The latest bout of jitters in the financial markets caused by the British government’s plan for unfunded tax cuts has triggered another increase in interest rates and put the pound under renewed pressure. It is a salutary lesson about the damage over-confident ideologues can do if entrusted with a nation’s fortunes.
Panic has now gripped Conservative Party MPs and there is even the prospect that prime minister Liz Truss could suffer the same fate as another hardline politician, Edmund Poots of the Democratic Unionist Party, who was removed as party leader after a month.
A striking feature of the Conservative leadership campaign was the cursory scrutiny the media gave to the Truss promises of unfunded lower taxes
To be fair to Truss, and her Chancellor Kwasi Kwarteng, they are doing exactly what she promised during the Conservative Party leadership campaign. A majority of party members agreed with her tax-cutting programme, so nobody can claim to be surprised at the contents of the disastrous mini budget that blew up in her face.
There is a lesson here for political parties all over the democratic world about how leaders should be selected, but that is another day’s work. A striking feature of the Conservative leadership campaign was the cursory scrutiny the media gave to the Truss promises of unfunded lower taxes.
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The suddenness with which the financial markets responded so negatively when Kwarteng did as she had promised should send shivers down the spines of people in this country who recall the suddenness with which those same markets reversed their assessment of Ireland from vibrant tiger economy to a basket case in the 2008-to-2010 period.
The Irish economy has recovered remarkably quickly from that traumatic financial crash thanks to the policy prescription set out by the terms of the EU/IMF bailout and the determination of the parties in power to implement them in the teeth of fierce opposition.
Thanks to the prudent policies pursued by Paschal Donohoe as Minister for Finance, the exchequer was in a position to provide the expensive set of supports devised to cope with the Covid pandemic and there is still enough money in the kitty to fund a substantial response to the energy crisis in the winter ahead.
Despite the expense involved, Ireland will still run a budget surplus this year and the forecast is for another surplus in 2023, although that forecast could change depending on the course of Vladimir Putin’s military campaign in Ukraine and his energy war directed at the rest of Europe.
Steady loss of support
Ireland has been in a position to respond to unforeseen emergencies precisely because the economy has been so well managed over the past decade. It is worrying, though, that far from getting any credit from the public, the parties in power have suffered a steady loss of support.
By any objective measure, Donohoe has done a great job for the country. But he has received little or no thanks from Fine Gael TDs who are angry that as he didn’t do the political thing and splurge money for party advantage in advance of the 2020 general election.
It is worth contrasting some of the headline figures from Ireland and the UK. Irish national debt has been cut from a dangerously high 120 per cent of gross domestic product (GDP) in 2013 to 56 per cent last year. This was achieved at enormous hardship in the early phase but helped by rapid economic growth and rising tax revenues as the measures began to take effect.
By contrast, in the UK the level of public debt has grown from 56 per cent of GDP in 2012 to 95 per cent in 2021 and by March of this year was touching 100 per cent. The UK national debt is now at its highest level since the economic crisis-ridden 1960s. This level of debt is why the financial markets have been spooked by the plan to borrow further vast sums to fund tax cuts.
Figures relating to national debt and growth may appear academic to people struggling to make a living but they ultimately translate into real consequences for real people.
The problem as far as this country is concerned is that there appears to be no political dividend for behaving responsibly but everything to gain from making wild spending promises, allied to tax cuts on the Truss model
An illustration of this was given during the week by a wise political figure Gavin Barwell. In an Twitter exchange with leading Brexiteer Arron Banks, he pointed out that one of the reasons the tax burden was so high in the UK is that the economy is smaller than it would have been if the country stayed in the EU. “You need a bigger share of the smaller pie to pay for a given level of public services. Maybe you should have thought about that before campaigning to make us poorer.”
The problem as far as this country is concerned is that there appears to be no political dividend for behaving responsibly but everything to gain from making wild spending promises, allied to tax cuts on the Truss model. Irish political history is littered with economic disasters that followed from ill-thought-out election-winning pledges.
The big question when the next election comes around is whether we are doomed to follow in the footsteps of Sisyphus and, having rolled the stone uphill at enormous cost, must watch it roll all the way down so that we have to start at the bottom again.