement, the lack of credibility on the part of the financial markets fueled a sharp drop in the pound sterling. The signal was very clear: the markets would not believe in a tax reduction plan without a counterparty to compensate for the loss of income. In other words, without an adjustment on the spending side, a fiscal imbalance is created. Even the IMF urged the government to reconsider tax cuts, adding to the volatility.
Truss’s economic stimulus plan is doomed to fail from the start because this supply side economics package is being implemented under conditions of rising interest rates and high inflation. This reached an annual rate of 9.9% in August, which led the Bank of England to increase its policy rate by 50 basis points on September 22 to reach 2.25 percent.
Faced with this situation, instead of rectifying, the government found out. Finance Minister Kwasi Kwarteny surprisingly announced the abolition of the top income tax bracket of 45% and insisted on the success of the program. But the markets are not fooled: the pound reached a new historical low and to avoid a crisis in the bond market (guilt market) and the mortgage market, last week the Bank of England began a massive purchase of bonds.
Truss intends to emulate Thatcher, but the historic prime minister, before implementing her pro-free market stimulus policies, was concerned with lowering inflation and stabilizing public finances. Ignoring the above is leading to a conflict of lack of coordination between the government and the central bank. As Germany’s finance minister put it: “The government has its foot on the accelerator and the central bank has it on the brake pedal.” Officials of the Bank of England have expressed that given the irresponsible fiscal policies proposed, they will require a significant response of monetary tightening. This will have the unavoidable consequence of plunging the economy into a recession.
The economic crisis is complicating the political landscape for Truss. The Labor Party takes advantage of the situation and presents itself as fiscally responsible. Truss wants to speed up the package to deliver results before the next general election, no later than 2024. But in the polls, Labor leads the Conservatives by 17 percentage points.
But in the midst of the economic and political crisis, what is really important is the announcement that by Christmas the English will have coins in circulation with the face of the new King Charles III.
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