UK Prime Minister Liz Truss showed no sign of backing down on her economic policies that yesterday forced a dramatic £65 billion intervention from the Bank of England, blaming Russia’s war in Ukraine for the market turmoil that pushed the pound to a record low.
“I’m very clear the government has done the right thing,” she said Thursday in a round of interview to local BBC radio stations. “This is the right plan.”
The remarks were Truss’s first since the £45 billion of unfunded tax cuts were unveiled six days ago. The central bank was forced to step in and buy gilts as a week of market upheaval left many pension funds facing margin calls. The British currency fell after the comments before later rebounding. The price of government debt also fell as Truss spoke, before paring losses.
Truss has made the most turbulent debut of any British prime minister in peacetime. In just three weeks, her administration has been battered by a crisis of confidence in her policies that have triggered a collapse in the pound and a surge in borrowing costs that threaten to push the UK toward a deep recession and a housing market crash.
The pound traded as much as 1.2% lower, but was up 1.8% at $1.1082 as of 5:18 p.m. In London.
PM’s Silence
It was the first time Truss has publicly addressed the market turmoil, which was sparked Friday when Chancellor of the Exchequer Kwasi Kwarteng announced the largest package of unfunded tax cuts in half a century.
Since then, the International Monetary Fund has urged her to reconsider her plans, which have also been publicly criticized by senior UK executives including Simon Wolfson. The boss of retail giant Next Plc and a Conservative peer appeared to blame the government for the crash in the pound and a worsening outlook for UK inflation.
US Commerce Secretary Gina Raimondo said Wednesday Truss’s determination to slash taxes wouldn’t boost growth, and Lawrence Summers, the former US Treasury Secretary and now a paid contributor to Bloomberg Television, said the UK has the worst economic policy of any major country.
Moody’s Investors Service, meanwhile, warned the government could do permanent damage to the public finances and will lower economic growth.
Pressure Builds
Former BOE Governor Mark Carney on Thursday accused Truss’s government of “undercutting” the nation’s economic institutions, after the first weeks of her administration saw the firing of the Treasury’s top civil servant, criticism of the central bank over inflation and the apparent sidelining of the government’s fiscal watchdog, the Office for Budget Responsibility.
Truss, then, was under intense pressure to try to reassure markets — and voters — during Thursday’s broadcast round. But unlike her predecessor Boris Johnson, she is not a natural communicator.
Each time Truss was asked about the negative impact of her economic package, she deflected attention from her tax cuts by pointing to the government’s energy package to help ordinary Britons this winter.
When asked about soaring mortgage costs, she said the central bank is responsible for interest rate decisions. She repeatedly pointed to Russia’s invasion of Ukraine as the cause of the market turbulence.
“We’re in a very serious situation,” she said later on Thursday in a round of interviews with local BBC television news programs. “It’s a global crisis which has been brought about by the aftermath of Covid, and Putin’s war in Ukraine.”
Options Limited
Having ruled out a policy U-turn, the question is what comes next.
In media interviews, Chief Secretary to the Treasury Chris Philp said there would be no delay to the fiscal package and that ministers would also stick to the timetable of unveiling the medium-term fiscal plan on Nov. 23.
But he also declined to confirm that Truss’s government would maintain a commitment by Johnson’s administration to raise pensions and benefits in line with inflation.
At a time when Conservative Members of Parliament are increasingly voicing their unease at the direction of the new government, reneging on such a politically-charged commitment — which was announced earlier this year by then Chancellor of the Exchequer Rishi Sunak — risks a major row in the ruling Tory party ahead of its annual conference in Birmingham next week.
Failure to follow through on Sunak’s announcement would draw even more attention to the tax cut Truss’s government is implementing for Britain’s highest earners, and to her scrapping of a cap on bankers’ bonuses.
In a later interview broadcast on Sky News, Truss said her government would be looking for spending “efficiencies” to ensure value for money. But she declined to give examples, and any cuts would also risk a political backlash given many government services have already been scaled back in the wake of the global financial crisis and the pandemic.
In reality, Truss has little room to maneuver. Backtracking so early in her administration risks fatally damaging her administration’s credibility. On the flip side, staying the course risks prolonging the turbulence in financial markets, as well as the resulting political fallout.
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