British Prime Minister Liz Truss is at risk of sending Britain’s economy into the abyss. Chancellor Kwasi Kwarteng’s latest £45bn mini-budget for tax cuts, just step on the gas. His humiliating change of heart this week on the proposed scrapping of the top income tax rate of 45 percent for higher earners has done little to change the course of travel.
or the whole political drama of the reversal of the tax cuts for high earners, it accounted for just £2 billion, which amounted to a £45 billion tax cut budget. From today’s perspective, the rest remains “uncovered”.
Even if you look at the UK media coverage this week, the pound regained value after recovering from the embarrassing slide and the immediate sell-off in UK government bonds eased. It was as if the turnaround had worked – and yet it actually changed very little.
The issues that raised the Kwarteng budget are all still there. The currency sold off and the cost of UK borrowing rose for three reasons – the uncovered cost of tax cuts; the fact that there were no independently verified forecasts; and the fact that the chancellor said on national television that he was planning further tax cuts.
He rolled back the further cuts fairly quickly. The Independent Budget Office (OBR) will publish its forecasts and the Chancellor has only withdrawn part of the entire tax package.
All the big problems are still there. The bond market only calmed down because the Bank of England stepped in and bought up bonds. That should end this month.
Mr Kwarteng has to come up with a medium-term plan on how he intends to reduce the UK’s public debt. In the medium term, he’s been on the job much longer than he’s likely to be. The tide will dry up sooner rather than later for this chancellor.
But with Liz Truss, conservatives need to be more careful. Another change in leadership could trigger a general election, and they are 32 per cent behind the Labor Party in the polls.
More deadlines and hot spots are coming. The first is next Friday, the date the Bank of England announced it was ending its bond-buying support scheme. The next will follow in the following month, when the chancellor is due to publish his plan to get government finances under control. Keep in mind that the UK will borrow around £190bn.
At the moment, the huge gap between the value of what it imports and what it exports is about 8 per cent of its GDP, or £240bn. Earlier this year, it was overtaken by India as the world’s fifth largest economy.
Another focus is previous commitments to increase welfare payments or benefits in line with inflation. This could cost up to £12bn. A hike of around 5 percent would save several billions, but it won’t sit well with Tory MPs who smell the political rot in their own government.
The new chancellor faces difficult decisions when it comes to presenting a credible plan to bring Britain’s finances and national debt back into balance.
Difficult decision number one is to roll back any more of his proposed tax cuts — which would wipe out whatever little credibility he has left.
Difficult decision number two would be to cut public spending, which could hasten a Tory party election implosion for years to come.
He could try to convince the independent Office of Budget Responsibility to raise its economic growth forecasts, which would theoretically balance the books, at least on paper. This would be a very difficult sale, especially given the attention their verdict on his plans is likely to receive.
He could promise to cut spending, but in a few years, after the next election. It would push his plan firmly into the realm of pure fiction.
His final option is to disagree with the OBR on his projections and assessment. This would be highly risky and would only work if Mr. Kwarteng and the government went into this process with an enormous stock of credibility and a track record of success. Both are missing.
The Tories have put the UK’s public finances in a potentially dangerous state. For this reason, whatever plan Mr Kwarteng proposes, the markets will look on and shoot the sell button on UK bonds and the pound.
Since the Brexit referendum of 2016, rhetoric has dominated political discourse in the UK. It is as if the ruling party’s chauvinistic language is finally being phased out.
Several senior business figures attended the Conservative Party conference in Birmingham later in the week.
You’d think they’d be smitten with politicians who have promised to cut taxes, lift the cap on bankers’ bonuses, subsidize utility bills, and advocate “growth, growth, growth.”
According to one financial times journalist was present, the opposite was the case. He spoke to three UK industry leaders from global companies. One said: “My main job is to persuade the global board to choose the UK over other options and it’s getting harder and harder.”
Another, accompanied by his global chief executive in Birmingham, described the whole experience as “borderline embarrassing”.
Rather than lean towards a government that could be seen as pro-business, there is a sense that UK-based international companies are struggling to persuade their global parents to invest in the UK.
Even the EU regulatory bureaucracy fireworks promised by Liz Truss at the conference have not been particularly welcomed by business leaders who don’t know what it will replace and who have spent big bucks to comply with the old rules.
Given this uncertainty, there is no room for gloating this side of the Irish Sea.
An unstable British economy is not good for us. What we could gain in new foreign investment from multinationals we would lose from Irish exports to the UK, which still provide thousands of rural and regional jobs in everything from food to tourism.
https://www.independent.ie/opinion/comment/the-uk-economy-is-in-peril-but-it-needs-far-more-than-a-u-turn-42049564.html The UK economy is in jeopardy, but it needs much more than a turnaround