How Liz Truss’ Tax Cuts Have Brought UK to the Brink of an Economic Collapse

Truss’ policies forced intervention from the Bank of England and was rebuked by the IMF.

3 min read
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Edited By :Ahamad Fuwad

The United Kingdom’s economy is in crisis with Prime Minister Liz Truss doubling down on her $50 billion ( £45 billion) tax cuts package that has left the country’s economy in disarray. 

A few weeks after she took over the top post from fellow Conservative Boris Johnson, Truss’ tax-cutting binge, which predominantly benefit the rich, has pushed the UK into an unprecedented economic spiral.

Speaking publicly for the first time since the market collapse, the UK PM blamed global market turmoil and the high energy prices due to Russia’s invasion of Ukraine, for the chaos.

Despite Tory MPs calling her package “inept madness” and a “disaster,” Truss told a local radio on Thursday, “This is the right plan that we’ve set out.” 

Economists quoted by The Independent calculated that almost half of the $50 billion package will go towards the top 5 percent earners, with anyone earning less than £155,000, who will end up paying more overall as a result of the tax change.


What’s Happening in Britain:

  • Crashing Pound: Following the announcement of the tax plan, the British Pound sterling fell to unprecedented lows, subsequently gaining a few points.  

  • Inflation slows, prices rise: Despite a small Inflation drop in August, consumer prices are still rising at the fastest pace in 40 years. 

  • High Interest Rates: On 22 September, the Bank of England raised the key borrowing rate and tried to keep high inflation further from the UK’s economy. 

  • Soaring Energy Bills: Gas and electric charges for the average household are set to increase by 80 percent, stoking inflation and squeezing pockets

  • Worried Investors: Financial markets remain in a spiral over the unease over the UK’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.

The Domino Effect 

Truss and the new chancellor of the exchequer, Kwasi Kwarteng, announced extra borrowing for tax cuts, they sacked the Treasury’s top bureaucrat and have insisted that they will continue on the same path despite a hostile market reaction.

As a result, the Pound crumbled to an all-time low against the US dollar on Monday after Kwarteng hinted at further tax cuts without explaining how to pay for them.

Subsequently, bond prices collapsed, sending borrowing costs to all time highs, and spooked investors sold off British assets worth $500 billion.

The British financial markets were already febrile because of the rising risk of a global recession and the three outsized rate increases as US banks aim to fight rising inflation. 


Truss Double's Down on Policy Moves

Truss’ policies have forced interventions from the Bank of England, who set off on a buying spree for long-dated UK sovereign bonds to prevent a tumbling crisis, and also brought in severe rebukes from the International Monetary Fund (IMF).

"Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy."
International Monetary Fund

Truss stressed that the biggest part of the mini budget was assistance for energy bills and added that the government sought to curb inflation while setting “a better trajectory for the long term.” 

However, it is important to note that such provisions were contained in a separate announcement earlier in September, which did not cause any market panic

Conservatives are now openly worrying about the optics surrounding a plan to dole out cash to the rich during a cost-of-living crisis. Polls show that the opposition Labour Party soared to leads as high as 17 percentage points. However, elections aren’t due to be held until early 2025 at the latest. 

The Tory Party has always branded itself as a sober, financially responsible force of the British political arena. Truss has defended the crisis and her supporters have since dismissed the backlash, calling it an outcome of the financial system which has apparently remained too orthodox in the past. 

(With inputs from The Independent)

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