Liz Truss was predicted to have a chaotic fall. The omens were below reality. Like the sudden death of Elizabeth II two days after they met, nothing went as planned in their first month in business. And when the prime minister tried to get a grip on the economy, things got…worse.
The climax of this disastrous start to the semester was reached on September 23rd. In Parliament, the newly appointed Minister of Finance, Kwasi Kwarteng, presented a “mini-budget” of which he is the architect. This economic stimulus package has two goals: to secure the purchasing power of households and to stimulate growth.
Liz Truss has therefore decided to cap household energy bills at £2,500 for two years. Half of the companies’ energy costs are covered for six months. These costly decisions were seen as the first reversal of those who barely mentioned an anti-inflation plan during the campaign. But they seemed inevitable when nearly 45 million Britons are at risk of “fuel poverty” this winter, according to the University of York.
Unpaid “mini-budget”, tax breaks … and public outcry
These billions that come from the public coffers are not compensated by savings or corresponding tax revenues. The total invoice is not created. The “mini budget” also provides for a stimulus Tax with exemptions for £45bn social security contributions for businesses and households. The lowering of the maximum income tax rate from 40% to 45%, interpreted as a gift to those least affected by inflation, caused unanimous outrage in the UK.
Ten days of fierce criticism, including from the Conservative camp, forced the government to reverse its tax cuts in favor of the wealthy. ” Liz Truss is already facing slingers with the Conservatives. This fringe fears losing the electorate won by Boris Johnson in the former Labor strongholds of northern England »analyzes the academic Aurélien Antoine, president of the Brexit Observatory, who points to the gap between the popular fringe of the Conservative Party and the other neoliberal and Thatcherist parliamentarians.
The Tories’ annual convention, currently being held in Birmingham, provided the spectacle of these tensions. The usually very civilized event was the scene of demonstrations. Some members of the government, such as Energy Secretary Jacob Rees-Mogg, were harassed by the protesters. ” We heard and understood », replied Kwasi Kwarteng on the Congress stage to justify withdrawing his tax breaks for the wealthiest. The Minister regretted this measure “is eclipsed” other parts of its program.
Debt and currency storm
In fact, the most serious thing is elsewhere. The lack of an accurate quantification of the “mini-budget” has terrified financial markets. The pound plummeted like never before, falling to its lowest level ever against the dollar on September 26th. 10-year government interest rates on UK debt rose to 4.5% from 3.5% following the unveiling of the anti-crisis plan.
Faced with this shipwreck, the Bank of England had to buy back debt on September 28 to save its interest rates and avoid the bankruptcy of pension funds holding British bonds. This unprecedented intervention caused interest rates to be relatively flat. The 10-year rate fell back to 4% as the pound edged higher.
But the financial storm has left scars. With borrowing rates tied to government rates in the real economy, mortgages are already rising in a country where a quarter of households are borrowing at variable rates. Which puts a little more strain on your budget. ” The very strong market reaction made ” mini budget » a disaster. The government managed to aggravate the already very serious economic crisis. Purchasing power falls, further diminished by the depreciation of the pound, which increases their import costs. It’s a disaster for products like fruits and vegetables from abroad »worries the academic Aurélien Antoine.
impression of amateurism
The failure is all the more devastating when it is accompanied by a sense of amateurishness, like the lack of household numbers. “ lic Truss sacked the UK Treasury Director in early September for not being in line with his budget. Likewise, it has not submitted its “mini-budget” for validation by theOffice for Budget Responsibility (Control Office for Public Finances, editor’s note), which was unable to produce any budget forecasts », observes Sophie Loussouarn, Professor of British Civilization at the Jules Verne Faculty in Amiens. The UK expert recalls that Liz Truss was still at the UN the day before the presentation of her “mini-budget”, the first turning point in her mandate, giving the impression that she was cramming it “between two planes”.
Already her political credit is dwindling as she wanted to be part of the continuity of a Margaret Thatcher capable of making highly unpopular decisions. The fears of his competitor at 10 Downing Street, Rishi Sunak, have been realised, and during the election campaign he described the tax cuts promised by Liz Truss as “ “whimsical” and “irresponsible”. He had no idea that the facts would prove him right so quickly.