Prime Minister Liz Truss took office in September, promising to confront the possibilities of a recession and rejuvenate the sluggish British economy. Instead, her leadership has been marked with chaos as the United Kingdom stumbles to the brink of an economic recession.
On September 23, Truss’ treasury chief, Kwasi Kwarteng, unrolled plans for a 45 billion pound tax cut—the country’s biggest cut in the last 50 years. The proposed mini-budget was formed to target high-earners, while also reducing corporate taxes and increasing the price of national insurance. Both policies are intended to go into effect next year. On top of the budget, Kwarteng also announced a plan to borrow 60 billion pounds to develop an energy budget plan to cap the worsening cost-of-living crisis.
Against conventional logic laid out by economists, the plan was enacted without receiving any of the typical political barriers to safe-guard it. On September 8, Truss fired Tom Scholar, the secretary of the Treasury and a lifelong civil servant, which gave her the freedom to combat the Treasury’s traditional approach to taxes and government spending. Labeled as “Treasury orthodoxy”, Truss claimed that these guidelines interfered with economic growth.
Kwarteng crucially failed to provide independent analysis on the government’s plan, and what it was projected to do for English finances. This propelled public speculation on whether the government would have to finance the proposal itself with borrowed money, which would push the struggling public into deeper debt.
In reaction to his statements, the pound crashed to record lows against the dollar. Loan costs soared as the bond market collapsed and pension costs were dragged to the brink of liquidation. The market response signaled the start of an economic crisis the likes of which the UK has not seen since 1992, when the British sterling was pushed out of the European Exchange Rate Mechanism; however, this time, Britain is not supported by the rest of Europe..
“There might never have been a good time to push through tax cuts,” Nikhil Sanghani, managing director of research at the Official Monetary and Financial Institutions Forum stated. High inflation from COVID-19 stimulus checks, interest rate increases to save the value of the pound, and overpriced energy caused by Russia’s invasion of Ukraine have been just a few conditions the UK is facing, and a tax plan that defies conventional logic is, he said, “the nail in the coffin in terms of, ‘Will there be a recession?’’’
Following assurances issued by the UK Treasury which failed to quiet the public’s panic, along with a direct reprimand delivered by the International Monetary Fund, the central bank of the UK announced it would print 65 billion pounds to purchase government bonds in order to lessen the fallout of Truss’ plan.
“While this is welcome, the fact that it needed to be done in the first place shows that the U.K. markets are in a perilous position,” said Paul Dales, chief economist at Capital Economics, when asked to comment on the plan.
This final measure helped to prevent critical damage, allowing bond prices to recover quickly and the pound to stabilize against the dollar. However, too much harm had already been placed on the relationship between Truss and the public. Doubts of the government’s ability to pay off debt had been raised, and Truss’ credentials to lead a struggling economy as a new prime minister were increasingly put into question.
On September 29, Truss finally broke her silence by defending her economic plan and cold-shouldering the grievances of the public. Notably, she asserted that the problems the economy faced, especially the currency crash, were global effects stimulated by the Ukraine-Russia conflict. Truss carried on, saying that she is willing to make “controversial and difficult decisions” to get the economy moving.
Until the government makes any more decisions, political pressure will continue to mount until some disputed policies are reversed. As for Truss, her authority as a leader for the UK has weakened. Her future as a Prime Minister has been put into question, and regardless of the outcome of this crisis, the majority of the public will still stay uneasy about the country’s next steps.
By Daniel Seong