Silvan Mifsud
Just like Brexit and Trump’s presidency has proved beyond reasonable doubt, populism is a road to perdition, with tragic consequences. In the past weeks we have seen the disastrous consequences of populism, once more in the UK.
Following an internal leadership campaign within UK Conservative Party, Liz Truss was elected UK Conservative Party Leader and Prime Minister in early September. One of her leadership campaign battle cries was a policy of aggressive tax cuts. Many economists did warn her that such tax cuts would mean some £50 bn in unfunded loss in government revenues and that this would shatter UK’s credibility in financial markets, but that warning was unheeded as Liz Truss kept insisting that these tax cuts are needed to boost UK’s economic growth.
Fast forward to the 23rd September when Liz Truss and her Finance Minister Kwarteng roll out the extent of their planned tax cuts in the so-called mini budget. All hell broke loose. The extent of the tax cuts meant that the UK government would have to increase its borrowing heavily. The financial markets soon delivered their own harsh judgement on all this. The value of UK government bonds collapsed and the sterling fell at one point to only $1.03. The fall in the value of bonds meant that suddenly many UK households faced higher mortgage repayments and that many pension funds who hold about $1 trillion of these assets became financially unstable. Within a few days the Bank of England was forced to reverse its “quantitative tightening” policy and start buying these bonds en masse (£65 billion) to avoid a financial meltdown. By Monday 3rd October, Prime Minister Truss was forced to backtrack, reversing the plan to get rid of the UK’s highest tax bracket. The damage was done as bond market remained jittery on UK debt paper. On the 10th October there was another sell-off of long term UK sovereign bonds, with the Bank of England having to widen its bond buying programme to include index-linked gilts in an effort to counter all this.
Today, the now ex-UK Finance Minister Kwarteng had to rush back to UK from Washington, where he was attending the global finance ministers’ meetings, as his PM decided to reverse several of the tax cuts outlined in the “mini budget” and sack Kwarteng as Finance Minister. In a very humiliating speech by the PM Truss this afternoon, she had to admit that her proposed tax cuts destabilised the UK’s economy and had to reverse some of them to ensure financial stability. Amongst the reversal of tax policy is now the fact that UK’s Corporate Tax will now be increasing to 25% as previously planned. It remains to be seen if all this will actually restore the market’s trust and credibility in UK’s economic policy, where the next few weeks will be crucial. On one hand, the PM’s Truss credibility has very much been dented and there are many Conservative MPs who are of the opinion that such huge U-turns in matter of a few weeks, reflect badly on PM’s Truss ability to lead the country. There are still proposed tax cuts that have not been reversed which the market is jittery on. On the other hand UK’s credibility to stick to a well outlined economic plan is now at an all time low, as it seems that the UK under PM Truss is now more inclined to jump from one policy to another in a hopeless reactionary mode.
This, in my view, teaches us all, especially business leaders, a very important lesson. Populism is a dead end. When politicians promise things which seem to be too good to be true and which defy economic logic, we should be very wary. Politicians come and go, but the effect of their vote catching, populist proposals will have to be faced by us and future generations. Present problems do not have easy solutions. To real address economic growth, requires a partnership between business and political leaders to make the long-run investments needed for prosperity together with changes in policy which deliver much needed reforms. We must all realise that policies for good and sustainable economic growth take time as they need to be based on difficult supply side economic reforms, as well as investments in skills and innovation. Mad and populist plans are unrealistic, dangerous and unsustainable – a true road to perdition.