IMAGEM DE OVOODOCORVO
Liz Truss’ honeymoon canceled as pound plummets
and UK borrowing costs soar
Bank of England forced to issue emergency statement
after UK leader’s mini-budget triggers market turmoil.
BY ESTHER WEBBER
AND EMILIO CASALICCHIO
SEPTEMBER
26, 2022 8:29 PM
LIVERPOOL,
England — As an inexperienced leader taking charge of a country in crisis, Liz
Truss knew she needed to hit the ground running this month.
But three
weeks into her fledgling premiership, the new U.K. prime minister finds herself
scrambling to stay ahead of events as last Friday's tax-cutting mini-budget
spooked financial markets, sending Britain's borrowing costs soaring and the
pound tumbling to an all-time low.
“If you
start going off on a dangerous tangent," one former Tory Cabinet minister
mused, "the markets will intervene.”
And
intervene they did. The pound fell to a record low against the dollar Monday
morning as markets reacted to the biggest package of tax cuts in 50 years, a
plan that raised expectations borrowing will surge.
Chancellor
Kwasi Kwarteng was forced to issue an emergency statement late Monday,
promising a fresh package of supply-side reforms over the coming weeks and a
fully costed "fiscal plan" on November 23 to get U.K. debt levels
falling over the medium term.
Bank of
England Governor Andrew Bailey offered no immediate rates rise, but warned the
bank's monetary committee "will not hesitate to change interest rates as
necessary" to push down double-digit inflation. The pound rallied somewhat
later in the day, but nowhere near enough to recover recent losses.
The
economic turmoil set nerves jangling on the Conservative backbenches, with MPs
fearing their party's long-held reputation for sound economic management is now
at serious risk. Traditionally the Tories have found political success in
painting their Labour opponents as high-spending and economically illiterate.
"[I'm]
very worried," said one of the dozens of Tory MPs who backed Truss'
opponent, Rishi Sunak, in the summer-long leadership contest. "It’s the effect
on interest rates that scares the bejeezus out of me. If you think things are
bad now, just wait till we see home repossessions."
Such
trepidation about Truss' approach is commonplace on the Tory backbenches. The
new PM entered Downing Street three weeks ago in a precarious political
position, having failed to secure support from the majority of her own MPs in
the parliamentary stage of the leadership race.
Her friends
and critics alike suggested she may only have two or three weeks to prove to
the party she has what it takes to lead the country through a time of economic
crisis.
But while a
multibillion-pound energy bailout announced on Truss’ third day in office went
down reasonably well, she did not get the chance to sell it to the country as
her planned agenda was overtaken by the death of Queen Elizabeth II.
Her first
big appearance on the world stage then fell somewhat flat after she was offered
a graveyard 9 p.m. slot for her speech at the U.N. General Assembly. And her
domestic position appears to have weakened further in the wake of last week’s
much-hyped mini-budget.
“It’s worse
than Black Wednesday,” said another Sunak-backing Conservative MP., referring
to the infamous Sterling crisis of September 1992. “This is self-inflicted and
without a mandate, whereas at least [Black Wednesday] was perceived as a bid to
manage a crisis.”
Another MP
said: "This is dangerous territory … What the PM hasn't realized is that
any gains made by the tax cuts will be more than outweighed by increased
mortgage payments.”
Nor is
disquiet in the Tory ranks confined to Truss’ sworn opponents.
One former
minister who backed her in the leadership race said the decision not to publish
official economic forecasts alongside last week's tax cuts was "a bit of
an own goal."
“The
Chancellor should have set out the fiscal position last week," the MP said.
"Markets hate uncertainty."
Part of the
markets' reaction has been sparked by the absence of any clues from the
government about where they might make spending cuts to reduce levels of
borrowing.
“You can’t
just borrow your way to a low-tax economy,” former Tory Chancellor George
Osborne told Channel 4 News. “Fundamentally, the schizophrenia has to be
resolved — you can’t have small-state taxes and big-state spending.”
Some fear,
in addition, that Truss’ top team lacks the savvy to deal with multiple
economic crises.
“They look
lightweight to me,” said a former Downing Street aide of the new-look No. 10
operation. “There’s not a lot of experience in there.”
The former
adviser questioned new chief of staff Mark Fulbrook’s organizational skills and
highlighted the relative youthfulness of many of his Downing Street colleagues.
Others
heaped fresh criticism on Kwarteng’s decision to dismiss Tom Scholar, the
long-serving top official at the Treasury, as one of his first acts in office.
“To fire your
only official with serious experience of crisis management and then precipitate
a crisis a fortnight later brings postmodernism to a new level,” tweeted former
Treasury Permanent Secretary Nick Macpherson.
Typically a
new prime minister can at least expect a significant, if temporary, poll bounce
on entering office — but no such phenomenon appears on the cards for Truss,
with the Labour Party maintaining a 12-point lead.
Yet Truss’
supporters are urging their colleagues to be patient, arguing that party
members picked someone offering a radical change for a reason.
One
Truss-backing minister said: “The dollar is strong, and we have just seen a
significant change in economic policy. It is inevitable that would have an
impact on trading. Things will settle when the markets get used to it.”
And another
Sunak-supporting MP insisted that excitable Westminster chatter of a further
leadership challenge so soon after the ouster or Boris Johnson was overblown.
“There’s a
huge amount of ill feeling," the Tory MP said. "People are angry. But
I think self-preservation is a much more motivating factor.
"We
haven’t got any choice. We have got to get behind this. Governments who get
things wrong tend to lose elections but governments that are split definitely
lose elections.”
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