Western government leaders are grappling with rising inflation, slowing growth, and fears of voters worried about winter and high energy bills. But British Prime Minister Liz Truss is the only person to have devised an economic plan that disrupted financial markets, aroused the anger of world leaders and the public, and undermined her political standing.
Overwhelmed by barbaric criticism on Friday, she withdrew. Truss fired her chief financial officer, Kwasi Kwarten, for crafting exactly the underfunded tax cuts, billion-dollar spending program and deregulation package she sought.
She was planning to raise the corporate tax from 19% to 25%, but had previously opposed it. The announcement comes on the heels of last week’s withdrawal from her proposal to abolish the top 45% income tax on the highest earners. Just over five weeks into her term, the prime minister promised that spending would increase more slowly than suggested, but did not give specifics.
The drama is still going on, and it’s unclear if the Truss government will survive.
In the United States, President Biden has waged his own political battles over gas prices and inflation, but he has never proposed a policy like the Truss administration has attempted, nor has any other European leader.
Still, there are timely lessons from the catastrophe that unfolded in London for European governments whose economies have suffered greatly from the shock and soaring energy prices caused by Russia’s war with Ukraine.
One of the strongest was provided early on by the International Monetary Fund. The IMF, which usually limits such rebukes to developing countries, doubled down on its message on Thursday. “Do not prolong the pain,” advised managing director Kristalina Georgieva.
How to blunt the impact of inflation on the most vulnerable without making inflation worse is the dilemma facing all governments.
“That’s the problem now,” said Cornell University economist Eswar Prasad, who was attending the World Bank and IMF annual meetings in Washington this week.
It is not uncommon for tensions to arise between government-proposed fiscal spending policies and central bank-controlled monetary policies. But now central banks are engaged in delicate policy manipulation in the fight against levels of inflation not seen in decades. With interest rates in the UK approaching 10%, the Bank of England is working aggressively to keep prices down through a series of rate hikes aimed at keeping consumers and businesses afloat.
An increase in government spending would hamper that goal to some extent, but Prasad said Mr Truss’ plan was too big and poorly defined.
“The measures alone to help households hit hard by the energy surge didn’t make much of a fuss,” he said. Many other countries are proposing just that. The European Union is also proposing a windfall tax on energy profits to help finance these subsidies.
Instead of figuring out how to pay for energy aid, Mr. Truss pushed for eliminating corporate tax increases and cutting income taxes for the wealthiest segments of the population. As a result, government revenues fell and Britain’s debt ballooned.
“Overall, the package was not very clear in terms of how it would support the economy in the short term without raising inflation,” Prasad said.
In contrast, Klaus Wistesen, chief eurozone economist at Pantheon Macroeconomics, said governments and central banks worked together to prevent an economic collapse and issue huge amounts of public debt when the pandemic hit in 2020. I mentioned that
Due to the coronavirus crisis, “central banks have printed every dollar, euro and pound spent by governments” to help households and businesses, Mr Bistesen said. But now things have changed and inflation is hurting the economy.
The actions of the US Federal Reserve Board show the switch made by the central bank. In the disastrous early weeks of the global coronavirus outbreak, the Fed has embarked on a special program to stimulate the economy and stabilize markets. This year, the Fed has hiked interest rates sharply to slow growth.
Both the US and the Eurozone countries are slightly more volatile than the UK. This is because the dollar and euro are much more widely used around the world as reserve currencies than the British pound.
Still, European governments can help homes and businesses survive the energy crisis, Bistesen said, but they can’t embark on unlimited spending.
We also have to consider what is happening in other economies. Academy of Social Sciences president Will Hutton said the wealthiest countries that make up the G7 are basically part of the same “monetary and fiscal convoy”. By defending the Thatcher-era rush of tax cuts and deregulation, he said, the Truss administration has strayed far from the rest of the military and the mainstream of the economy.
Diane Coyle, a professor of public policy at the University of Cambridge, has revealed that an adherence to the nitty-gritty truth of the 1980s risks sticking to outdated policies in the face of changing circumstances.
“The situation in 1979 was very different,” Coyle said. “We had a hardened, high tax and overly regulated economy, and it’s gone.” Today, Britain’s taxes are low and its economy is more than the average member of the Organization for Economic Co-operation and Development, which is made up of 38 major economies. Regulations are loosening.
“The character of the economy has changed,” she said. “Public investment in research and skills is more important.”
In that sense, what was missing from Mr. Truss’ economic plan was as important as what was included. And what Britain lacks is Mariana Matsucato University College London economist and billion dollar climate change digitalization plan adopted by european union Or the US Climate and Infrastructure Program.
“Without a growth plan or an innovation policy in the industrial strategy, the economy will not expand,” said Matscato.
Both Mazzkart and Coyle believe the UK had certain economic challenges before the Truss government, including its 2016 referendum exit from the EU, stubborn lack of productivity, poor business investment and lagging research and development. emphasized that he had a physical handicap.
Still, Ms. Coyle offered some advice that was explicitly mentioned to Ms. Truss. “I think the main lesson is that you shouldn’t shoot yourself in the leg.”