The Echoes of the 1976 Bailout in the World Economy
“History Doesn’t Repeat Itself, but It Often Rhymes” — Mark Twain
WORLD — Since Liz Truss assumed office on the 6th of September as the new Prime Minister of the United Kingdom (UK), her policies and views have been shrowded with controversies. In fact, just recently, a massive international backlash against her intention to reduce the UK’s top rate of taxation has ensued. This fuels the call for her early resignation from the office as UK’s public confidence, as well as the global conviction in her newly elected administration, hit rock bottom.
Moreover, the contentious tax proposal is particularly sensitive as the historical economic powerhouse has recently been pushed out of the world’s five largest economies list by its former colony, India. Finally, to add salt to the wound, the UK is now the sole G-7 economy yet to recover from the pandemic. As a result, economists also forecast a “grand” prospect of the UK falling into a recession ahead of all developed economies including the US and Germany.
The Remnants of the 1976 Bailout
With the current predicament of the UK, experts have been comparing the country’s dire situation and controversial tax proposal to its historical 1976 economic failure when the UK plead for a bailout from the International Monetary Fund (IMF).
Mark Sobel, a former US Treasury Department official and currently the US chair of the Official Monetary and Financial Institutions Forum, remarked: “The UK fallout is a reminder that authorities should not forget global spillovers and spill-backs, and whether they collectively might be overdoing it.”
On the other hand, Gilles Moec, the chief economist of AXA, said in his commentary: “There is zero patience with governments embarking on large permanent tax cuts. Investors have very little time for narratives driven by ‘supply-side miracles.’”
Meanwhile, the Bank of England (BOE) remains at the forefront of averting a broader financial-market fallout that could have disastrous consequences not only for the UK but also for other economies that have significant economic activity with the country.
Hence, just this Monday, the UK’s central bank boosted its subsidy for the county’s bond market. This shows how it is being squeezed tighter by the administration’s fiscal aspirations. Moreover, the BOE aims to prevent a further retreat in the pensions industry’s $1 trillion as it will leak the most if the proposed fiscal policy is to be pursued.
The Impact on the World Economy
In addition to the overwhelming domestic adverse effects on the UK’s economy, one cannot deny the gravity of the economic trouble. This is owing to the fact that the UK is still the second-biggest economy in Europe and a major economic and trade partner of many economies around the globe, including the US, China, Singapore, and Japan.
Furthermore, if the tax cut plan persists, the country’s equity and bond markets are expected to plunge beyond manageable levels. Hence, this will have a profound blow to the world economy as economic shockwaves from the event could further destabilize the worsening economic landscape we are seeing today.
