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Explained | What triggered the economic crisis in the UK? – Mintpaisa

Why did the new Prime Minister’s policies on tax cuts for top earners prove controversial and cause the economy to plummet? Does the Conservative Party plan to oust her and replace her with the Sunak-Mordaunt duo? What awaits us?

Why did the new Prime Minister’s policies on tax cuts for top earners prove controversial and cause the economy to plummet? Does the Conservative Party plan to oust her and replace her with the Sunak-Mordaunt duo? What awaits us?

The story so far: On Friday, British Prime Minister Liz Truss sacked Chancellor of the Exchequer Kwasi Kwarteng and scrapped parts of her announced economic program to tackle rising inflation and ease market turbulence.

When did the trouble start?

Britain’s economy has veered dangerously into freefall in recent weeks as Ms Truss and Mr Kwarteng have fumbled to set out a clear economic strategy, while persisting in their stated aim of boosting economic growth in the post-Brexit scenario. Their troubles began shortly after September 6 when Ms Truss took over from her predecessor, Boris Johnson, who left Downing Street under a cloud after an internal party rebellion over his involvement in the ‘Door Gate’ scandal. left”. At the time, she vowed to make the Conservative Party respectable and eligible again. Yet even when she took office, her cabinet watched a looming energy crisis in part due to instability resulting from energy supply disruptions associated with Russia’s war in Ukraine. While she appeared to be acting decisively in early September to assure British families, who are struggling to pay their gas bills, a guaranteed energy price and subsequent cost savings, that was her wider plan cut income tax for the highest earners in the UK and scrap a corporate tax hike that was in the firing line.

What has been the impact of the policies?

Its now infamous September 23 mini-budget outlining these proposals caused such turbulence in the markets that the Bank of England (BoE) was forced to intervene to help the pensions industry survive the soaring government borrowing costs, the collapse of the pound sterling and soaring mortgage rates. Ms Truss fired Mr Kwarteng and replaced him with Jeremy Hunt, a former minister to former prime ministers Theresa May and David Cameron, who was incidentally a key supporter of Ms Truss’ rival for the Tory leadership , Rishi Sunak. Some see it as Ms Truss’ attempt to bring her opponents within the party to her side before she faces a rebellion of the kind that toppled Mr Johnson.

Why are these proposals unpopular?

The Truss firm was mainly criticized for what Mr Sunak called “fantasy island economics” of cutting revenue streams without adequately funding the large tax hole such a giveaway would create. Recent proposals have also been attacked as the wrong priority given the more immediate concern surrounding runaway inflationary trends triggered by swings in global commodity prices, energy market convulsions and government side stresses. offer of a post-Brexit economic structure.

The first policy proposed by the Truss-Kwarteng duo to revive the British economy was a plan to abolish the top rate of 45% income tax for people with incomes of £1.50,000 or more. A second policy in the same vein was the proposal to drop a planned increase in corporate tax from 19% to 25% from next April. Together, the two measures amounted to £45billion in unfunded tax cuts. Almost immediately after Mr. Kwarteng announced these measures, 10-year government bond yields jumped dramatically from 3.5% to 4.3% and then stabilized at nearly 4. .05% after the BoE intervened with a £65bn emergency bond purchase program to stabilize. the market. It is widely accepted that a rise in gilt yields, effectively the cost of borrowing for the UK government, indicates a lack of confidence in the market to buy government debt, probably in the belief that it has exploded from out of control or that sufficient mitigation measures are not in place to reduce this debt to sustainable levels.

The cost of borrowing has continued to rise despite the Truss government’s reversal of its two controversial fiscal policies, first after the end of the BoE’s emergency program, and then after a recent press conference where Ms Truss said stubbornly refused to show any contrition for the economy. trouble his plans may have caused.

What are the political ramifications of the crisis?

There is a common perception that the Truss government, if not already on its last legs, may not have long to go before its embarrassing display of tone-deaf economic policy completely undermines its weak political standing. . At the moment, it seems likely that Ms Truss could be ousted from office before the next general election, which is expected to be held by January 2025 or sooner. Rumors abound that a group of Tory lawmakers have planned to kick Ms Truss out of Downing Street by Christmas 2022 and install a ‘moderate dream ticket’ in her place including Mr Sunak and Penny Mordaunt, who has been minister. and Secretary of State under Mr Johnson and Margaret Thatcher respectively. Both members are recognized as Conservative Party heavyweights and challengers to Ms Truss in the recent leadership race.

What measures would be needed to mitigate the crisis?

While the Truss Government’s U-turn on unfunded tax cuts may temporarily ease market turbulence and prevent further economic damage, deeper macroeconomic changes are needed to put the UK back on a stable path of economic growth. and manageable levels of inflation. On the one hand, the executive must refrain from shooting itself in the foot by undermining the BoE’s attempts to rein in inflation, which is now close to 10% in the UK. The BoE has attempted to do this through a series of interest rate hikes aimed at moderating business and consumer spending. An unfunded fiscal program with ripple effects on the cost of borrowing and government bond prices limits the BoE’s ability. Secondly, in terms of public spending, what may be needed in the long term to develop a UK economy capable of meeting the challenges of the 21st century is a more visionary program of public investment, similar to the climate and digitalisation agenda. European Union in the amount of 1,000 billion dollars or the United States. vast climate and infrastructure program.


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