On September 6, almost a month ago, a hunched and greatly diminished Elizabeth II made the last public appearance of her 70-year reign. Two days before she died, received at her Balmoral residence Liz Truss, the conservative leader elected by her party to replace the ousted Boris Johnson, to ask him to form a government. The British, with her phlegmatic black humor, now say that the monarch preferred to leave this world so as not to witness the disaster that the prime minister was going to cause.
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A few hours after his meeting with the queen, Truss drew some applause by making £100 billion ($113 billion) available to subsidize the price of energy for households and businesses. As for households, of the 3,500 pounds a year that they had to pay for the price increase, they will only pay 2,500. The measure worried the markets because it aggravates the debt and the deficit, but the two weeks of mourning and paying homage to the deceased monarch provided a respite for the new government.
After the funeral of Isabel II, the respite ended. At the urging of his finance minister, the Exchequer’s chancellor, Kwasi Kwarteng – a son of Ghanaian immigrants, famous for his colloquial speech and use of big words – on Friday, September 23, Truss launched a bold program of reduction of taxes.
To cover the fiscal gap caused by the tidal wave of subsidies that the Government assumed during the covid-19 crisis, his predecessor Boris Johnson – for whom Truss was Foreign Minister – had increased the tax rates on companies and alcoholic beverages, as well as the income tax, especially for the richest. Kwarteng convinced Truss to put those hikes on hold and even stop raising the top income tax, which was supposed to go up from 40 percent to 45 percent.
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“He is irresponsible and complacent”, former Economy Minister Rishi Sunak, defeated by her in the race to succeed Johnson, ruled on Truss’s plan. In a matter of hours, the markets proved Sunak right: the downgrade program increased public debt by 72 billion pounds in the short term and, consequently, the pound fell against the dollar to levels not seen since the 1980s. , and the debt papers were devalued at great speed. Forced to intervene, the Bank of England dipped into its reserves and bought debt bonds at four hands.
Markets barely calmed down, and the International Monetary Fund (IMF) issued a statement in the tone it often uses to scold Third World countries. In a situation like the current one – high inflation and high fiscal deficit – the IMF “does not recommend” a reduction program like the one proposed by Truss and Kwarteng, the entity said in a statement. The storm was just beginning.
reverse
The final hours of September were marked by new shocks, but not only in the stock markets, but also within the Prime Minister’s party. Summoned for a congress from this Monday, in Birmingham, over the weekend the Conservatives gave free rein to their criticism against Truss and Kwarteng, terrified by the worst poll numbers in decades.
According to the opinion firm YouGov, if the elections were held now, the Tories (Conservatives) would barely get 21 percent of the vote, against 54 percent for their Labor opponents. When some delegates to the party congress began to shuffle names of candidates to succeed her, the prime minister understood that, if she did not back down at least in part, she would not survive the Birmingham summit.
(Also: Liz Truss vows to ‘ride out’ economic storm after taking office as prime minister)
The prime minister understood that, if she did not back down at least in part, she would not survive the summit
On Monday morning, Kwarteng tweeted that the 45 percent to 40 percent cut in the rate for the richest’s income would not be applied due to widespread criticism. “We understand, we’ve heard,” he explained. And while some Tories praised the correction, others, like former Culture Minister Nadine Dorries, saw it as negative. “It is true that they should seek a certain balance –he said–, but throwing your finance minister under the bus is not”.
The serious thing for Truss, and for the United Kingdom, is that the reverse solves little the economic crisis, since the bulk of the plan is still standing and can bring the country to the brink of bankruptcy. The popular London newspaper Daily Mirror was more categorical: ‘The damage has already been done’, he headlined. But in addition, the shift leaves Kwarteng and the prime minister herself in a very fragile position. A weakened and unpopular government, navigating the worst economic storm in decades, is not exactly the kingdom that Carlos III, who waited so many years to ascend the throne, hoped to inherit.
