Opinion: Liz Truss's wager on the UK economy is already failing. Italy's Giorgia Meloni take note – The Globe and Mail

In Italy, Giorgia Meloni’s compelling victory in Sunday’s election will be followed, inevitably, by a political honeymoon when she forms her government in October. Be careful, Ms. Meloni. The honeymoon enjoyed by another newbie conservative prime minister, Britain’s Liz Truss, lasted about five seconds.

Ms. Truss won the Conservative Party leadership election after Boris Johnson’s tumultuous premiership collapsed in July. She has officially been Prime Minister since Sept. 6.

The market reaction to her new economic policy – massive unfunded tax cuts coupled with massive spending, a reliable recipe for surging deficits and debts – has not been kind to her or her Chancellor of the Exchequer, Kwasi Kwarteng.

On Monday, the pound hit a record low, plunging 5 per cent against the U.S. dollar as the government rolled out the biggest tax cut in half a century (on Tuesday, the currency rose a bit, and traded at about US$1.08).

Britain’s FTSE 100 stock index has been in rapid decline since mid-September and is not far above its 52-week low. Bond prices have fallen. Crippling energy prices and rising interest rates – which may now rise faster to protect the pound from further humiliation – seem destined to push the country into recession, if it is not there already.

Welcome to government, Ms. Truss, and the harsh realities of economic programs deemed unhealthy – or brain dead – by the financial markets. No wonder opposition Labour Party, led by Keir Starmer, has a 17-point lead over the Conservatives, according to the latest YouGov poll, published Monday.

Back in Italy, Ms. Meloni is about to start forming a coalition government with former prime minister Silvio Berlsuconi’s Forza Italia party and Matteo Salvini’s League party. The process will almost certainly make her the first woman prime minister since Italian unification in 1861, and the leader considered furthest to the right since the bloody demise of the country’s fascist era in 1945.

Tax cuts for families and business, including lowering energy taxes, were at the core of her election promises, and it is hard to see how she can reverse her stance even as Italy, too, barrels towards recession. One of her coalition’s programs is fiscal reform that would include a flat income tax that would be regressive in nature – that is, it would help the wealthy more than the poor.

The potential cost of lowering personal and business taxes is really just a guess at this stage. There are better numbers for the proposed subsidy extensions for energy. Under the technical government of Mario Draghi, former president of the European Central Bank, Rome has spent some €66-billion ($87-billion) protecting citizens from the outrageous price increases for natural gas and electricity since Russia invaded Ukraine in February. Reportedly, extending the existing breaks until December alone would cost almost €5-billion ($6.6-billion).

Mr. Draghi knew he had to subsidize energy costs to avoid a wave of bankruptcies, especially among energy-intensive companies. But he was always wary of launching a deficit-spending bonanza.

Ms. Meloni’s populist government may not have the same qualms about borrowing mountains of money to finance new spending, even though she said herself in her victory speech Monday, “This is the time for being responsible.” Mr. Salvini, her coalition partner, wants to widen the deficit.

Italy’s problem is that it has almost no financial wiggle room. Its has a debt-to-GDP ratio of 150 per cent, one of the highest in the world, and is running a hefty budget deficit. Italy’s per capita economic growth has been static for more than 20 years, and may remain that way now that Mr. Draghi, the credible author of a credible pro-growth agenda, has been pushed out of government.

Italian bond yields have been rising – the spread above German yields is almost 2.5 percentage points – and climbing interest rates will push up the cost of Italian debt. In other words, there seems very little capacity for more deficit spending, especially since a recession seems inevitable.

On Monday, ECB President Christine Lagarde said the central bank would not use its emergency bond-buying scheme to bail out countries that make “policy errors,” a clear warning to the incoming Italian government.

In London and in Rome, tax cuts of one form or another remain on the agenda even though the governments can’t afford them. And never mind that some of the cuts, such as Ms. Truss’s giveaway to Britain’s wealthiest households, barely benefit the poor and the middle class.

There is a solution, though one that seems taboo to conservative governments practically everywhere: Tax the rich.

Governments could impose higher levies on high earners and companies that have earned outsized profits since the war in Ukraine started. The extra revenue would fund the support for the families and companies suffering most from savage energy inflation. Even the ECB’s chief economist, Philip Lane, thinks higher taxes to the wealthy or companies that are “highly profitable despite the energy shock” are the answer, he said in an interview this week with Austria’s Der Standard newspaper.

Ms. Meloni and Ms. Truss will almost certainly ignore the tax-the-rich idea, meaning their extra spending will probably go unfunded. Ms. Truss is already paying the price for what investors deem a reckless new economic program. The question is whether Ms. Meloni will learn from Ms. Truss’s mistake.

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