Analysis | Great Britain, Truss and fairy tales

The Conservative Party has governed Britain incompetently for the last 12 years. Liz Truss will be the fourth unprecedented prime minister. David Cameron resigned because he staked his political career on winning the Brexit referendum. Theresa May resigned because she was unable to get her Conservative Party colleagues to approve her Brexit deal. Boris Johnson was chosen to carry out Brexit and he did so by signing an international treaty with the European Union that included the Northern Ireland protocol.

After a series of hilarious scandals and legal fines, Boris Johnson was forced to resign by the Conservative Party as the party’s popularity was slipping in opinion polls. The British public realized that Boris has a lot of charisma, but he was not interested in running the country. He was more interested in giving wacky speeches about Global Britain than solving the day-to-day problems facing the country.

The British people are very pessimistic about their future prospects. Voters’ priorities are clear: the cost of living (inflation) and public services. Many feel that things are simply not working very well, from the national health services to the police, the transport network and the criminal justice system. Unions are on strike for wage increases to match inflation and airports and ports are in chaos.

Currently 69% of Britons, including 60% of Conservative voters, agree that the country is “in decline”. All European countries face difficult challenges, but none are so pessimistic about their governments, their political parties and their future prospects.

As serious political and economic problems piled up, the Conservative Party decided to elect a new leader. Former chancellor and favorite Rishi Sunak called on voters not to believe in “fairy tales” and accept the fact that Britain needs to raise taxes and increase spending to solve its political and economic problems.

Conservative Members of Parliament voted overwhelmingly for Rishi Sunak because they believe he is the best candidate to solve the economic problems and win the next general election in 2025.

Interestingly, it is not the deputies who elect the party leader, but the party members. The unknown candidate, Liz Truss, has promised to mimic the right-wing economic policies of Thatcher and Reagan to please party members.

She claims that cutting taxes and reducing government spending will boost future economic growth in Britain. Nobel Prize-winning economist Paul Krugman calls these economic policies Voodoo.

It is a fairy tale that you can reduce taxes and government spending in the midst of an economic crisis and increase economic growth at the same time. These 1980s policies are more likely to increase public deficits and public debts leaving the country worse off.

But his tax-cutting message appealed to the Conservative Party’s 160,000 wealthy, white and mostly elderly members, who elected him over the hard truths offered by his opponent, Rishi Sunak. Furthermore, Truss asserts that it is incorrect to assess all economic policy through the “lens of redistribution,” claiming that it was acceptable that his planned tax cut would benefit the richest people 250 times more than the poorest.

Party members were also impressed by his tough stance on Britain’s relationship with the European Union. He currently agrees to the policy of unilaterally breaking the Northern Ireland protocol and risking a trade war with the EU.

On immigration, he wants to continue the policy of sending asylum seekers to Rwanda in defiance of a ruling by the European Court of Human Rights. Diplomats are concerned about Britain’s reputation as a reliable partner in upholding the rules-based international order, especially in a world of heightened geopolitical tensions.

The European Union is concerned that Truss provokes unnecessary conflicts to arouse nationalist passions instead of engaging and working on a mutually beneficial solution. As prime minister, Truss faces a number of immediate economic challenges and will be judged on her actions, not her words.

The first challenge is the cost-of-living crisis, with gas and electricity bills projected to rise 80% by October 2022. In his first speech, he laid out a two-year energy relief package for homes and businesses that it could cost up to £100bn.

The key question for financial markets is whether Truss will now recognize that Britain cannot afford to cut taxes substantially, as it would dramatically increase the public deficit and drive up inflation.

Investors have little faith that Truss will take sensible political and economic action. They are selling British government bonds and taking their money out of Britain. The proof is the value of the pound sterling. It has depreciated to the lowest level in 30 years and may continue to depreciate. It all depends on whether the new prime minister believes in her own fairy tales.

Paul Moran He is Professor of the Master in International Finance of IEB

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Analysis | Great Britain, Truss and fairy tales