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Truss Takes a Bold Economic Gamble. Will It Sink Her Government?


LONDON – Britain’s Prime Minister Liz Truss campaigned as a tax cut and supply-side economy advocate, and she won the race to replace her scandalous predecessor, Boris Johnson. . Now, she has set her free-market agenda, and it could sink her government.

Four days after Ms. Truss’s tax cuts and deregulation plans With financial markets reeling and pounding the pound, the prime minister’s political future is increasingly uncertain.

Her Conservative Party is under fire, with a new poll showing the opposition Labor Party leading the Tories by 17 percentage points. It’s a dangerous place for a prime minister in just his third week in office.

Labor is seizing the moment present itself as the financially responsible party. With some experts predicting the pound could fall to par with the dollar, economists and political analysts say uncertainty over the UK economic path will continue to haunt the market. Truss school and government.

“It is entirely possible that she could be replaced before the next election,” said Tim Bale, a professor of politics at Queen Mary University of London and an expert on the Conservative Party. “It will be very, very difficult to conduct a full-blown leadership contest again, but I wouldn’t rule anything out.”

The fact that Ms. Truss should have found herself in this predicament soon after taking office has demonstrated both the radical nature and awkward timing of her proposals. Tax cuts at a time of near double-digit inflation, when central banks in London and elsewhere are raising interest rates, will always mark Britain as an economic frontrunner.

But the government caused yet another shock last Friday when the prime minister of the Exchequer, Kwasi Kwarteng, unexpectedly announced that the government would also abolish the top income tax rate of 45% that applies to those earning more than 45 percent. 150,000 pounds, or about $164,000, a year.

And Mr. Kwarteng failed to submit the funding package for the government budget that government budgets normally receive, deepening fears that tax cuts, without corresponding spending cuts, would puncture public finances. his.

On Tuesday, the pound was near-term steady against the dollar, as were 10-year UK government bond yields, although both began to turn around later in the day after an official Senior executives at the Bank of England signal a strong interest rate hike.

The International Monetary Fund, which sponsored Britain in 1976, added to the deep anxiety when it urged the British government to reconsider its tax cuts. In a statement, they said the cuts would exacerbate inequality and lead to fiscal and monetary policy operating at “cross-purposes”.

The specter of higher interest rates has sent the housing market to a boil. Two major UK mortgage lenders have announced that they will stop offering new loans because of market volatility. The higher rates will affect hundreds of thousands of homeowners who need to refinance their fixed-term mortgages — property owners, analysts note. note, is the foundation of the Conservative Party.

“It’s not like in the US where people are using 30-year mortgages,” said Jonathan Portes, a professor of economics and public policy at King’s College London.

An estimated 63% of mortgage owners have floating-rate mortgages or loans that will expire in the next two years. And the sharp drop in the pound means interest rates will have to rise further than they were just to contain inflation.

Mr. Truss, he said, could have taken a more conservative approach: implementing supply-side measures first, such as a plan to debunk Britain’s cumbersome residential planning rules and build building more housing, which is hindering economic growth. Then, when inflationary pressures ease, the government can cut taxes.

But that was never in the cards, Professor Portes said, because Ms. Truss and Mr. Kwarteng were free-market evangelists who fervently believed that tax cuts would limit growth, and because they have less than two years left to turn the economy around. they face voters in a general election.

“This was ‘shock and awe,’ he said. “Truss, Kwarteng, and the people around them thought they had to act quickly. The longer they wait, the more resistance will build up.”

During the campaign, Ms. Truss modeled on Margaret Thatcher, who also announced a series of free-market measures after taking office as prime minister and enduring a tumultuous few years. However, unlike Ms. Truss, Thatcher is worried about curbing inflation and strengthening public finances; She even raised some taxes during the 1981 recession before reducing them in later years.

But Thatcher stepped in after an election victory over an exhausted Labor government, which gave her more time to weather the downturn and let her deregulation measures take effect. . She also rose to prominence after Britain defeated Argentina in the 1982 Falklands War, sparking a surge of patriotism.

