Turmoil in Britain: Its political crisis is a self-inflicted wound

Govts should respect fiscal constraints as once confidence is lost in a country's institutions and political maturity, it cannot be easily regained

The United Kingdom’s short experiment with fiscal irresponsibility came to an inglorious end last week when Prime Minister Liz Truss was forced to resign as a consequence of the economic and political turmoil her economic programme had unleashed. Ms Truss and her original choice for chancellor of the exchequer, Kwasi Kwarteng, had set out an expansionary fiscal programme that included the cancellation of planned corporation tax increases and a cut in personal income tax rates. A huge package meant to subsidise British consumers’ energy costs at a time of sharp fuel price rises was also included. The fiscal and growth impact of the package was not officially released, but the markets were clearly convinced that the impact was excessive. As a consequence, the UK’s borrowing costs soared — which, of course, made the fiscal impact look even worse.

Some weeks on, Ms Truss and Mr Kwarteng are both gone. But it is far from clear who will replace them and how the UK will find its way back to economic and political normalcy. In an extraordinary twist, Ms Truss’ predecessor as prime minister, Boris Johnson — who was forced out in disgrace less than two months ago — has cut short a tropical vacation presumably so he can demonstrate his availability for the post once again. He has already attracted considerable support within the ruling Conservative Party, including from Priti Patel, who had served as his home minister. The UK’s political crisis is a self-inflicted wound. Mr Johnson had been given an unusually emphatic mandate in the 2019 general elections partly as a response to the incredible weakness and unpopularity of his opponent, Jeremy Corbyn of the opposition Labour Party. Yet Mr Johnson’s party stuck with him long beyond the point it was clear that he had become a liability as prime minister.

Following a revolt of party MPs, Mr Johnson had to resign and the long-drawn-out process of finding his replacement saw the party rank and file choose Ms Truss, who was the most extreme candidate on offer. Ms Truss’ record in office of fiscal irresponsibility was fairly signalled to her party before they chose her, so they can hardly complain now. Yet the Conservative party is more than 30 points behind in opinion polls as a consequence of this sequence of events — a margin not seen since just before Tony Blair’s epoch-defining victory over the party in 1997. Furthermore, the damage to Britain’s reputation is severe and will last beyond Ms Truss’ tenure. Future prime ministers and chancellors of the exchequer will find their fiscal space more constrained partly as a result of the markets’ loss of confidence.

Confidence once lost in a country’s institutions and political maturity cannot be easily regained. And if the Conservative Party, in defiance of all reason, winds up re-selecting Mr Johnson to succeed Ms Truss, the notion that the UK’s politics is too dysfunctional for its policies to be completely trusted will be given additional heft. Emerging markets may view these events with a certain level of caution. These developments are a harsh reminder that markets can sharply change a country’s borrowing costs — no matter what its fiscal position — and cause political turmoil in even the United Kingdom. Policymakers in emerging markets will also be wise to consider the constraints imposed by fiscal orthodoxy going forward.