Liz Truss became Britain’s shortest-serving prime minister. He came to power to replace Boris Johnson – also forced to resign after an internal revolt – and he did so by embodying neoliberal dogma at its purest and promising massive tax cuts in an unfavorable economic context. The strategy, which the British think tank Institute for Fiscal Studies described as “a huge economic experiment with many risks”.
“Looking at everything in terms of redistribution is a mistake. I want to grow the economy. So far, the economic debate of the last 20 years has been dominated by the redistributive discussion, but what has happened has been relatively low. Growth,” Truss said during the Conservative Party leadership campaign, making his intentions clear.
According to the Prime Minister, the formula was clear: tax cuts will grow the economy. And he decided to do it. After announcing the electricity tax cap, he and his then economy minister, Kwasi Kwarteng, introduced the biggest tax cuts in 50 years, including a five-point cut in the top income tax rate and a six-point cut. Corporate tax.
The reaction was immediate. Given the high inflationary pressures in many countries, including the UK, we do not recommend large tax cut packages in this situation, as it is important that fiscal policy does not conflict with the monetary policy of the institutions that are the big guarantor of liberal dogma. . “Furthermore, the nature of the UK measures is likely to increase inequality,” he added.
Central banks have decided to tighten monetary policy by raising interest rates to “cool” economic activity, hurt demand and thus fight inflation, Diego Larouy and Daniel Yebra said. These organizations suggest that this is a decision that increases the risk of recession and is countered by tax cuts – leading to a clash between monetary policy and fiscal policy. It is for this reason that the European Central Bank (ECB), the Bank of England and the Federal Reserve of the United States have called for fiscal policy and, above all, aid aimed at the most vulnerable, those who suffer the most. From rising prices of electricity, gasoline or mortgages.
Ratings agency Moody’s also issued a strong statement saying unfunded tax cuts are “credit negative” for the UK, with the risk of a structural rise in funding costs that could hurt the economy.
On the same day Kwarteng announced the tax cuts, the pound fell to a level not seen since 1985. “The interest rate on government debt has risen more in one day than at any time in the last 30 years,” said Paul Johnson, director of the organization. Institute for Fiscal Studies. To calm the markets, the Bank of England was forced to announce the purchase of long-term British debt.
Faced with obvious pressure, and reluctantly, Truss retreated. First, he announced that he would avoid cutting income taxes for the wealthiest people because, he said, it had become a “distraction” from the rest of his fiscal plan.
It was not enough to ease the situation. A few days later, a new fix. In order to save himself, he suggested removing the Minister of Economy and suspending the reduction of the corporate tax. “We need to act now to ensure fiscal discipline in the markets,” Truss said, justifying his decision. “Some reforms went further and faster than the market could handle.
After the radical change of course, the director of the Institute for Fiscal Studies stated: “Fiscal credibility is hard to gain but easy to lose.” “The announcements will not be enough to undo the damage caused by the debacle of the past few weeks, but it is a clear and important step in the right direction,” he added.
The last two major events on the European continent: the pandemic and the war have also weakened previously unquestioned neoliberal dogmas, as Andrés Gill, a correspondent in Brussels, pointed out in this report.
During the pandemic, the European Union created a recovery fund of 750,000 million, for the first time, based on joint public debt, which Angela Merkel said would never have happened ten years ago. The second crucial step was to suspend fiscal rules, i.e. an open bar to public spending, even at the cost of increasing debt and deficits. Suspension of the Stability Pact, which also led to its reform.
As for the war, the EU has agreed, among other things, to limit windfall profits for energy companies involved in nuclear, renewables and lignite. That is, market intervention is done in order to limit business profits. In other words: society decides how much the private sector can earn. The commission also recalled that this is not the time to cut taxes, on the contrary. 27 decided to tax at least 33% the super profits of fossil fuel companies. Finally, EU leaders meet on Thursday and Friday to assess how to lower gas prices.
Despite all the chaos that has arisen in the UK as a result of the reforms and his resignation, Truss remains confident in his formula: “low taxes, high wages and a high growth economy”. Perhaps the Prime Minister still believes in one of the maxims of his book, Britannia Unchained, published with Kwasi Kwarteng and other Conservatives, in which they both showed blind faith in neoliberalism: “In the early stages of a project, failure should not be a disaster. But this time it looks quite similar.
Source: El Diario