A spectacular disaster

September 27, 2022 10:14
Photo: Reuters

Britain is at the cusp of a spectacular disaster.

By late July this year, the triple whammy of COVID-19, Brexit, and the war in Ukraine had precipitated an unprecedented inflation crisis in the country. The economic malaise had taken the form of double-digit inflation figures in July, with worse anticipated to come, even then. Gas prices had been estimated to increase by over 50% relative to year-on-year average over the winter – threatening to up-end the heating plans for millions of households. The then outgoing Boris Johnson administration had made little to no plans to stymy the surging prices – after all, ‘tis ‘Not in His Backyard’, given that he was on the way out.

And all this had been on the wall prior to the political tragedies that had rocked the country in August and September. The victory and subsequent acceding to power of Liz Truss – a Prime Minister elected with the promises of radical cuts to taxes, limited popularity amongst Conservative MPs, and with the mandate bestowed upon her by a highly populist and capricious crowd of grassroots supporters. The death of the Queen and the rise of King Charles. The installation of a new cabinet, new government, and new policies paired with chaotic personnel turnovers in various key departments. Tragedies and horrors galore.

And then came, of course, the absolutely brilliant package of half-baked policies, ill-baked proposals, and clearly, clearly skewed fiscal propositions. This package contained a rather mixed bag – vast and unprecedented subsidies by the state to cover the gas expenses of households (fair enough); unprecedented tax cuts (this is clearly bonkers). The former makes sense, if not also in an ironic manner, given the vehement opposition that Truss had historically and continuously, till recently, displayed towards any and all “hand-out-ism” from the state.

The latter, on the other hand, is inane. Where does the money come from? Coming out just short of pointing at the sky and asserting that manna would fall from the heavens, Truss’ cabinet basically resorted to a last resort for most administrations in economic crises (albeit not necessarily healthy governments who would otherwise be capable of repaying such loans) – debt. After all, if the government is to cut taxes, whilst seeking to desperately maintain fiscal injection and the voluminous subsidies, there is so much it could do before it turns to spending out of a budget that it hopes to make up in the future. The only way for Truss to reconcile – at least, for now – her underlying fiscal conservatism concerning the role played by the state, and her urgent need for an expanded budget to cater to the incidental yet significant costs for the winter – is borrowing. Borrow, borrow, borrow till the UK government is knee-deep in debt that it could well strain to repay.

And it was with this in mind that, in face of a prospective item of spending that would take up to 1.5% of the UK GDP, Chancellor Kwasi Kwarteng unveiled a vision that would send the GBP tumbling by nearly 10% vis-à-vis the USD. All’s well, ends well. Except the sliding GBP is likely to only further compound the country’s woes in relation to inflation: after all, imports don’t come by cheaply these days, and with its heavy reliance upon goods imported from both EU and the US, the UK fundamentally could ill-afford to have a currency cratering in value as significantly and perniciously as the pound currently is.

Amidst all of this, what, really, are Truss’ plans? If we are to interpret her as bearing good faith, at best, we could view her gambit as the classic yet flawed assertion that with sufficient stimulus in the short run, the government could promulgate growth in aggregate supply and demand over the upcoming few years – thereby leading to restoration of normalcy to the economy in the medium run. Yet at worst, Truss’ move is but a desperate ploy of opportunitism: that is, it involves kicking the can of debt down the road, running up enough debt to provide a runway for her till the next election, and the continued befuddling and conceit towards a population that is, by now, too deflated and cynical to will genuine change to the political order. In other words, Truss ‘trusses’ that her bombastic policies shall suffice in convincing people – for now – that the Tories have their economic act together, whereas in practice, it’s clear that that is anything but the case. So much for being Trussworthy.

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Assistant Professor, HKU