Lhe pantheon of the greatest errors in economic policy has just been enriched with a new textbook case. By deciding to blow a wind of liberalism tinged with populism and obtuse conservatism on a United Kingdom weakened by its post-Brexit isolation, an economy undermined by inflation and an unprecedented energy crisis, British Prime Minister Liz Truss , and its Chancellor of the Exchequer, Kwasi Kwarteng, plunged their country into a serious financial crisis.
To boost growth, Liz Truss, barely named, launched a gigantic tax reduction plan, not seen since 1972, which is not financed, with as a corollary a program of support for British households to pay their utility bills. gas and electricity. An explosive cocktail that threatens the sustainability of British debt. The reaction of the financial markets was swift, propelling the pound to its historic lows and government bond yields to peaks. The government had modestly called its initiative a « mini-budget »he must now manage the « maxi-effects”.
“It is the characteristic of situations where credibility is lost”, summarizes Larry Summers, ex-Treasury Secretary under Bill Clinton between 1999 and 2001, who called the UK government’s announcements “completely irresponsible”. “It happens most often in developing countries, but it happened before with Francois Mitterrand before he flip-flopped [en 1983]with the Carter administration before Volker [nommé président de la Fed en 1979]and with Oskar Lafontaine in Germany [en 1999] ».
Is not “Maggie” who wants
Liz Truss therefore becomes the first woman to join this select club of leaders, who, out of dogmatism, have chosen to go it alone, against the economic environment. “It is a government that gives the impression of being very far from reality with ideological references which, in the current context, are doomed to failure”, estimates the economist Véronique Riches-Flores, president of RF Research.
The Prime Minister applies yet another version of the “trickle down theory” of lowering taxes on the wealthiest to boost growth. Investors doubt it, while the International Monetary Fund has distanced itself from “massive and untargeted tax plans” and is concerned about measures that “will likely increase inequality”.
Liz Truss and Kwasi Kwarteng sinned by nostalgia, that of the end of the 1970s when Margaret Thatcher came to power. But is not “Maggie” who wants. The Iron Lady has indeed deregulated at all costs and drastically lowered taxation, but at the time, it had taken care to compensate for the drop in revenue from income tax and corporation tax by raising VAT and increase in social security contributions.
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