At the end of September this year, the British government announced a tax cut, an announcement that shook the British markets. The goal was to weaken the burden of the price increase for the country’s citizens, while inflation in the Kingdom stands at 10%. The lowering of taxes was part of a series of decisions by the new Prime Minister who took office after Boris Johnson, the decisions and construction of the new policy was built together with the Minister of Finance, Kwasi Kwartang who has been in office for less than six weeks.
The government’s decision to lower taxes shocked the British markets. The market realized that this step of lowering taxes by the government, not only will it not take the burden off of these citizens but will increase inflation in Britain more, since lowering taxes will lead to more available disposable income for the citizens, who will not think twice about spending the free money, thus leaving the inflation That decision sent the pound falling to an all-time low against the dollar while yields on British government bonds soared. Now British Prime Minister Liz Truss is firing her finance minister Kwazi Kwarteng and scrapping parts of the ambitious tax cut plan she built with him that sent markets into turmoil , all this in order to survive the political pressure and economic chaos caused by the publication of the program.
The Minister of Health and former Minister of Foreign Affairs – Jeremy Hunt, was announced as Kuarteng’s replacement. Chris Philp, the chief secretary of the Treasury, was also replaced by Edward Erger. At a press conference where the new appointment was announced, Terras said that she wanted to calm the markets, and that the new Minister of Finance, Annette, shared the same economic ambitions as her. Truss also canceled the commitment to cancel the increase in corporate tax from 19% to 25%, a very expensive decision that will add about 19 billion pounds to the state coffers by 2026.
Outgoing Finance Minister Kuarteng said: “The economic atmosphere has changed rapidly since we published the growth plan on September 23. In response, together with the Bank of England and other senior officials at the Ministry of Finance, we responded to these events, and I thank my subordinates for their commitment, it is important now as we move forward to emphasize your government’s commitment to discipline Fiscally. The medium-term fiscal plan is essential to this goal, and I look forward to supporting you and my successor to achieve this from the backbench.”
There is no doubt that Liz Truss started her term on the left foot and with an embarrassing U-turn – if we admit the truth it is good for her and even more so for her citizens that she chooses to go back now and admit her mistake, and not at a later time when the damage will be irreversible. Inflation in the Kingdom has reached double digits and it is expected that despite the decrease that occurred in the last month, prices will continue to rise in view of the coming winter and the war in Ukraine.
The two factors that probably influence the economy of a particular country the most are the fiscal policy, which is determined by the government, and the monetary policy of the country, which is determined by the central bank. The central bank and the government should act parallel to each other to ensure the stability of the country’s economy. The British government did exactly the opposite – while the central bank is trying to fight inflation, it took a step that, as mentioned, is only supposed to increase it. This led the country’s central bank to withdraw from its monetary policy and it announced that it would return to purchasing government bonds in order to lower the yields on those bonds back down.
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