Many South Africans will be watching the soap opera that is British politics with rapt attention. And so they should, given that the UK is a significant trading partner for SA and a key source of tourism and inward investment.
It’s simultaneously entertaining and disturbing. Boyish Boris Johnson has finally left, taking with him his disrespect for his Covid rules and citizens as well as for basics such as telling the truth. He has left a legacy for sure, of a Brexit Britain whose economic fortunes are deteriorating just as many economists said they would — and in a global environment which is turning out tougher than anyone thought it would.
That is the legacy new UK Conservative Prime Minister Liz Truss faces. While all of Europe grapples with the energy crisis precipitated by Russia’s invasion of the Ukraine, the UK is one of the worst off because it is so dependent on gas. Soaring energy prices have been the main driver of a cost of living crisis that has seen UK transport and other public sector workers resort to the kind of strike action last seen in “Iron Lady” Margaret Thatcher’s Britain.
The cost of living crisis is the most pressing issue facing Truss, whose team said on social media that she would “hit the ground running from day one”. She did so yesterday (Thursday) with the announcement of her promised energy emergency package, at an estimated cost to government of £150bn. Truss’ energy package will cap household energy bills at £2,500 a year for two years, preventing them getting to the £3,500 or the even higher levels that economists had projected. It will also cap businesses’ bills for six months. The idea for the plan came largely from opposition parties but Labour had proposed tax hikes to help fund it, including a windfall tax on energy producers. Truss by contrast has promised no tax hikes (indeed she had earlier promised tax cuts).
That means the package is to be funded with more borrowing — by a government that is already highly indebted. The UK’s public debt to gross domestic product ratio is almost 100% after the large stimulus packages the Tory government dispensed to buffer households and businesses from the Covid crisis. Then, interest rates were close to zero. Now they are rising rapidly in an environment in which UK inflation is over 10% and rising, and the British pound has crashed by 15% against the dollar this year amid mounting investor concern about the UK’s fiscal and growth outlook.
Truss’s team claim the emergency energy package won’t cost nearly as much as £150bn because it will bring down inflation and public debt costs. More sober economists don’t believe that for a moment. As The Economist put it, “Trussonomics means more borrowing.” And the fear is that tension will grow between fiscal and monetary policy with government debt spiralling while the central bank is forced to implement sharp hikes in interest rates to contain inflation — all of it in an economy which is already expected to go into recession this year.
Ironically, Truss herself called earlier for the mandate of the Bank of England to be changed to force it to focus exclusively on price stability. Though she has since dropped her call, it might amuse South Africans, given that here we had the Radical Economic Transformation types calling for the mandate of the Reserve Bank to be changed in quite the opposite direction. Even SA’s problematic public finances begin to look less bad by contrast to the trajectory in the UK.
But SA’s economy and its financial markets are still linked quite closely to the UK, and the picture is not pretty. The risks of a UK fiscal crisis are mounting, and so are the risks of recession. None of this can be good for SA. We have to hope that Trussonomics provides more relief, at less risk, than expected, and that Truss and her new ministers govern wisely.
Truss certainly owes it to the memory of the late queen, whose last official act was to make her prime minister.
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