Home News Liz Truss government backs off on tax cuts for the rich – Alessandro Lubello

Liz Truss government backs off on tax cuts for the rich – Alessandro Lubello

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Liz Truss government backs off on tax cuts for the rich – Alessandro Lubello

04 October 2022 12:06

On 23 September, the UK government unveiled a £ 45 billion tax cut plan, the largest in fifty years. Among the measures announced by the Chancellor of the Exchequer (the Treasury Minister) Kwasi Kwarteng was the reduction of the minimum rate of personal income tax to 19 percent, while the maximum rate would go from 45 to 40 percent. In addition, the corporate tax hikes envisaged by the previous government and health insurance contributions were blocked. Kwarteng also outlined a £ 60 billion plan to limit the cost of electricity to UK businesses and households over the next six months.

The chancellor stressed that these measures are aimed at getting the British economy back on track, which, according to the Bank of England, may already be in recession. But in the days following the announcement, the pound depreciated sharply against the dollar, falling to its lowest level since 1985, and at the same time interest rates on gilts, British government bonds, which are at highest level since 2008.

A risky bet
The negative reaction of the markets is linked to the fact that London would like to finance its plans by relying largely on debt. The government claims that £ 72 billion will be needed. But according to Paul Johnson, director of the independent study center Institute for fiscal studies, it will reach at least 120 billion by 2025, “a risky bet, made with money fed into an economy already struggling with high inflation” and unmanageable if the country doesn’t really grow that much. “Investors,” writes the Guardian again, “do not think Kwarteng’s plans are credible. In general, higher interest rates should attract capital towards the pound, but the fact that the opposite is happening reflects the collapse of confidence in the UK’s economic outlook ”.

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Even the International Monetary Fund (IMF) has intervened, arguing that the London government risks aggravating inequalities and further exacerbating price increases. Meanwhile, the Bank of England has announced that it will not increase the cost of money and will intervene in the markets to support gilts. Initially, the institution will buy securities with a maturity of at least 20 years for £ 65 billion. Many observers believe it will not be easy to stop speculation, but there is much more behind the Bank of England’s defense of gilts. As the New York Times explains, the sharp rise in government bond yields jeopardizes the stability of the financial system and in particular that of pension funds, especially those with already defined benefits (pension funds that manage workers’ contributions by promising a pre-established pension level) that often use gilts as collateral to obtain liquidity and honor commitments.

Almost all the Italian parties, including Fratelli d’Italia (the winner of the elections), continue to propose expenses without indicating solid coverage

The government led by conservative leader Liz Truss has come under tremendous pressure, not just from the markets. “Two weeks before the government’s plans were announced,” writes the Financial Times, “when asked if she was ready to become unpopular, Truss replied: ‘Yes, yes, I am!’ Well, it must be said that she did it very well ”. All City operators and many politicians, including several of Truss’s party comrades, were speechless, while Labor took a 33-point lead in the polls. The premier and Chancellor Kwarteng remained firm in their positions for a long time, but then they began to yield.

On October 3, the government withdrew the lowering of the tax rate on richest incomes from 45 to 40 percent, stressing that this measure had “distracted” public opinion from the true scope and effectiveness of the whole package. But how is it possible, asks the British financial newspaper, that a country like the United Kingdom and a party like the Conservative one, once always in tune with the City, have thus triggered panic in the markets?

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One possible answer is that the populist spirit has also been brewing among British conservatives for some time. “Party leaders once viewed funded markets as a neutral entity that threw the truth in the face of clueless governments. Today, however, many on the more conservative wing see the markets as an elite who do not understand the potential of their tax cuts to stimulate growth. David Frost, former Brexit minister, is among those urging Truss to firmly resist the ‘frightening clique’ of the economic establishment ”.

The US economist Lawrence Summers, a Harvard lecturer and US Treasury Secretary with Bill Clinton, said a financial crisis in the UK would penalize London as a global financial center and, by hitting a global reserve currency such as the pound sterling, would also have negative consequences for the rest of the country. planet. At this moment in the United Kingdom, added Summers, we see things that “happen more often in the poorest countries, but which in the past also involved France at the beginning of the presidency of François Mitterand, the United States at the end of the administration of Jimmy Carter and Germany, when Oskar Lafontaine was the finance minister of Gerhard Schröder’s first red-green government for about six months ”.

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Italy could also be added to the list, a heavily indebted country where governments often announce measures (sometimes not very productive) that have uncertain coverage or are based exclusively on new debts and on the hope of relaunching growth and therefore also state revenue. This, for example, was one of the causes of the flight of investors that in 2011 caused the crisis of the last government led by Silvio Berlusconi. In that case, as every time the markets or the European Union do not respond to the demands of politics, there was talk of a conspiracy of the markets, of Brussels or of some European partner.

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And this could be repeated in the future, given that almost all Italian parties, including Brothers of Italy (the winner of the elections), continue to propose expenses without indicating solid coverage or making it clear that they will resort to new debts. And almost all parties are ready to lash out at investors. Or against the European Union (when it is not willing to grant it funds or guarantees), perhaps forgetting that if Italy has resisted in these years of crisis it is thanks to the support of Brussels and the European Central Bank. And forgetting that in recent days a country with its own currency that has even left the European Union has ended up in the eye of the market storm. In reality, to quote Summers again, certain crises can only be avoided if governments stop announcing little credible measures that they do not have the means to implement.

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