Conservative Iain Macleod, professional gambler and former editor of The Spectator, served as the United Kingdom’s Chancellor of the Exchequer for exactly one month in 1970 before he died of a heart attack. Kwasi Kwarteng lasted a little longer, 38 days. He was recalled by Prime Minister Liz Truss from a meeting of the International Monetary Fund in Washington DC, and sacked on Friday. It was an ignominious end to a brief and disastrous turn in charge of the country’s finances.
Truss and Kwarteng came into power less than six weeks ago as a package. It hasn’t gone well.
As the news broke that Kwasi Kwarteng, Britain’s chancellor of the Exchequer, had been fired on Friday, Britons on both sides of the political divide expressed dismay over Prime Minister Liz Truss’s first month in power and said that her leadership position looked increasingly untenable.
The son of Ghanian immigrants, Kwarteng is the first black Brit to serve his government in such a high position of responsibility. He first got attention writing columns for the right-wing rag The Daily Telegraph. From there he was set up as chairman of the right-wing think tank The Bow Group.
His fatal mistake as chancellor was immediate. Seventeen days into his term, he introduced “The Growth Plan 2022.” Quickly dubbed “the mini-budget,” it was typical Reagonomics. A plan to raise the corporate tax rate was scrapped. The high-end tax bracket of 45 percent was abolished. People receiving the Universal Credit social security payment were told to try harder to find work. It was basically what Republicans do every time they come to power in the United States. They deplete the government’s coffers and undermine the social safety net.
Except, forcing the United Kingdom to do massive deficit spending in the midst of inflationary pressures wasn’t what the doctor ordered. Nor was stimulating demand with tax cuts during a time of supply disruptions.
The budget, which was unveiled against the backdrop of a cost of living crisis, was immediately followed by a sharp fall in the value of pound sterling against the United States dollar as world markets reacted negatively to the increased borrowing that would be needed. By the next day of trading, the pound had hit an all time low against the US dollar. The statement drew widespread criticism from economists, some of whom feared its reliance on increased government borrowing to pay for the largest tax cuts in 50 years could lead to a situation like the 1976 sterling crisis when the UK was forced to ask the International Monetary Fund (IMF) for a financial bailout. The IMF took the unusual step of issuing an openly critical response to the budget, saying it would “likely increase inequality”.
Kwarteng’s proposals threw the British economy into crisis. It was as pure an example of blind ideology trumping sensible policy as I’ve ever seen. The ideas were so bad that they didn’t need to be implemented to cause damage. The mere suggestion that they might be implemented was sufficient.
The Bank of England had to engage in immediate triage.
The Bank of England has said it will step in to calm markets after the government’s tax-cutting plans sparked a fall in the pound and caused borrowing costs to surge.
It warned that if the market volatility continued there would be a “material risk to UK financial stability.”
The Bank will start buying government bonds at an “urgent pace” to help restore “orderly market conditions.”
This is the kind of thing that happens when you have a one-size-fits-all political philosophy. It’s completely foreign to the supply-side ideologues to think there might be a good time to raise taxes or keep them the same. They don’t know when to goose the economy with stimulus to poor and middle wage earners, or how to tighten things up when demand outpaces supply. They complain about debt and deficit spending, but they deplete the government’s coffers at every opportunity without ever having the power or resolve to make corresponding (and unpopular) cuts that would balance the books.
It’s easier to get away with this in the United States than elsewhere, mainly because we have such a strong market for our bonds and can seemingly print as much money as we want. But also because our presidents serve for four-year terms and are not subject to recall or loss of confidence votes. In the U.K., the Tories are already talking about replacing Truss as prime minister, just as they recently replaced Boris Johnson. The president of the United States can tank the economy without having to worry about being booted by their own party.
What’s happening in Britain is a perfect illustration of what’s what wrong with conservative economic theory.
While it was a very irresponsible policy, I think the current worldwide environment (war, pandemic) with the Federal Reserve hiking in unrelenting fashion was more responsible than the policy itself. Bank of England hasn’t exactly been covering itself in glory either, Bailey should resign or be replaced, too.
“We have such a strong market for our bonds”
People misunderstand Government bonds: they are no more and no less than risk free future money. There is no logical argument why there wouldn’t be a strong market for them.
Thanks for your comment. Aren’t they “risk free future money” only as long as 1) the government pays its future bills, and 2) buyers don’t have a better option?
There was a time when the pound sterling was the world’s strongest currency (and when the sun literally never set on the British empire). Then…the world changed (in part because the British powers-that-be grew overly complacent about their power).