Being all over the news lately, the British pound somehow right now is taking massive hits. But why is it happening in the first place?
Interestingly, this story has to do more with British politics than the British pound itself.
A few months back, Boris Johnson (the Prime Minister of Britain) had to step down because of the stepping down of key leaders and ministers in wake of the growing protests against some scandals – scandals that are not important for this conversation.
The throne of the Prime Minister was taken by Liz Truss, a leader in the conservative party, becoming the third female prime minister of the UK.
However, her entry into the leadership rather came at a strange time – a time that’s heading towards recession, the economy is bad and most of your general population is barely crossing the minimum wage threshold.
Combine the same with the rising expenses of the country and mix it with the energy bills, you get such a bad economy that could potentially help the UK top the list of some of the worst-performing major economies next year.
So you get what Liz Truss is up against. She doesn’t have to just take up a major position in her country’s affairs, she has to pick its economy from the rubble and bring it back to life. From beating inflation to dealing with the energy crisis, she has to do it all.
The most challenging part is that she has to do it all before the general election in 2024.
Kind of a sticky situation, isn’t it?
Would you go ahead and follow the trajectory of your predecessors?
Or would you think out of the box?
The previous ruling authorities have stuck to a conservative approach and raised taxes while maintaining a low disparity between what is being earned and what is being spent. This is called being in deficit.
But how high could these deficits really go?
Well, the thing is that if they go too high, the govt can go bankrupt.
And if it is too low, you are derailing your country’s economy.
Among these two options, Liz Truss is going for the second one – ALL IN!
Her govt is cutting taxes, increasing corporate taxes, and putting more money in people’s pockets. The hope is that this could be a great step in the long term for the economy.
Altogether, the tax cuts are going to cost the government a lot (£45 Billion precisely). But at the same time, this money is something that the people of the country won’t have to pay as taxes.
The economy of the country right now might seem bad, and it could also go downhill from here. In fact, the govt might also be pushed to borrow more than ever. This borrowed amount will be used to fund the disparity in the deficit.
This is why the British pound is losing value because really, there are fewer places to invest this British pound. A bad economy means failing businesses and fewer opportunities for wealth creation.
However if the plan works, the economy will roar back to life and the pound will be all well again.
So what do you think of this story?