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Australia Truss doubles down on the new British tradition of reckless debt

05:11  26 september  2022
05:11  26 september  2022 Source:   crikey.com.au

'Proving the naysayers wrong': Truss and Kwarteng forced to defend tax cuts

  'Proving the naysayers wrong': Truss and Kwarteng forced to defend tax cuts Prime Minister Liz Truss and her new chancellor have been forced to defend their controversial tax cuts, with the former vowing to usher in a "decade of dynamism".Using more than £70bn of increased borrowing, Kwasi Kwarteng announced the biggest programme of tax cuts in 50 years, including abolishing the top rate of income tax for the highest earners.

If it’s not a basket case already, the UK economy is on the cusp of such status: inflation at nearly 10%, a plummeting currency, soaring interest rates, government debt at 100% of GDP, and surging energy prices ahead of winter. But in an apparent bid to ensure the UK’s descent to economic chaos is guaranteed, PM Liz Truss and her chancellor Kwasi Kwarteng have embarked on an astonishing display of fiscal recklessness that has severely rattled markets.

  Truss doubles down on the new British tradition of reckless debt © Provided by Crikey

The irony of those comparisons of Truss to Margaret Thatcher is that her fiscal policies are exactly the reverse of the Iron Lady’s — and far more reminiscent of the pre-Thatcher Tory party and the Callaghan Labour government that followed it, which had to go with a begging bowl to the International Monetary Fund (IMF) in 1976.

Adults intervene to save the UK economy as Tories play ideological games

  Adults intervene to save the UK economy as Tories play ideological games Only a major intervention by the Bank of England prevented the UK financial system from collapsing yesterday, as the Truss government inflicts mayhem on the UK.Liz Truss and Kwasi Kwarteng’s disastrous, debt-fueled £45 billion tax cuts package didn’t just send the pound plummeting — it also started an interest rate surge that sent every major UK financial institution to the verge of halting lending, which would have plunged the real-world UK economy into a major 2008-style crisis.

A return to the IMF is now being forecast by notoriously bearish economist Nouriel Roubini, amid circumstances that look a lot like Ted Heath’s “dash for growth” that ended in disaster for the British economy in the 1970s. Truss and Kwarteng have unveiled — in stages, given the death of the queen, a massive fiscal loosening including subsidies of £150 billion or more for energy users, and another £45 billion in tax cuts — the largest in 50 years, and aimed primarily at high-income earners. A planned increase in company tax back to 25% has also been ditched.

  Truss doubles down on the new British tradition of reckless debt © Provided by Crikey

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How will it be paid for? Entirely by borrowings — at a time of rapidly rising interest rates. If the move triggers a crisis in bond markets, the UK could be headed for a second IMF bailout in 45 years.

Fool Britannia: sloppy Tory treatise a hint of horrible things to come

  Fool Britannia: sloppy Tory treatise a hint of horrible things to come A decade ago, Britannia Unchained, a poorly researched and written book charting new directions for UK growth, was released. Today two of its authors hold the keys to the kingdom.Britannia Unchained deserves to be less than a footnote of history. And it would be, if it were not for the fact that two of its authors are the new prime minister and her close friend, the new chancellor of the exchequer.

An “emerging market turning itself into a submerging market” was how former US Treasury secretary Larry Summers termed it. The British pound fell to 37-year lows against the US dollar and is now at just US$1.08, with suggestions parity may not be too far off. That’s partly because the US dollar is currently so strong — all currencies, including the euro, the Aussie dollar and the yen, are performing poorly against the greenback, even if they’re performing well against other currencies. But it also reflects market sentiment about the trajectory of the UK economy.

Under four successive prime ministers, the Tories were unable to restore the UK budget to balance, before the pandemic arrived and Boris Johnson and his chancellor Rishi Sunak turned on the fiscal taps to support the economy. Just as the UK deficit was coming back down this year, Truss and Kwarteng have now once again embraced deficit spending — not in response to a pandemic, but because the Bank of England is determined to keep lifting interest rates until inflation is crushed.

The UK’s growing economic crisis, explained

  The UK’s growing economic crisis, explained New UK Prime Minister Liz Truss introduced a massive tax cut package — and triggered a currency crisis.On September 23, Truss’s Chancellor of the Exchequer, Kwasi Kwarteng, introduced the UK’s biggest tax cut in 50 years, estimated to amount to about 45 billion pounds over five years. The so-called “mini-budget” proposed tax cuts for the UK’s highest earners, and announced a rollback of corporate tax hikes and a cost increase for national insurance, both intended to go into effect next year. Kwarteng and Truss’s plan also slashes the stamp tax, a duty on land sales in Britain and Northern Ireland, in a bid to increase home purchases.

That is, the UK government is hellbent on trying to undermine its central bank’s monetary policy — guaranteeing that interest rates will rise higher for longer in order to get inflation back down.

The energy package was a political necessity; Britons face a bleak winter, despite gas prices coming off recent highs. The country is heavily dependent on gas, and has allowed major storage facilities to close, making it even more reliant on imports. That’s exacerbated the UK’s Brexit-created trade problems: its trade deficit in the second quarter of the year widened to a new record of £27.9 billion.

But the tax cuts, designed to provide big tax relief for the wealthy (who are the least likely to spend), reflect the discredited belief that tax cuts pay for themselves through higher growth. That they are entirely funded by borrowings has shaken markets.

The next UK election is due in 2024. Truss is on a clock to restore Tory fortunes — Labor under Keir Starmer has a substantial lead in all polls, and a double-digit lead in some. The fiscal recklessness could be just beginning.

The post Truss doubles down on the new British tradition of reckless debt appeared first on Crikey.

UK's Truss rejects 'drift and delay' in defiant speech to Tories .
Britain's Prime Minister Liz Truss is set Wednesday to close her party's tumultuous annual conference with an unabashed defence of "disruption" to counter economic "drift and delay". "We cannot have any more drift and delay at this vital time."Just a month since she succeeded Boris Johnson, Truss has alienated voters, financial markets and many in the Conservative party with a crash programme of debt-fuelled tax cuts to revitalise growth.

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