Britain’s Conservatives are screwing up the economy

As the UK grapples with double-digit inflation, a prolonged recession, declining living standards and widespread labor strikes, Kwasi Kwarteng, the Chancellor of the Exchequer, finds himself the most hated man in London. At the same time, Prime Minister Liz Truss, who appointed him, is arguably the most hated woman.

Immediately after the end of the official mourning period for Queen Elizabeth II, the new Conservative Party government unveiled its economic plan, popularly known as “Trussonomics”, to be administered by Kwarteng, a veteran MP who served as former Prime Minister Boris Johnson’s foreign secretary acted for business, energy and industrial strategy. The announcement of the financial plan, which includes £45bn in unfunded tax cuts – with promises more to come – sent stock markets reeling, interest rates soaring and the pound falling to record lows against the dollar because of this A tax-cut spree would only stoke inflation by giving more stimulus to an economy the country’s central bankers are desperate to cool.

After a political backlash among her strongest supporters, Truss did a 360-degree turn and scrapped the idea of ​​the tax cut. Kwarteng said the proposed cuts had become a “distraction,” a ridiculous understatement. he tweeted, “We understand and we have listened.”

Listening may not be enough. While the inflation rate slowed slightly to 9.9 percent in August, the fastest pace in 40 years, it is expected to reach 11 percent this month. The Bank of England, the UK’s equivalent of the Federal Reserve, says it will not hesitate to raise interest rates further.

To revive the sinking ship, the bank had to wade into the financial markets, buying up to £5 billion a day of ‘gilts’, or long-dated UK government bonds, to restore stability. (The name gilded comes from the once gilded edges of government bonds.)

All of this should be a warning to the US. It’s not just that a collapsing British economy can hurt America’s. Should the Republican Party gain control of Congress this year and the presidency in 2024, it would pass tax cuts — just like Truss and Kwarteng proposed — potentially with the same market-churning implications. Of course, 2025 is still a long way off. Still, the chaos in London is a reminder that similar GOP policies here could unleash similar economic turmoil. As the pond divides British and American Conservatives, their top priority remains an atavistic drive to cut taxes. The Truss administration uses the phrase “supply-side reforms” with the fervor of Arthur Laffer, a former economic adviser to Reagan and a tax-cut cheerleader.

Meanwhile, six in 10 UK voters think Kwarteng’s supply-side budget was unfair, making it the worst assessment of a fiscal event since 2010. Henry Mance, writes in the financial times, speared Kwarteng’s plan: “His plan wasn’t just clear. It wasn’t just brave. It was kamikaze – or should we say, kami-kwasi. Less Britannia Unchained, more Britannia Unhinged.” The London financial community was equally skeptical. Mark Dowding, chief investment officer at BlueBay Asset Management, told dem FT, “The market asks, ‘How are you going to pay for this?’ It’s almost like there hasn’t been the slightest attention paid to that question.” And Quentin Fitzsimmons, a portfolio manager at T. Rowe Price, said the government’s strategy is to “go broke” and treat government bonds and the currency as ” Victims.” FX options traders warned that more intervention was needed to halt the pound’s downtrend.

When Truss rose to the post of Prime Minister, many top Tory bankers expected her to be a heavyweight Treasury Secretary. Instead, the mountain worked and brought forth a lamb.

Such was the case when Kwarteng attended a private champagne reception on Friday, September 23, hours after his mini-budget was handed over. There, hedge fund managers who would benefit from a fall in the pound goaded him into going along with his plans – a move that would benefit them as they bet against the pound. In fact, the pound fell to its lowest point of $1.03 the following Monday, September 26, only to reverse course after the Bank of England entered the bond market. After the reception, at least two prominent hedge fund chiefs told their peers that Kwarteng was “a useful idiot.”

It didn’t help that on his first day in office, Kwarteng took the reckless step of firing veteran first permanent secretary, Tom Scholar, and leaving the two top official posts vacant under his supervision. This blunderbuss approach helped his support in Parliament and the public dwindle.

It didn’t have to be like this. Kwarteng has an impressive academic background: Eton; a first at Cambridge in Classics and History; and a year at the Kennedy School at Harvard. He also holds a PhD in economic history from Cambridge. But when asked about the “barber boom” (and bust) of the 1970s – a major episode in British economic history named after a previous Chancellor who undertook a tax-cut spree that ended badly – he replied: “I only remember the financial crash of 2008.” His doctoral dissertation “Political Thought of the Recoinage Crisis of 1695–7” and co-authorship of a book on traffic congestion bolstered his academic credentials, but did not seem to have prepared him for a moment that required more common sense than noble degrees. Kwarteng , the first black Briton to hold one of the ‘great offices’ in British government, such as Foreign Secretary, faces an uncertain political future.

To be fair, it’s not all Kwarteng and Truss’ fault. The public is also to blame. Their approval of Brexit, albeit narrow, in 2016 sowed the seeds of economic chaos. It was then that the relationship between the Bank of England and the Treasury deteriorated for the first time. In fact, a 2018 government analysis showed that Brexit would slow British economic growth by between 2% and 8% over the next 15 years. Recent studies have argued that Brexit has exacerbated Britain’s cost of living crisis. With regard to Brexit, the editor-in-chief of the financial timesRobert Shrimsley, wrote, “What was once a slow economic tire failure is now an audible hiss.”

Kwarteng’s sacking may prove inevitable. Yes, after the humiliating tax U-turn, Truss said she will “stand by her man” as Kwarteng said he has no plans to resign or reverse his field. But the last three predecessors of Kwarteng have lasted just over a year on average.

The Conservatives have governed Britain for 30 of the last 43 years. But now, recent polls show Labor have their biggest advantage since 2001, 17 points clear of the Tories. The next general election isn’t due until January 2025, so technically there’s plenty of time for the Truss government to recover. However, an earlier no-confidence vote would grease the runners of his exit. The way things are going, that seems possible. It would end the Conservative Party’s run of prime ministers and serve as a sober warning to conservative politicians this side of the Atlantic. Tax cuts can go either way.