Context
British Prime Minister Liz Truss recently fired Chancellor of the Exchequer Kwasi Kwarteng and scrapped parts of their economic package. The economic package was announced to combat rising inflation and calm market turbulence.
Relevance
GS Paper 2: Effect of Policies and Politics of Developed and Developing Countries
Mains Question
What is the current UK economic crisis? How the raising inflation led to the current situation? Elucidate. (150 Words)
The UK’s economic crisis
- In recent weeks, the UK economy has veered (deviated) dangerously close to free fall.
- The problems began shortly after Ms. Truss took over from her predecessor, Boris Johnson, on September 6.
- Boris Johnson was forced to resign as a result of an internal party revolt over his involvement in the “party-gate” scandal.
- As she took office, the United Kingdom faced an impending energy crisis, which was exacerbated by the insecurity caused by Russia’s Ukraine war.
- She took decisive action to reassure British families who were struggling to pay their gas bills of an energy price guarantee and subsequent cost savings.
- Her broader plan to cut income tax for the highest earners in the UK and scrap a corporate tax hike, on the other hand, was heavily criticised.
Proposals that are contentious
- The first policy aimed to jump-start the UK economy by eliminating the 45% top rate of income tax for people earning £150,000 or more.
- A second policy in a similar vein was the proposal to cancel a planned corporate tax increase from 19% to 25% beginning next April.
- The two measures added up to £45 billion in unfunded tax cuts.
What accounts for the unpopularity of these proposals?
- The Truss Cabinet has been primarily chastised for reducing revenue sources while failing to adequately fund the large fiscal hole that such a giveaway would create.
- These proposals were also criticised for their misplaced priority.
- At the moment, Britain is experiencing runaway inflationary trends caused by global commodity price fluctuations, energy market convulsions, and supply side constraints.
- According to analysts, instead of extending a tax break to the highest earners, these issues should have been addressed first.
Steps needed to alleviate the crisis
- The Truss administration’s U-turn on unfunded tax cuts may temporarily alleviate (improve) market turmoil and prevent further economic damage.
- However, deeper macroeconomic changes are needed to return the United Kingdom to a stable path of economic growth and manageable inflation.
- Inflation in the United Kingdom has now reached nearly 10%. As a result, executives must avoid undermining the Bank of England’s (BoE) efforts to control inflation.
- The Bank of England has been attempting to achieve this through a series of interest rate increases aimed at moderating business and consumer spending.
- An unfunded fiscal programme with knock-on effects on borrowing costs and government bond prices limits the BoE’s ability.
- When the Truss cabinet announced the above-mentioned controversial proposals, 10-year government bond yields skyrocketed.
- As a result, the Bank of England intervened with an emergency £65 billion bond-buying programme to help stabilise the market.
- In terms of public spending, the UK should prioritise more visionary public investment programmes, such as the EU’s trillion-dollar climate and digitalization scheme or the United States’ expansive climate and infrastructure programme.
