Prime Minister Liz Truss and the Mini-Budget

Britain has been hit by one turmoil after the other from a sluggish economy, Brexit, resigning prime ministers, to the Queen's unfortunate passing. For the UK to be withstanding such turmoil and still maintaining order is remarkable (I may be jumping the gun here). Now they are facing a chaotic market and a declining currency caused by Prime Minister (PM) Liz Truss's announcements. PMs always have to come into office with a splash; for Liz Truss, it is through her ambitious economic policy. Will her approach withstand scrutiny?  Continue the article and find out.

Prime Minister Liz Truss is often seen as following the lead of Thatcher-Reagan and free market capitalism. This revolves around reducing government spending and deficit whilst encouraging spending and investment by lowering taxes and regulations. However, for Reagan, government spending increased by a third, the deficit increased by 50%, and tax decreased only for high-income earners rather than for all. Even the level of regulation remained the same, according to Christopher De Muth, head of the American Enterprise Institute. Under Thatcher's government, the spending growth rate and budget deficit did decrease. If PM Liz decides to follow the lead of her predecessors and stick with free market principles, it will help reduce the UK's high budget deficit and government spending. However, it seems the timing of her policies couldn’t be more wrong. But before discussing that, let's briefly look at the mini-budget's particulars.

The mini-budget plan will impact several things. It will reduce the basic tax rate from 20% to 19% and will cancel the planned increase in corporation tax.  In total, the tax cuts will cost £27bn next year and £45bn by 2026-2. They also aim in this budget to remove the "complex patchwork of planning restrictions and EU-derived laws that constrain our growth" and to encourage investment. Unfortunately, union rules will be toughened, and the bank bonuses cap restrictions will be removed. In addition, jobseeker claimant commitment rules will be tightened up to reduce unemployment benefit spending. A significant piece is the Energy Price Guarantee which “will cap the unit price that consumers pay for electricity and gas, limiting the average household bill to £2,500.”

Apart from where in the world will the budget be funded, one significant criticism is that there seems to be a lack of coordination between the central bank and the government. Before the mini-budget, the main concern for the government and the Bank of England was inflation, not growth. This was followed by hikes in interest and quantitative tightening to slow the overheated economy reduce the money supply, and offset inflation. But the new mini budget emphasises “growth, growth, growth,” as Liz Truss stated. It aims at both reducing taxes and stimulating spending and investment. If successful, will have a devastating impact on inflation. There is an apparent conflict between the central bank's aims of controlling inflation, allowing a rise in unemployment and a possible recession, and  the government’s plan which is the complete opposite. It seems to be a zero-sum game between the BoE and the government.

The reveal of this mini-budget has caused havoc in the UK stock market and currency, leading to emergency interventions from the BoE to ensure the nation's financial stability. The way Liz Truss introduced the bill was not well planned. Furthermore, to counter the BoE efforts seems counter-productive because if, for instance, PM Liz Truss wants to expand the market more, the BoE will respond with higher interest rates, as the chief BoE clearly stated. That is a deplorable move from PM Liz Truss unless there is something we are not seeing.