After two weeks of mourning the Queen, new British Prime Minister Liz Truss decided to give British people something new to worry about, writes Brooke van Velden. Photo / AP
After two weeks of mourning the Queen, new British Prime Minister Liz Truss decided to give British people something new to worry about, writes Brooke van Velden. Photo / AP
Opinion
OPINION:
What were they thinking? After two weeks of mourning the Queen, new British Prime Minister Liz Truss decided to give British people something new to worry about - her mini-Budget. The reaction of the global market to the world's sixth-largest economy is something we, in the world's 50th-largest economy,should think about more carefully than they did.
If you haven't followed the British events, here's a very quick recap. Truss got elected to lead a UK Government facing real problems. Her predecessor, Boris Johnson, locked down the country for months on end trying to hold back Covid. Then, their Reserve Bank, the Bank of England, pumped the economy with a lot of cash and the Government borrowed and spent to compensate for its own decimation of the real economy.
Then things got much worse with Putin's war against Ukraine (I would argue it's against all democratic nations). Putin is deliberately starving Europeans of energy as they go into winter. The net result is a stultified economy with lots of cash floating around and the highest inflation in a generation.
That's when newly-minted Prime Minister Truss got to work with a mini-Budget. It introduced tax cuts that had been planned by the Tory government and then promised £100 billion ($198bn) of energy subsidies. In other words, they were going to take on problems in the real economy (short of gas, supply chains still sluggish, high inflation) by borrowing and spending cash.
It's been a bad decade for economic pessimists. They've been astonished by the economy's resilience again and again. Covid restrictions were supposed to cause mass unemployment and economic carnage.
Few people really thought high house prices would still be a problem in 2022. If you said there'd be labour shortages, people would have thought you were out of your mind, but here we are.
But, there's another economic cliché, which is that if something can't go on forever, it will stop. And that's what's just happened in the United Kingdom. When Truss's newly-minted government tried to borrow its way out of trouble, players in the global financial markets said, "No you don't".
"You can keep printing pounds," they said. "The more you print, the less they'll be worth." Now the British Pound buys less compared with other currencies than at any time since 1985. That has real consequences for British people. It makes their cost-of-living crisis (they have one too) worse.
Even British-produced goods become more expensive in Britain, because most things are globally tradeable and priced in US dollars. If British pharmaceutical manufacturers sell on a global market in US dollars, and British workers pay in pounds, their medicines cost more.
View of the Bank of England in London. Photo / AP
It's a long time since New Zealand has had to delve into this stuff, but we are now in uncharted territory. The Government has borrowed a net $76bn, or $15,000 per person, since Covid struck. The Reserve Bank has printed $53bn in its Large-Scale Asset Purchase Programme.
We have been doing what the British have done - we just haven't had one big stupid event like Truss's mini-Budget to pull out the last Jenga block.
Naturally, the astute commentators in New Zealand have turned to look at what might be in store for us. Could a desperate New Zealand politician squeak into power next year and do something as silly as Liz Truss just did?
Could Labour decide to follow Joe Biden and write off existing student loan debt? They've done similar election bribes before.
Could National try to cut taxes but not spending, leading to a massive deficit and a collapse in the currency? Nobody thought the UK Tories would do that, either, but they have, and the Nats have not produced an alternative Budget since the disaster of 2020's "fiscal hole".
Neither of the above scenarios will happen. We no longer have a two-party system, so neither party will govern alone. In the case of Labour, reliant on the Greens, and possibly Te Pāti Māori, things could be much worse. Both those other parties have ideas that make Truss look responsible.
In the case of National, things look much safer. No poll in the past two years has shown National governing without needing Act for every vote. Act is the only party that has produced a fully-costed alternative Budget. That alternative confronts reality while others are doing their best to wish it away. There is a resource crunch all over the world - economic survival will require doing things better and smarter with less.
Act's alternative Budget reduces taxes, like Truss's, but reduces spending by even more. When you look at the excess that is going on under this Labour Government, it is surprising there aren't more people with the courage to call for spending reductions.
There's so much waste - we reduce it by $7.2bn without touching health, education, or any frontline service.
When something cannot continue, it will stop. That is one role Act intends to play over the coming year, bringing home fiscal reality so our dollar doesn't join the Truss Pound in the race to the bottom.
• Brooke van Velden, MP, is the deputy leader of the Act Party.
