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The United Kingdom must quickly restore its credibility

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En presenting on September 23 a radical fiscal program disconnected from the economic context, British Prime Minister Liz Truss and her Chancellor of the Exchequer, Kwasi Kwarteng, caused a spectacular shock wave. For the past week, the United Kingdom has been experiencing a financial and monetary storm like the country has rarely experienced. All it took was a handful of ill-calibrated measures to cast doubt on the ability of the world’s fifth-largest economy to repay its debt.

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Barely appointed, the government wants to initiate a “virtuous circle of growth”. If the intention is understandable, the method of achieving it is contested by the financial markets, the International Monetary Fund, the Labor opposition and even some of the Conservatives. A tour de force.

To aim for an annual growth rate of 2.5%, Liz Truss undertakes to lower taxes as never for fifty years, especially for the richest, a little less for the middle classes, while renouncing to increase the tax on corporations, as promised by his predecessor, Boris Johnson. On the budgetary level, this is a huge shortfall, which not only is not financed by savings, but which is accompanied by a freeze (supported by the State) of utility bills. household electricity and gas. If the second measure is undoubtedly necessary, added to the first, it leads the country to dangerously increase the weight of its debt.

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Between hypothetical growth and the possible inability of the United Kingdom to repay its creditors, the latter decided in favor of the second hypothesis, propelling the pound to historic lows and demanding higher yields on government bonds. . Confidence in the United Kingdom’s signature is badly damaged. Now the government faces a dilemma. Either he goes back on his announcements, which would cause him to lose all barely named political credit. Either he persists, and the financial crisis will worsen.

inconsistency

In the meantime, the Bank of England (BoE) is placed in a very uncomfortable position. She must put out a fire lit by the government at the worst time, when inflation is not under control and deficits are widening.

The central bank is forced to urgently buy back the bonds issued by the British Treasury in an attempt to restore confidence. Faced with the inconsistency of the government, the BoE is pushed to adopt a scribble policy. Contrary to its fight against inflation, it must temporarily return to a measure of monetary easing, before probably having to accelerate the pace of raising its key rates to calm the rise in prices which threatens to start again. This monetary tightening could precipitate a real estate crisis, weigh more heavily on purchasing power and ultimately accelerate the onset of a recession.

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Out of sheer dogmatism, Liz Truss and Kwasi Kwarteng are using unsuitable recipes in an already strained financial context. Believing that potential growth will be boosted by a reduction in taxation, without at the same time initiating structural reforms, is the Coué method. The level of public debt and the expenditure necessary to avoid a social crisis in the face of inflation invite more pragmatism than ideological blindness. The government will find it difficult to save its reputation. Will he be able to restore the credibility of the United Kingdom? To begin with, he would have to admit his mistake.

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