What the new Chancellor of the British Exchequer, Jeremy Hunt, did yesterday has been described as “the biggest reversal in the history of the country’s economy”. But the concept of reversing implies a somewhat orderly retreat, looking in the rearview mirror and seeing if someone is coming in the opposite direction. In the case of the Truss government, it has been a violent and desperate action, a sudden swerve with the foot on the accelerator and without any control of the vehicle. The car has spun, a 180-degree turn on the financial highway.
More than the scissors, Hunt has taken out the ax and has killed all the tax reductions announced a couple of weeks ago by the government, and which were the reason for being and the platform with which Prime Minister Truss conquered the Tory leadership . The decrease in corporate tax and the highest tax rate of 45% had already succumbed in previous days. Yesterday they also did the reduction of the basic tax rate from 20% to 19%, and the aid plan to cover gas and electricity bills (they will only be covered for six months instead of two years), in addition to minor details such as the freezing of VAT on alcohol and the reform of the way the self-employed are taxed. A real massacre.
Of all the aspects of the budget that the ousted Economy Minister Kwasi Kwarteng had introduced yesterday (the second shortest in history), only the annulment of the rise in Social Security contributions decreed by Boris Johnson has survived , and the reduction of the stamp duty , the tax that is paid in the United Kingdom when a real estate property is purchased. The rest, to the stake. For the vast majority of Britons, this will translate into a higher tax burden, despite the fact that it is already the highest in seventy years.
As much as it is the sixth largest economy in the world, markets have treated the post-Brexit UK as if it were an emerging country or a banana republic. Liz Truss declared war on “orthodoxy”, and orthodoxy has won by a landslide, humiliating her government and forcing it to go back on everything it had promised, to the point that Conservative MPs are wondering what the point of their presence in Downing Street. Holding the reins is Jeremy Hunt, from the party’s moderate wing, an original critic of Brexit who only joined the movement to leave the EU when it was seen to be inevitable.
The markets reacted favorably from the start of the unprecedented reverse, the pound rose 1% against the dollar (to 1.13) and the price of gilts (British bonds) fell, easing the pressure on pension funds and the financing of the public debt. By undoing the tax reforms, Hunt has plugged half of the estimated €80bn hole in the Treasury’s coffers. Now the other half remains, which will have to come from cuts in social subsidies and in the budgets of all the ministries. The promise to increase Defense spending by 3% is in serious danger, as are the Health and Education items, and the planned investments in infrastructure.
Liz Truss is brain dead. After crashing the car into the market tree, neither word of mouth nor cardiac massages have been of any use. The Conservative Party has put her in an induced coma, while she agrees on how to take her off the ventilator and looks for a new leader.