Charles Moore, a former editor of The Daily Telegraph who wrote a three-volume biography of the former prime minister, said: “Thatcher thought in 1979 that I just needed to give voters something they liked. in 1982. “Liz Truss didn’t have enough time.”

Truss’ better parallel, he said, is Ronald Reagan, given his emphasis on tax cuts and other supply-side policies, as well as his disregard for their effect on the public deficit. . Like Thatcher, Reagan weathered the recession before America started to grow again in 1983. And like her, he had a stepping stone before facing voters.

By contrast, Ms. Truss took office after 12 years in power by Conservative-led governments, and three years after Mr. Johnson’s term. She will have to call an election, by early 2025 at the latest. The Labor Party, divided by Brexit and internal disputes, has been galvanized by the tumultuous start of the new government, especially Mr Kwarteng’s plan to cut the highest tax rate, which has allowed Labor to pose a stark contrast on issues of economic justice.

Speaking at the party’s annual conference in Liverpool on Tuesday, the Labor leader, Keir Starmer, claimed that the Conservatives “say they don’t believe in redistribution. But they have – from the poor to the rich. “

Labour’s lead by 17 percentage points in a new poll by market research firm YouGov is the biggest advantage it has had over the Conservatives in two decades. According to Professor Bale, The Tories won the support of just 28% of those surveyed, raising questions about its ability to keep its existing seat.

That prohibitive political backdrop only adds to the challenge Ms. Truss faces. For the tax cuts to achieve one of their desired effects – which is to encourage businesses to invest more – economists say companies will need some reassurance that the policy will not overturned by the new government in two years.

Kenneth S. Rogoff, an economics professor at Harvard, said: “This is a very inexperienced government in a situation where Labor is the favorite candidate in the next election, if they don’t go overboard. far to the left,” said Kenneth S. Rogoff, a professor of economics at Harvard. “If someone believes the tax cuts will be reversed under Labour, and most likely the Labor government, why would they affect long-term investment?”

The UK is also up against much larger forces in the global economy, Prof Rogoff said. After years of low inflation and ultra-low interest rates, the wave of public spending because of the coronavirus pandemic has brought inflationary woes and shifted to higher rates.

“The verdict is almost certainly that governments borrowed too much and should have raised taxes on the wealthier,” he said.

In the short term, Ms. Truss is likely to find herself increasingly at odds with the Bank of England. The bank was expected to raise interest rates at its next meeting in November. On Tuesday, its chief economist, Huw Pill, said the government’s new fiscal policies would require a “significant monetary policy response.”

Adam S. Posen, an American economist who served on the Bank of England’s monetary policy committee, said, “Government policies are not only outrageously irresponsurable but seem like they don’t understand that banks have to respond to these policies by raising interest rates so much”.

Mr. Posen, president of the Peterson Institute for International Economics, likened Britain’s discredit in the market to Britain and other European countries in the 1970s and Latin American countries in the 1980s. Good way, he said. especially for the government to reverse its fiscal policy, although he said Ms Truss and Mr Kwarteng appeared to be “willfully committed to it”.

Sure, they gave no indication that they planned to back down. On Tuesday, Mr Kwarteng told bankers and asset managers he was confident the government’s plan would work.

After the chaos that led to Mr Johnson’s ouster in July and the lengthy campaign to replace him, few in the Conservative Party now move against Ms Truss. But analysts note that the new prime minister has a shallow source of support among lawmakers. Only a third of them voted for her in the final ballot against her main rival, Rishi Sunak, and she won the next vote among party members by a margin closer than expected. .

Noting the new YouGov poll, Huw Merriman, a Conservative lawmaker, may have spoken on behalf of many of his colleagues when he said on Twitter, “Those of us who support Rishi Sunak have lost contest, but this poll shows that winners are losing to our voters with the policies we warned about. “

“For the sake of our country and the livelihoods of people in our country,” he added, “I still hope to be proven wrong.”



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