The UK seems to follow Sri Lankan politics
By Dr UPUL WIJAYAWARDHANA
On Friday 23rd, the British Chancellor of the Exchequer was billed to present a mini-budget, but what he actually did took everyone by surprise, as it was a budget and half! It was full of tax cuts including the reduction of the basic rate of income tax from 20% to 19%, which gives an average earner a saving of a few hundred Pounds, whereas the reduction of the top rate from 45% to 40% would save a person earning a million, a cool £ 50,000! Cap on bankers’ bonus was removed and there was no wind-fall tax on energy companies making a mint out of the spiralling energy prices due to the war in Ukraine. Whilst all these proposals would lead to less revenue, the government announced an energy subsidy package costing £140 Billion. How was this going to be financed? By increased borrowing! It looked as if Kwasi Kwarteng had taken a leaf out of Mahinda Rajapaksa’s book!!
The underlying argument was that these measures would stimulate the economy and the resultant growth would ultimately benefit all; the very same argument that Mahinda’s advisors too advanced with disastrous consequences. What is interesting is that the same theory of ‘trickle-down’ economics is being applied by an ultra-right Conservative government in the UK and, paradoxically, by a left-leaning socialist government in Sri Lanka. One can say that in UK dogma has taken precedence over all else, but why it happened in Sri Lanka remains a mystery. However, we have seen the consequences in Sri Lanka, and the million-dollar question is whether the UK will face a similar fate. Of course, the UK being a much larger economy has a larger buffering capacity, but initial signs are certainly causing concern.
Disregarding the initial scepticism of many, two days later, the Chancellor predicted that more tax cuts were on the way! What happened next? The Pound fell to its lowest ever against the dollar. In the late 1980s, when we settled in the UK, the Pound was equal to around 1.7 US Dollars but now it is 1.06 but may drop further and be on par soon!
Perhaps, the Chancellor’s actions are reminiscent of Gota’s organic agriculture policy; the right thing being done at the wrong time! As pointed out during the Conservative leadership campaign by the previous Chancellor, Rishi Sunak, the main problem facing the British economy is inflation. Though inflation in Britain has not reached the dizzy-heights seen in Sri Lanka, at around 10% it is high enough. Rishi Sunak’s strategy was to bring down inflation and then consider tax cuts, but his opponent, Liz Truss held the opposite view. She won and became the prime minister, resulting in her chancellor rushing in with a mini-budget that has reaped havoc.
With the devaluation of the Pound, inflation is bound to increase and the Bank of England, which is an independent body, will have no choice but to increase interest rates which will have a very significant effect on mortgage rates. Britain is a property-owning democracy, where everyone dreams of owning a house and the first thing anyone who gets employment does, is joining the property-ladder. Get a flat first, and as your income increases move to a larger unit. The only way to do this, except for the very few born with a silver-spoon in their mouth, is by getting a mortgage. Therefore, the mortgage rate is vitally important and it depends on the interest rate fixed by the Bank of England. As it is very likely that the Bank of England would be forced to increase interest rates sharply, many lenders have stopped giving mortgages altogether, which is causing utter confusion.
The other significant development is that the projected interest rates for government borrowing have increased sharply; just what happened with Sri Lanka leading to near bankruptcy! As this may severely affect pension funds too, the Bank of England has stepped in with the urgent measure of buying-back government bonds, which seems to have stabilised the situation, for the moment.
In an unprecedented move, the IMF has issued a statement expressing concern that the measures announced in the mini-budget are likely to have an adverse effect and may widen disparities. IMF usually does not comment on the actions of G7 countries, usually reserving such comments when referring to developing countries, especially when a new government comes to power and attempts economic reform.
Just like Ranil, who was propelled to the presidency by a stroke of luck, Liz Trust, who became PM with the votes of around 80,000 Conservative party members, has no public mandate but seems to be taking drastic measures. Considering that she is showering concession after concession on the rich and the private sector, one wonders whether she is trying to carve out positions for her lackeys and herself in the future, following the very likely defeat at the next general election. Anyway, most British Prime Ministers earn much more after they leave office!
By the way, Liz Truss is very much like a Sri Lankan politician. She was born to a Labour-supporting family and in her youth, while being in Glasgow with her family, joined protests demanding the resignation of Margaret Thatcher, shouting “Go, Maggie, go!”. In Oxford University she was with the Liberals and spoke for the abolition of the monarchy. As she took to active politics, she changed sides and joined the Conservative party, and had an extra-marital affair with her Conservative mentor. He faced a divorce but she was able to patch-up with her husband and went on to have two daughters with him. Having lost the elections in 2001 and 2005 in different electorates, when she was selected as the 2009 candidate for a safe Conservative seat in Norfolk, some rich farmers in the party objected to her selection because of this but she overcame them; dubbed ‘the Turnip Taliban’.
Liz Truss’ policies now seem more Thatcherite than even Thatcher’s and what they will do to the UK is anybody’s guess. For the moment, it looks as if they are working counterproductive to the needs of the British economy and do hope she will not make Sri Lanka out of Britain!