Brexit legacy
It would be unfair to blame everything that happens on Truss and Kwarteng. It is true that they poured a gallon of gasoline on the flames, but also that the bonfire that today consumes the United Kingdom was lit several years ago, when in 2016 the populism that blamed all the ills on Europe convinced the majority of British voters to give free rein, through a referendum, to withdraw from the European Union, the famous Brexit.
Boris Johnson, who would later become prime minister, was one of the main drivers. He and his fellow travelers made people dream of a revitalized Great Britain that, freed from the supposed obstacles that Europe imposed on it, would regain its preponderant place on the planet. None of that happened and, on the contrary, six years after the vote, and even before the mistakes of Truss – who, by the way, at the time opposed Brexit – the figures show the United Kingdom weakened.
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A report from the Center for European Reform is devastating. When comparing what happened to the British economy in these six years with countries that advanced at a similar rate to theirs before Brexit, and that suffered the pandemic equally, it turns out that British GDP has grown 5.2 percent less; gross capital formation, 13.7 percent less, and trade in goods, 13.6 percent less.
The costs of procedures and paperwork that they now have to fill out to export to Europe have made fishermen, agricultural producers and small and medium-sized industrialists give up their sales to the continent. Post-Brexit customs fees have increased import costs by 6 percent, which partly explains why inflation in the United Kingdom is around 10 percent, while in European Union countries it is 7.5 percent. percent.
It’s what The Economist analyst Duncan Weldon calls the ‘perfect storm’: high energy prices, the strongest inflation in 40 years, slowed exports, rising interest rates, the highest public debt (as a percentage of GDP ) in half a century and strikes on the rise. It’s no surprise that a recent study of British consumer confidence has marked the lowest figures since 1974.
Neither is it that, in a survey by the firm Statista, 52% of Britons have said that Brexit was a bad decision, against just 36% who considered it a good one. In another survey, from the firm Omnisis, 67 percent said that Brexit increased inflation and 64 percent that it brought negative effects.
Who knows what would happen if there was a referendum on returning to the European Union, but if that vote were called and a return to Europe was imposed, negotiating that return would be extremely complicated. It’s much easier to get the toothpaste out of the tube than it is to put it back in.
the disunited kingdom
The crisis also threatens the unity of the old empire. In Scotland, the majority believe that the withdrawal from the EU did them an enormous harm that they did not seek, because, in fact, in that region, the voters rejected Brexit, although they still had to submit to the national result.
In the cold Scottish lands, the winds of independence have blown again. If in 2014, 55 percent of the voters voted against independence, compared to 44 percent who voted in favor, the polls now show a tie, with a new referendum in sight, in October 2023, which will have a consultative nature.
Northern Ireland – another part of the UK that did not win Brexit – has been hit particularly hard: its sister nation, the Republic of Ireland, remains in the EU, and the deals that brought peace after decades of violence in that region provided for there would be free trade between the two Irelands. Due to Brexit, there are customs barriers to trade between Northern Ireland and the rest of the United Kingdom, which has made life difficult for many employers and workers.
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This explains why the independentists of Sinn Féin won the parliamentary elections in May and why the desire of a good part of its inhabitants in favor of joining the Republic of Ireland and leaving the United Kingdom has grown again. Something similar has happened with the inhabitants of Wales, the other region that makes up the United Kingdom. In short, in addition to the high economic costs that the English, Welsh, Scottish and Irish have had to pay for Brexit, there is also the risk of the remnants of the former British empire imploding.
Solutions? The economic crisis will continue, if Truss’s measures do not make it even worse. As for an eventual return to Europe, it would take years to become a reality and even longer to bring benefits. So the only thing that the British can hope for, with their new King Charles III at the helm, is that the Government is capable of mitigating, at least in part, the damage already caused. If it doesn’t, the real crisis is just beginning.
MAURICIO VARGAS LINARES
FOR THE TIME
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