The economic policies which Truss and her Cabinet implemented to resolve the effects of high inflation, and energy prices, have led to nation-wide condemnation. Kwasi Kwarteng, previous Chancellor of the Exchequer, has also been fired after the failed performance of a tax-cut policy.
The United Kingdom’s economic state was already showing signs of decline before Truss’ win. Inflation passed 10% (a 40-year high) with no signs of slowing down. Energy prices also skyrocketed in the U.K. after sanctions imposed on Russia caused a decrease in the country’s gas supply. Therefore, the fight against oil prices was one of Truss’ key priorities.
Truss first enacted a policy which capped gas prices at 2500 GBP annually per household. This policy will see households save 1000 GBP on utility bills, and will cost around 100 billion pounds. The change will be financed through government borrowing, causing the central bank to raise interest rates.
The second economic policy was brought forward by the previous Chancellor of the Exchequer, Kwasi Kwarteng. It involved creating a mini-budget of tax cuts worth 45 billion GDP. This policy, although enacted with optimistic intent, caused the pound to hit an all-time low against the dollar – plunging almost 5 percent. Consequently, many began to sell off pension funds in fear of a 2008-like financial crisis, accelerating the decline. This forced the Bank of England to make an unanticipated intervention, and spend 65 billion GBP (over the course of 13 days) buying government bonds.
However, this extensive effort may have only had a temporary effect. City investors, and the pensions industry have alerted the central bank that their unanticipated intervention might not be enough to combat the government’s rising borrowing costs. Harsh criticism for the chancellor followed, coupled with calls for his dismissal. Tory MPs claimed that, “Kwarteng would have to resign in order for the party to survive this economic crisis”, and labor leader Keir Starmer condemned the government for “losing control of the economy”. Moreover, Olivier Blanchard, former chief economist of the IMF, described the situation as a “textbook example of how not to design, and not to sell a fiscal expansion.”
Chris Philp, the Treasury Minister, stood out amongst the backlash and defended the tax cut in an interview on Sky News. He insisted the government would not be reversing their decision – showing that some of the party still had faith in Kwarteng’s decision. Nevertheless, pressure was placed on the chancellor to unveil a new fiscal plan on October 31st.
The extent of the damage caused can be seen from the amount of funds required for compensation, which the Institute for Fiscal Studies assesses to be around 60 billion pounds. The British government will need to raise interest rates, in order to obtain capital and pay off the tax cuts. This will likely decelerate economic growth and could lead the UK into a recession.
Ultimately, Kwarteng was sacked by Liz Truss as Chancellor of the Exchequer on October 14th. As of now, he has been replaced by Jeremy Hunt. Kwarteng has accepted this decision gracefully, posting a letter on Twitter in which he stated his understanding of Truss’ decision, and pledging his support. Following his dismissal, plans of the tax cut will be changed; and one of its key points – corporation tax cuts, will be abolished.
Many believe Liz Truss and her cabinet members were placed in an already unfavorable situation when they took their seats at Downing Street, but have also made several poor decisions over this past month and a half. All that is left to see is whether they will be able to find a way back, or if their term will be a short and infamous one.