Two European countries have already chosen women leaders on the right, openly extremist, but so far only one of them has caused a financial shock, and it is not Giorgia Meloni. Liz Truss became Prime Minister just three weeks ago, and much of that time was entirely absorbed by the Queen’s state funeral. Nonetheless, in the very short time allowed to her, Prime Minister Truss pushed the pound to an all-time low and is in the process of triggering a downgrade in the UK’s rating by rating agencies.
In particular, what caused all this was the very unexpected, but very dramatic, announcement of the budget by his new Chancellor of the Exchequer, Kwasi Kwarteng, last Friday. Both he and Truss said they firmly believe in a small state and low taxes, recalling the sacred memory of Margaret Thatcher.
In addition, they decided to realize this vision in a hurry, just days after the announcement of the most generous European package of energy subsidies to households and businesses, and ignoring the unfortunate detail that Maggie Thatcher hated debt, public loans and inflation more than anything else in the world.
It seems that, for the most part, it was this haste that alarmed and worried the financial markets. The British economy is not yet in a full-fledged recession, but it is experiencing one of the highest price inflation in Europe. The promise to cap the prices of energy raw materials by paying generous subsidies – if necessary, even for two consecutive years – seemed to have resolved the possibility of a worse pressure on the cost of living and on businesses, albeit with the risk of taking capital loan for larger sums.
But, for Ms. Truss and Mr. Kwarteng, this was still not enough. Thus, without delay, without preparations, without a well-studied and adequate plan for the management of public finances and after having prohibited the independent agency Office for Budget Responsibility from churning out new economic forecasts, they announced the most consistent series of tax cuts. that have been seen from 1971 to today.
The stated aim of this gigantic fiscal stimulus is to boost UK economic growth, both in the short term to avert a recession, and in the long term by encouraging business investment and productivity. Yes, they seem like noble aims, but unfortunately they clearly do not enjoy the confidence of the financial markets, which immediately lowered the value of the pound against the US dollar bringing it to historical records, leaving it 7 percent lower than the currencies of its trading partners. important since the beginning of August.
It is difficult to refrain from concluding that the actual purpose of this hasty and radical budget law that resulted in tax cuts was to affirm Truss’s authority in its same conservative party. Her victory, when she was elected by her party mates, was not as decisive as she had hoped, and among the parliamentarians she garnered less support than her opponent. Unlike Giorgia Meloni, her political position appears fragile: probably, Truss is already thinking anxiously about the possible general elections of 2023 or the beginning of 2024.
In light of this, the attempt to stimulate economic growth in the short term and to please its constituents by cutting their taxes could make sense. The first problem, however, is that the tax breaks are actually mostly liked by the wealthy and businesses, as they, more than the poor or the middle class, will benefit the most from this budget. The second problem could be even more serious: this budget law could act like a boomerang, haunt Truss and the British economy, hitting them hard.
For their part, in fact, tax cuts and a surplus of public loans could support faster economic growth in the short term, keeping unemployment close to its current very low levels. However, by focusing the tax cuts on the wealthy, the budget risks limiting this benefit substantially, as those with large rents may very well decide to secure excess money instead of spending it, and firms may very well decide. not to invest more in these uncertain times just because the taxes on their annuities have been reduced.
The sharply falling value of the pound, meanwhile, will increase price inflation, driving up the cost of imported goods, and it is plausible that it will force the Bank of England to raise official interest rates very abruptly and abruptly, perhaps as early as next week. The combined effect of inflation, high-priced loans, investor nervousness could lead to the very long recession that Truss promised to avoid.
Certainly, the new British Prime Minister has defined her political identity and her art of government quickly and without hesitation. This could guarantee her some success when she shows up at the Conservative Party’s annual conference that opens next weekend. If, on the other hand, this extreme move were to backfire on her, her reputation and the support of her own party could vanish into thin air in no time.
The UK is fortunate to be able to borrow mostly in its own currency, and consequently is not exposed to the sort of acute financial crisis that occurs when foreign lenders lose confidence and start betting on a nation’s debt. However, the UK could suffer from a slow but inexorable stranglehold as lenders, whether British or foreign, demand interest rates.they are higher on all loans to both the government and UK businesses.
Given that in Europe it is second only to Greece in terms of the largest current account deficit, and that it has the highest budget deficit in all of Europe, the UK must be able to please its lenders if – if it wants to take borrowed a very popular and “British” slogan, dating back to wartime – means “Keep calm and carry on”, keep calm and carry on. Truss’s gamble with taxes, loans, debt and inflation is far from calm.
Translation by Anna Bissanti
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