LBritish Prime Minister Liz Truss’ budget plan, which led to her swift resignation, has been called the biggest economic policy mistake of modern times. No doubt, but there are more essential and worrying lessons, which concern most of the governments of the planet. They intend to reconcile the fight against inflation, response to the energy crisis, social demands to maintain income, all in a context of major international uncertainties. The British chaos shows that it is an impossible mission.
The mini-budget presented on September 23 is first and foremost the expression of harmful fundamentalism. Isn’t it surprising to refer to the trickle-down theory according to which tax-freeing the rich ends up contributing to the prosperity of the poor? The experience of the past two decades, however, has invalidated this belief. Stimulating supply by reducing taxes on the rich is not always effective, takes time and above all does not respond to the energy shortage, one of the main sources of the renewed inflation that is mobilizing public opinion today. public against the government.
A considerable reduction in taxation on the profits and income of the wealthiest is in fact financed by an increase in public debt, which has set in motion processes which concern many governments, far beyond the United Kingdom. Indeed, investors, worried about the aggravation of the public debt, no longer buy public securities and thus jeopardize the pension funds which had anticipated the maintenance of interest rates at low levels by covering themselves on the derivatives market.
By their statute, defined benefit pension funds must restore their position by selling public securities, which aggravates the rise in interest rates and initiates a new spiral. This vicious circle nearly swept away the British financial system: in an emergency, the Bank of England had to reserve 65 billion pounds (72.8 billion euros) to stabilize the market for three weeks, in contradiction with the anti-inflationary policy which consisted on the contrary in reducing the outstanding public debt. Thus follow a dogmatic approach to the economy, turbulence on the financial markets, loss of credibility of the government and a new speculative cycle which threatens financial stability.
knot of contradictions
The storm in the UK financial markets highlights most of the contradictions facing policy makers. Indeed, the United Kingdom, like the United States, has embarked on a strategy to exit a long phase of quantitative easing, characterized by nominal interest rates of almost zero and refinancing of structural public deficits . However, the latter increased with the 2008 crisis, then the Covid-19 epidemic and after February 2022 to fight against runaway inflation linked in particular to the explosion in the price of energy that followed the invasion of Ukraine.
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