Last Friday, Kwasi Kwarteng, the latest Tory chancellor of the exchequer, finally released to the public the budget he would not term a mini-budget, therefore avoiding the scrutiny of the Office of Budgetary Responsibility. There were unfunded tax cuts of £45 billion in this
budget fiscal statement, making it one of the most significant in the past 50 years. Bankers, the wealthy, and fossil fuel firms that avoided an additional windfall tax will benefit from Kwarteng’s handout. Those of us who rely on public services, who deserve a raise in wages and who work hard but still can’t make ends meet were the ones who lost out. People with lower incomes will be hit the hardest by this statement, as their benefits will be reduced if they are unable to work more hours. Those without paid employment will be hit even harder. This is the economics of inequality.
Mr. Kwarteng got himself into a bind on Wednesday, and Bank of England governor Andrew Bailey had to come to his rescue by acquiring long-term government bonds. This, however, will not be a one-time rescue effort; rather, it will be a comprehensive programme of daily purchases that will last from now until around the middle of October. The cost to the nation could reach £65bn which equates to an astronomical £5bn per day.
Mr. Kwarteng and Prime Minister Liz Truss are in big trouble.
The markets’ rejection of the government’s first major policy choice has broken its credibility as a fiscally responsible government. Playing fast and loose with the public purse will be remembered by the electorate. Even if the bank’s manoeuvres succeed, the consequences, such as higher mortgage payments (that’s if you can find one; at the time of writing, 41% of deals have disappeared since Friday’s announcement) and import expenses, will now be felt by a much larger segment of the public. This is not good news as we enter the turbulent waters of an ever-deepening crisis over the cost of living.
The poor decisions that Ms. Truss and her chancellor have made have resulted in the new leader asking her cabinet members to investigate cost-cutting methods. This is despite the fact that she pledged repeatedly throughout the campaign that she would not reduce government spending. The era of austerity has been revived.
Department budgets are currently under the greatest strain since previous Conservative Prime Minister Theresa May reversed the austerity strategy implemented by those compassionate conservatives, Cameron and Osborne. In addition to real-term cuts, the Treasury will require extra efficiency savings. It is worth noting that this would go against the Conservative Party’s 2019 strategy, which calls for laying waste rather than levelling up. The government is not listening to the electorate. The people couldn’t be clearer: they want well-funded public services paid for with progressive taxes. Everyone experienced the strain the pandemic put on underfunded public services, which had not recovered from earlier Conservative spending cuts.
Everyone bears the consequences whenever a government allows a relatively tiny number of wealthy people at the top to take an excessive amount of our money. This cash is never put back into circulation, never used to stimulate the economy. Instead of taking action to ensure that ordinary people can make ends meet, this Conservative government is removing limits on the bonuses that bankers can receive and lowering taxes for their pals in the city who benefit from your labour. It could be different.
In a short period of time, this government could enact policies that are both easy to understand and widely popular. For example, the tax on capital gains should be raised to the level of the income tax to ensure that people who make money through speculating are subject to the same level of taxation as the rest of us who work. Seven out of ten respondents feel that taxes should be raised on extremely affluent people for the government to have enough money to pay for public services and to help offset the rising cost of living. Why, therefore, did we wind up with a “bankers’ budget” that sends money to the wealthy rather than aiding families who are having trouble making ends meet?
The opposition leader, Keir Starmer, said on Wednesday that the International Monetary Fund’s views on Britain’s new fiscal policy show what a mess Truss’s government has made of the country’s economy. He stated on LBC Radio:
I think the IMF statement is very serious and it shows just what a mess the government have made of the economy and it’s self-inflicted. This was a step they didn’t have to take.
It is difficult to overestimate how humiliating it is for the government to be publicly chastised by the IMF, and the government has been pushed to re-examine the mini-budget published the previous week. The representative from the IMF adopted terminology more akin to that of a struggling emerging market economy seeking assistance. The United Kingdom is not in a position that is comparable to this. However, the IMF’s intervention shows how swiftly the chancellor’s approach has failed, even though Kwarteng is unlikely to require a rescue from the IMF in the near future. This also reflects the IMF’s concern about the potential consequences of a full-fledged financial crisis in the UK on the economy of the rest of the world.
Truss and Kwarteng are at a crossroads and must make a pivotal choice. If they don’t want to follow the IMF’s recommendations, they don’t have to. They can either doggedly persist in the face of mounting pressure from the IMF and other financial institutions, or they can immediately rethink their strategy. The problem is that they are both too stubborn to do so.
Since the health of the economy remains a major factor in deciding election outcomes, Labour must demonstrate that it can manage the economy more responsibly, sustainably, and fairly than the Conservatives. It shouldn’t be too difficult.
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