Editor’s note: Frida Ghitis, (@fridaghitis) is a former CNN producer and correspondent, world affairs columnist. He is a weekly columnist for CNN, a columnist for The Washington Post, and a columnist for World Politics Review. The opinions expressed in this comment are his own. See more reviews on CNN.
Much of the world watched in shock earlier this month when former foreign secretary Liz Truss became prime minister of the United Kingdom – a country of around 67 million people – after winning an election by just 81,000 votes. Less than three weeks later, shock turned to panic when Truss made dramatic moves that threatened to send his country into a recession.
What on Earth is happening to Great Britain?
Truss replaced the disgraced Boris Johnson, winning the support of a majority of Conservative Party members. With that, he became the leader of the Tories, the party that still has a majority in the UK House of Commons. But after going to the prime minister’s residence at 10 Downing Street and waiting out the official period of mourning following Queen Elizabeth’s death, he announced a series of measures that sent panic into financial markets and among British households worried about their finances.
In the midst of a wave of inflation hitting the world and prompting central banks to raise interest rates in an attempt to cool inflationary pressures, Truss’s plan was to open a fire hose full of petrol to cut taxes, especially for the wealthiest. raging economic fire.
Economists and politicians on the left and the right largely agreed that, if not the policy itself, the sudden expansion and the timing could not have been worse.
Officials in Washington have openly expressed concern about the timing of Truss’ actions. They came at a time when the world – and the West – is on a knife’s edge, with Russian President Vladimir Putin annexing large parts of Ukraine and suggesting the use of nuclear weapons as his invasion falters. As mysterious explosions cause leaks in Nordstream pipelines, adding further concern ahead of a terrifying winter of gas supply shortages across Europe, all this is happening as democracy finds itself under pressure around the world.
There couldn’t be a worse time to experiment in one of the most important countries in the West and the world.
Truss says tax cuts will encourage investment and growth. But even supporters of the trickle-down economy know that cutting taxes when inflation is at its highest levels in decades and banks are struggling to contain it is like eating candy to stave off a diabetic coma.
As soon as he and his finance minister, Chancellor of the Exchequer Kwasi Kwarteng, unveiled a new budget full of tax cuts, and then said they would scrap the top tax rate for the highest earners, investors began pouring into UK government bonds, albeit predictably. Sharper interest rate hikes to cover the yawning budget hole Truss was excavating.
The pound sterling began to fall, reaching its lowest level in four decades. The pound, which traded at more than two US dollars for much of the 1970s, fell to near parity with the greenback.
In what was both a statement and an act of denunciation of UK government policy, the Bank of England, Britain’s Fed, began buying bonds to support the pound and avoid “dysfunction” just days after raising rates to fight inflation.
To deal with the sale, and to keep pension funds from shrinking, he vowed to continue buying on “any scale necessary”. Its chief economist, Huw Pill, said Truss cuts would require a “significant monetary policy response”. In other words, Truss’s decision would result in even higher interest rates for everyone.
The International Monetary Fund, which more often oversees the policies of poor countries, also issued a rare rebuke, warning that the policy would increase inequality and that fiscal and monetary policies would work at “cross-purposes”.
For British households, rising interest rates have a greater impact than in the United States. Almost two-thirds of UK mortgages have a variable interest rate or expire in the next few years. Coupled with the rising cost of home heating, the impact on families can be devastating. Truss has announced a cap to help ease rising energy costs.
On Thursday, Truss gave a series of radio interviews to local stations in an attempt to defend his controversial policies. There were no signs he intended to back down and his explanations – his overall performance – were largely seen as disastrous.
Truss lacks a mainstream presence, but he seems to try to make up for it with his devotion to free-market orthodoxy. This worked well in winning the party leadership contest, but it is wreaking havoc in the government.
The story of Liz Truss’s rise to the top job and her terrible first weeks in office is emblematic of our political times, and not just in the UK. In an age of social media and political polarization, simple dramatic statements – I will cut taxes – project courage and a strong commitment to ideology, without concessions or nuance. Such bare-bones appeals to the party’s base require appearing tough and impervious to criticism, willing to compromise.
His victory only convinced party loyalists to vote for him, a stance that helped him win office. There were certainly other factors at play. But the contest was reminiscent of a US party primary, when voter turnout is high for party activists at the expense of moderate candidates.
As a result, he came into office with incredibly low expectations, and it appears he’s living up to them. A poll showed that only 12% expected him to be a good or great prime minister.
The re-energized opposition Labor Party, which has suffered terrible leadership in the past, can hardly believe its good fortune after struggling for so long to win an election. The last three Prime Ministers have been Tories.
Polls show Labor well ahead of the Conservatives, but the next election may be years away.
Truss could still lose power by then. Just as Boris Johnson was ousted by his own party, so was Truss. No doubt other Tories are strategizing. Even Johnson can smile, reflecting on his hopes.
Beyond the frustration and anger he sparked in the UK, Truss’s ham-fisted actions have added another cause for concern among Western allies even outside the gate. At a crucial moment in history, when democratic countries are not only rising up against aggressive authoritarianism, but trying to defend that democracy remains the best system of government, it is imperative that Britain not only strengthens its economy, but also proves it. a democracy capable of creating wise and effective governance.