On 23 September 2022, the newly elected UK Prime Minister Elizabeth Truss proposed a mini-budget aspiring to boost the post-pandemic economic recovery. The proposal aimed to achieve its objectives through tax cuts in various economic sectors, called “investment zones.” Besides a classical reduction of taxes for big companies and wealthy individuals, the plan proposes to eliminate stamp duty and reduce employment taxes, as well as further reductions in taxes after profit due to new write-off plans for investments in plant and machinery. Although the rampant inflation and the expansion of the British debt, Truss fiercely defended her policy as the right course for the UK economy, reassuring the public that she was “prepared to take difficult decisions” to set “a better trajectory for the long term,” and rejecting any idea of error. Moreover, the plan also aimed at capping the energy bills for private consumers after the soaring prices in energy commodities following the Russian invasion of Ukraine. Briefly, Truss’s idea could be condensed into one main objective: to shift the focus from income redistribution to income creation. Indeed, during the annual party meeting in Birmingham this year, the new UK prime minister said that “for too long, the political debate has been dominated by how we distribute a limited economic pie. Instead, we need to grow the pie so that everyone gets a bigger slice.” Regrettably, the reduction in state revenues and expansion in spending to maintain the proposed budget should have been financed by additional government spending and debt, which immediately triggered the Office for Budget Responsibility – Britain’s independent fiscal watchdog – to start an investigation into the repercussions of such policy.
Not surprisingly, foreign, and domestic investors immediately reacted after the policy announcement. An increase in budget spending through debt emission means that bond interest rates are likely to increase, thus changing investors’ expectations of the UK economy. Creditors commenced a downward trend in British bonds, selling them, thus generating a downward spiral for the Pound Sterling which reached its lowest value in four decades. After a week of defending her policy, Truss and her Chancellor of the Exchequer Kwasi Kwarteng decided for a humiliating U-turn regarding their policy idea. Most of the points regarding tax cuts are now eliminated or downsized, but the promise to cap or aid citizens with their energy bills remains still in place. During their exit strategy, chancellor Kwarteng took responsibility for his actions by claiming “I’ve said that I’ve listened. I get the reaction. I’ve spoken to lots of people up and down the country. I’ve spoken to constituents. I’ve spoken to MPs and councilors, and other people in our political system. But most importantly, I’ve listened to voters.”
However, many analysts and economists still believe that this latest desperate U-turn is too late to change investors’ expectations and reduce this ongoing spiraling crisis. First of all, the Bank of England, the British central bank, had to promptly intervene to calm down all the market turmoil, reassure the fiscal soundness of the UK economy, and avoid even grimmer repercussions generated by Truss’s policy, buying government bonds for a total value of £65 billion (€74 billion). This intervention confirmed investors’ fear and doubt regarding the future of the UK economy. Besides, the Institute of Fiscal Studies also sustained that this U-turn will provide no significant change in expectations since there still are around £43 billion (€49 billion) of her economic policy being funded by government borrowing. Therefore, Truss and her chancellor need to implement more muscular and firmer actions, altering other tax announcements made, if they want to really convince the public about their commitment to fiscal sustainability.
There are possible scenarios ahead based on the decisions that Conservative party members and the current government will take to solve the economic crisis and the new lack of belief and confidence from investors. According to the Guardian, there are worst, medium, and best-case scenarios. In the worst case, the party will soon start to vigorously turn against Truss’s policies and ideas, forcing her to amend numerous other parts of her program. This mutiny could create a less divisive agenda from the party due to the multiple compromises that Truss will be forced to complete, but still a problematic project to implement. Indeed, many Conservative politicians could use the government’s weakness as a weapon to coerce it to please their demand in face of a total failure. Therefore, resignations and dismissals will rise exponentially, identifying scapegoats for bad governance performance. Tories – the members of the Conservative party – would try to circumvent the 1922 regulation banning a confidence vote for the first 12 months of a government to save their seats in Westminster. This attitude could create a significant precedent for UK democracy and parliament. Otherwise, Tories could also begin to collect letters of no-confidence from as many party members as possible as a clear sign of the necessity to change the government leader.
In the medium-case scenario, Truss convinces other party members and the public opinion of her renewed commitment to fiscal discipline and more traditional Conservative values, saving her from domestic “coup d’état”. Tories would be more cautious regarding criticisms against their own party leader and Prime Minister, fearing that their open dissent could only worsen an already critical situation. The economic support planned by Truss is fully implemented during the winter, and public opinion becomes more appeasing toward the government after receiving aid. However, this climb in the poll statistics could still be insufficient or inadequate, enabling Labor Party candidates to win even more local elections and expand their electoral support before the general election in 2024.
In the best-case scenario, Truss defends strenuously and maintains her policies without receding. In this optimistic scenario, her policies are not only implemented, but also successful in the long term. The economy could grow again after the numerous subsidies executed during winter. After winning this political gamble, she reassures global investors and domestic markets, reducing the stress on the pound sterling and British bonds. In addition to this, she can further expand her agenda, also cutting taxes for other sectors and lower earners to improve public opinion’s perspective of the government. This policy also provides a significant boost ahead of general elections. Although the three scenarios just mentioned a reasonable and credible picture of the possible future of the Truss government, the reality is always in between. It will be difficult to predict what will really happen, but this gives us a fair idea of what to expect. What will happen next will shape the future of the UK as an economic and political power in a contested and unstable global system.
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