Despite the astonishment and dismay at the instability that has engulfed the new British government, this crisis was anticipated.
When Liz Truss stood for Conservative Party leader this summer on a programme of massive tax cuts, her opponent Rishi Sunak advised against starting on a borrowing binge at a period of rising prices.
On Friday, the last threads of that fairy story came undone. Prime Minister Truss dismissed the chancellor of the Exchequer, Kwasi Kwarteng, after his tax-cutting scheme shook the markets and caused the pound to plummet. She also declared intentions to reintroduce an increase in corporation taxes, thereby abandoning her supply-side agenda in favour of Mr. Sunak’s proposals.
It was unclear if the sacrifice of Mr. Kwarteng, one of Ms. Truss’s closest colleagues and the architect of the tax cuts, would be sufficient to preserve her own career. But it was a clear indication of the price the prime minister paid for snubbing economic orthodoxy, avoiding budgetary scrutiny, and rowing against global monetary trends — all in pursuit of her goal of being a free-market rebel.
For some critics, it was a dismal conclusion to 12 years of Conservative-led governments, a period that included the painful austerity policies of Prime Minister David Cameron and his chancellor, George Osborne; the bitter debates over Brexit under Prime Minister Theresa May; and the massive state aid distributed by her successor, Boris Johnson, during the coronavirus pandemic.
Britain’s economy has stalled for more than a decade, and none of these drastically varied strategies have been able to restore it. Some of them, such as the Brexit, may have hindered it even more by imposing new trade obstacles.
There are several indicators of the country’s economic decline: India just surpassed Britain as the fifth-largest economy in the world. It is the only industrialised country in the Group of 7 whose GDP is less than it was before the outbreak. Recent volatility has given Ireland the unpleasant distinction of being the leading source of worry at G7 finance meetings, displacing Italy.
According to analysts, the most recent crisis has also revealed a deeper tension in British politics, particularly on the right: a desire for the low-tax policies prevalent in parts of the United States, but also a desire to preserve the National Health Service and other institutions of a European-style welfare state.
Ms. Truss’ tax-cutting stance resonated well with Conservative Party members, who chose her against former chancellor Mr. Sunak. The roughly 160,000 members who, due to a curious quirk of Britain’s parliamentary system, elected the leader of a nation of 67 million people, were unmoved by his warnings that Britain needed to control inflation before it could decrease taxes.
Jonathan Portes, a professor of economics and public policy at King’s College London, said that it took the Conservatives around ten days to recognise that the government’s budgetary policies were unsustainable. However, this does not solve the issue because there is no apparent alternative method for a nation that want Northern European public service standards and American tax levels.
Ms. Truss bets that replacing Mr. Kwarteng with Jeremy Hunt, a former foreign secretary who voted against Brexit, supported Mr. Sunak in the leadership contest, and represents the moderate wing of the party, will stabilise the markets and assist the government in regaining its credibility in the short term.
The issue is that Ms. Truss’s policy programme is in disarray, which raises doubts about how she can claim a mandate to remain in power. Even before the current turmoil, her claim to power was tenuous: less than a third of Conservative legislators backed her in the first round of the leadership election.
Throughout the campaign, economists, investors, and senior Tories cautioned that Ms. Truss’s pledges of tax cuts in an era of double-digit inflation were irresponsible. Former Cabinet member Michael Gove described them as “holidays from reality.” Now, rebel Conservatives are scheming to remove Ms. Truss from office.
With her power so severely damaged, several observers anticipated that Mr. Hunt would essentially govern the nation, a stunning turnaround of fortune for a politician who was defeated by Mr. Johnson in a leadership competition in 2019 and finished last in the fight to succeed him this summer.
The opposition Labour Party noted that in his most recent campaign, Mr. Hunt advocated for a 15 percent reduction in the corporation tax rate. According to the reversal made by Ms. Truss, it will increase to 25% in the spring of 2019. Labour portrayed Mr. Hunt as an advocate of the same “trickle-down” economics that Mr. Kwarteng supported.
Ms. Truss continues to attribute increasing interest rates to a worldwide tightening of monetary policy by the Bank of England, the Federal Reserve, and other central banks, which reflects the impact of Russia’s invasion of Ukraine. Although correct, this does not recognise the effect that her government’s tax policies have had in driving up mortgage rates in Britain.
