Liz Truss has denied accusations from critics that she is undermining the UK economy. The new Prime Minister’s economic policies have been widely questioned, especially since the government had to make an embarrassing U-turn on plans to scrap the 45p income tax rate for the highest earners.
Since she became Prime Minister on 6th September, the UK has plunged further into economic crisis. This was something her rival in the leadership race, Rishi Sunak, had predicted, describing her policies as “fairytale economics”.
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Two weeks into her term in office, Truss and chancellor Kwasi Kwarteng announced their mini-Budget, when the economic policies included scrapping the 45p in the pound tax rate for people who earned more than £150,000 a year. This sent shockwaves through the economy.
Immediately after the mini-Budget, the pound fell sharply on 23rd September, losing 3% against the US dollar as it dipped below $1.09. The pound also fell 0.75% against the euro. Three days later, on 26th September, the pound fell to an all-time low of $1.0327 against the US dollar – its lowest since Decimal Day back in 1971.
The PM later had to reverse the policy change on scrapping the 45% income tax, after the International Monetary Fund took the unprecedented step of condemning the plans, saying they would “increase inequality”. The people who would have benefited financially from the change included Truss herself and her colleagues in the Cabinet.
There are also plans to cut the basic rate of income tax to 19% from April 2023, rather than in April 2024, as previously discussed. A freeze on energy bills for the next six months (costing the government an estimated £60 billion) was also announced. The aim of the freeze is to reduce inflation by 5%.
From 6th November, the government will reverse the 1.25% National Insurance rise introduced in April 2022 by Boris Johnson. In addition, plans to introduce a Health and Social Care Levy in April 2023 have been scrapped, as have plans to increase corporation tax from 19% to 25% at the same time.
What has the economic fallout been?
After the pound continually fell against the US dollar, Kwarteng’s subsequent announcement of a U-turn on scrapping the highest income tax rate caused it to rise again to pre-Budget levels of $1.13. It rose again to $1.14 after the chancellor announced a report by the Office for Budget Responsibility would be published.
The chancellor announced he was bringing forward his medium-term fiscal plan and the OBR forecast, in a move described in the media as the “government’s latest about-turn”. He had been due to announce more measures to help the economy on 23rd November. However, on 10th October, he announced, he was bringing this forward to 31st October. He said it would enable the OBR to capture data releases, including the Quarterly National Accounts, providing time for the medium-term fiscal plan to be determined.
The forecast is expected to provide more details of how the measures announced in the mini-Budget will be funded. However, for Truss’s critics, the damage has already been done, as the Bank of England has said it will “not hesitate” to raise interest rates and is “monitoring developments closely”.
However, it isn’t due to meet again to discuss interest rate levels until November. Huw Pill, the Bank’s chief economist, has warned it will have to deliver a “significant monetary policy response”. The Bank has already launched a £65 billion bail-out to save pension funds from collapsing, following the mini-Budget.
Many banks and building societies across the UK have already withdrawn some mortgage deals, fuelling growing concerns the interest rate will increase. The Skipton Building Society and Virgin Money have withdrawn mortgage offers for new customers, while the Bank of Ireland has stopped all mortgage offers.
The Nationwide Building Society has already increased its fixed rate mortgages by between 0.90% and 1.20%. In total, 40% of all mortgage deals had been withdrawn from the UK market by 29th September. By 5th October, the typical interest rate on a fixed-rate two-year mortgage had risen above 6% for the first time since 2008.
What happens next?
Following the chancellor’s announcement of £45 billion in tax cuts, Truss briefly acknowledged the state of the UK economy. When asked if the crisis had been caused by her own government, she responded it had been “very important” that they took “urgent steps” to combat the costs families were facing this winter.
The average household’s annual energy bill should be no more than £2,500 as a result of the freeze – up from £764 in 2021. Without the action taken by the government, it was expected to increase to £3,500 for the year. Truss cited putting the energy price guarantee in place as a reason for government borrowing, adding, “I recognise there has been disruption,” in reference to the economy. She also defended the decision to announce the mini-Budget without the Office for Budget Responsibility’s accompanying forecast, blaming the urgent need to respond to energy prices.
S&P, the financial research and analysis organisation, predicts the UK’s GDP will contract by 0.4% in 2023. It also believes the UK is already in the grip of a “moderate” recession. However, financial support measures, such as the freeze on energy bills under the Energy Price Guarantee, will significantly protect consumers from the impact of even worse inflation.
Opposition leader Keir Starmer has accused the Prime Minister of having “lost control” of the economy and told her she has “crashed the pound”. Analysts say Britain’s latest economic woes have presented an opportunity for Labour to offer itself as a viable alternative to the Conservatives.
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