By Joe Montero
The British are in trouble. A new government under Liz Truss and Chancellor of the Exchequer (in other words the treasurer), Kwasi Kwarteng, has just handed down a mini budget. And it has caused a storm.
It is a disaster such as that it is even dividing the ranks of the government and ruling Conservative Party. There is talk about ousting Truss and Kwarteng. A question mark hangs over this coming weekend’s party conference on whether the issue will blow up or be kept under wraps for now – in the interests of the government’s survival.
Chancellor of the Exchequer Kwasi Kwarteng
The controversy lies on one simple point. A massive cut in tax for the rich, by scrapping the 45 percent top tier tax rate (for those with an income over £150,000 a year or $250,500 in Australian currency) and tiered down to incomes of £40,000 and above. Those with smaller incomes will get no cut. There are other measures that benefit the well-heeled. The tax cut amounts to a £45 billion or $75 billion fall in government revenue.
Kwarteng has promised more tax cutting for the top end in November.
If you are an owner of a major financial institution, it might look like Christmas has come early. But for the British population and economy, it is an entirely different story. They are the ones who will wear the cost.
This creates a massive hole in the government’s capacity to maintain services and honour its promise to provide payments to counter the high cost of energy.
Achieving both the tax cut and spending promises is impossible. What is the solution offered? Massive borrowing from the financial institutions.
There is a lesson in this for Australia and the plan to deliver the stage 3 tax cuts promised by the late Morrison government.
Back to the United Kingdom. Over there, the plan to finance the impossible means that the price must be paid – and soon. Cuts to financing of government services will come. This will be blamed on necessity. Government sources are already blaming the war in Ukraine. It may be an aggravating factor. But it isn’t the cause.
The borrowing is really a means to finance the tax cuts and has little to do with investing in the economy.
There’s a loopy rational that if you make the fabulously rich even richer, they will create more economic activity, and the benefit will trickle down to everyone else. It won’t, and we know this because history has proven the opposite. Decades of applying this rational, which has been the heart of neoliberalism, has led the United Kingdom to where it is now.
Despite this, Liz Truss is shouting ‘trickledown effect” from the hustings. Already hit by rising inflation, the nation can now expect this to jump far higher.
The big time investors Truss and company are trying to please are getting nervous, worried that this direction is not good for their bottom line after all. The response is to invest even less. Share prices are falling. The value of the British pound is going south as well.
It is this that is feeding division within the government and Conservative Party. Not that any different direction is being offered. The argument is over the pace and scale.
But for the punter in the street, it is far more serious. The pulling of funds from genuine investment in the economy, including the building of new business and infrastructure, and government services that enable wage earners and those on social security to be part of the economy, plus the debt burden that they will be made to pay, promises fewer jobs, a much worse cost of living crisis, and dim prospects for the future.
Just about everyone knows this, and this is why the critics are crawling out of the woodwork and becoming a flood.
Sensing the extent of the crisis, and especially how it hits the financial market, has forced the Bank of England to step in with emergency action to halt a run on the nation’s pension funds and protect the threatened financial system. It has issued £65 billion worth of bonds to be delivered over 13 working days. This will provide a haven for investors.
But is it enough? It will probably buy the government a little time. Beneath this, the crisis will continue, maybe at a slower pace for a while. Then it will resurface and hit hard.
There’s already talk about having to ask the International Monetary Fund (IMF) for emergency help. This is how serious the situation is. Getting this help may be a little harder than one might assume. The IMF has just handed over a stinging rebuke over the contradictory monetary and fiscal policies. Help will have strings tied to it, and access to funds will come with a contract to impose severe spending cuts. This is the style of the IMF.
Opposition Labour leader Keir Starmer accused the government of “losing control of the economy” and called for parliament to be recalled. Many voices will sympathise. But Starmer has a major weakness. Under his leadership, Labour has returned to the politics of Tony Bair and the embracement of Thatcherism and neoliberalism. The gap between Labour and the Conservatives under Truss is quite narrow. Don’t expect too much from here.
The British are in for a frosty winter, figuratively speaking.