Prime Minister Liz Truss and Treasury No 2 Chris Philip have failed to reassure investors that the British economy is safe in their hands.
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In a series of local radio interviews, Truss tried to deflect a barrage of blame over her tax-cutting policies as bond yields float up and stock markets tumble.
The rearguard action came after almost a week of silence from Downing Street over the reaction to Chancellor Kwasi Kwarteng’s shambles of a mini-Budget dubbed an ‘emergency fiscal event’.
Since he announced several tax cuts and policy reversals, the pound has plunged to an all-time low against the dollar. Today (Thurs), Sterling is worth $1.0789, a 0.9 per cent drop on the day.
Government bond yields are rising, and stock markets have tumbled across Europe. In London, the FTSE 100 shed 1.8 per cent, and the FTSE 250 fell 2.3 per cent. Elsewhere, Germany’s Dax slipped 1.9 per cent, France’s CAC lost 1.8 per cent, and Italy’s FTSE MiB dropped 1.1 per cent.
Any rise in bond yields increases the government’s cost of borrowing.
Truss Is A Lady Not For Turning
Despite the International Monetary Fund (IMF) and former Bank of England governor Mark Carney heaping criticism on Kwarteng and Truss, they seem to be sticking to their guns and refusing to contemplate a U-turn.
Truss told radio listeners: “I have to do what I believe is right for the country and what is going to help move our country forward.”
Treasury number two, chief financial secretary and longtime Truss supporter Chris Philip, was wheeled out to back his boss – only to deny the economy is in crisis.
“There was a crisis with the energy situation, and we’ve addressed that, and if any other challenges arise, then the government will deal with where it’s in our power or the independent central bank if it’s in their power,” he said.
Explaining The Fiscal Event
The British economy was already in trouble before the Chancellor’s fiscal event – carefully not termed a budget – on Friday.
The distinction between the two is important.
The figures in a Budget must have independent oversight from the Office of Budget Responsibility (OBR), while a fiscal event needs no such monitoring.
In Parliament, Kwasi Kwarteng told MPs he was scrapping planned tax hikes previously announced by defeated Tory leadership contender Rishi Sunak. The cost, he said, was £45 billion, and the money would come from economic growth generated by the tax cuts.
This spooked investors. Talk of unfunded tax cuts unsettled the markets and triggered a run on the pound, which saw Sterling drop to a record low of $1.02. Stock markets responded with a sale of UK shares which saw the value of the FTSE tumble while yields from gilts started to rise.
Banks and building societies pulled thousands of loans and mortgages as the Bank of England promised action. Worried lenders were in limbo – how can a long-term borrowing rate be set when no one knows what’s going on?
Add to that the spiralling cost of energy and the impact of the war in Ukraine, and economically Truss looks stuck between a rock and an even harder place.
Tax Cuts In Detail
Truss maintains her tax-cutting policies are right for the economy and that urgent action was needed to grow the economy.
In her first public words since the fiscal event, she told BBC radio listeners that she was ready to do whatever is needed to revive the economy.
She explained that taxes had already risen to the highest level for more than 70 years, and her policies were needed to turn the economy around to avoid a recession.
Her Chancellor’s Growth Plan aims to tackle energy costs, bring down inflation and help consumers and businesses by bringing down the cost of living.
The main policies are:
- Cancelling a rise in Corporation Tax to keep the rate at 19 per cent
- Cutting the basic income tax rate to 19 per cent in April 2023 – one year earlier than planned – with 31 million people getting on average £170 more per year.
- Doubling the nil rate band of Stamp Duty from £125,000 to £250,000 to help homebuyers
The plan sets an ambitious target for 2.5 per cent growth, securing sustainable funding for public services and improving living standards for everyone.
What The Chancellor Says
Chancellor Kwasi Kwarteng has maintained a low profile since announcing his Growth Plan in Parliament.
He has not been seen nor issued a comment in almost a week.
A statement was issued about his Growth Plan last week, in which he said: “Economic growth isn’t some academic term with no connection to the real world. It means more jobs, higher pay and more money to fund public services, like schools and the NHS.
“This will not happen overnight, but the tax cuts and reforms I’ve announced – the biggest package in generations – send a clear signal that growth is our priority.
“Cuts to stamp duty will get the housing market moving and support first-time buyers to put down roots. New Investment Zones will bring business investment and release land for new homes in communities across the country. And we’re accelerating new road, rail and energy projects by removing restrictions that have slowed down progress for too long.”
What The Economists Say
Widespread criticism from opposition parties, financial institutions and economists has been directed against the Growth Plan.
Former Bank of England governor Mark Carney agreed the UK economy needed to grow, but pointed out that seeing results from the policy could take some time.
He said: “There was an undercutting of some of the institutions that underpin the overall approach – so not having an OBR forecast is much-commented upon and the government, I think, has accepted the need for that but that was important.”
The International Monetary Fund, the world’s bank of last resort, rebuked Truss and Kwarteng with some blunt remarks normally reserved for struggling economies seeking financial support.
“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” said the IMF.
Currency Crisis FAQ
Who is Kwasi Kwarteng?
Kwasi Kwarteng is Chancellor of the Exchequer and probably the second most powerful person in government after Prime MInister Liz Truss. He has a background as an economic historian.
Aged 47, he was appointed Chancellor on September 6, 2022.
Kwarteng has previously served as business secretary and held a post as under-secretary of state for exiting the European Union.
Did Kwarteng trigger the currency crisis?
This is a question for historians to argue over. The Tories say the economic malaise had set in before the mini-Budget and was already undermining the global as well as the UK economy. Undoubtedly, the strengthening dollar was already an issue, together with runaway energy costs triggered by the Russo-Ukrainian War. Both combined to push up inflation and the broader cost of living.
The currency crisis is more an issue of confidence in the leadership of Truss and Kwarteng and if the markets believe they have the ability to manage the economy. So far, the consensus seems to be a resounding no, hence the downward spiral of the pound.
When will the UK know if Truss is right?
The UK economy is in uncharted waters and the crux of the problem is no one knows if she is right or wrong – and won’t know until the economy either starts growing or collapses, by which time action may come too late.
Are other countries in an economic crisis?
Yes, other economies are blighted in the same way as the UK, including France, Germany and much of Europe. The main problem faced in Europe is reliance on Russia to supply oil and gas while under sanctions for the war in Ukraine.
When will the currency crisis end?
No one knows when the currency crisis will end or how the crisis will be resolved.
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