Liz Truss’ honeymoon canceled as pound plummets and UK borrowing costs soar. Bank of England forced to issue emergency statement
by Esther Webber and Emilio Casalicchio - "Politico"
LIVERPOOL — 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.”
(Esther Webber and Emilio Casalicchio www.politico.eu)