Liz Truss took over the mantle three weeks to the day and it was off to a very bad start.
he people cannot really blame her for Queen Elizabeth’s untimely death after she was officially appointed Prime Minister of the royal residence in the Scottish Highlands. But sterling’s fall to record lows yesterday is a different matter altogether.
Last Friday’s budget by Finance Minister Kwasi Kwarteng triggered an international firestorm on the money markets just three days later.
This side of the Irish Sea, Messrs. Donohoe and McGrath are hoping for a warmer reception for their financial plans for 2022/2023, which will be presented at noon today.
Sterling fell to an all-time low against the US dollar early yesterday in response to Mr Kwarteng’s promised ongoing program of tax cuts. These have fueled money market worries about the London government’s economic policies, while the UK, like many other western economies, appears to be headed for recession.
In fact, the British currency has been hammered since Friday when Mr Kwarteng announced the UK’s biggest tax cut in 50 years.
The Government plans £45bn, almost €50bn, in tax cuts, plus billions more to help households and businesses meet rising energy bills.
The trouble is that this level of spending has in turn fueled investor fears about the London government’s debt spiral.
The weakening currency puts pressure on Ms. Truss and her new Conservative government. Their game of tax cuts funded by increased borrowing to stimulate economic growth got off to a very shaky start.
The majority of orthodox economists insist that the “trussonomics” strategy will only fuel inflation. This in turn will add to the nervousness of international money markets about UK borrowing, with a knock-on effect for people trying to buy homes and also for employers considering potential investments in expansion and job creation.
All eyes are now on the Bank of England – the country’s independent central bank – on what it will do with interest rates. The only question now is when there will be more sharp rate hikes. The bank raised interest rates by 0.5 percentage points to 2.25 percent just last Thursday and said it will do so now
undertake a comprehensive assessment of economic trends ahead of the next policymakers’ meeting in November.
The reaction of world money markets to Mr. Kwarteng’s vows to stick to his debt-financed tax cuts and energy subsidies is unequivocal. And this rather unconservative move drew a very mixed reaction from the party’s own MPs. Sterling’s decline is a very bad sight for this party, which by definition is committed to keeping things between the ditches.
Former Treasury Secretary George Osborne was scathing. “You can’t just finance yourself into a low-tax economy — you can’t have small government taxes and big government spending,” he said.
Ms Truss’ press machine sent out some government leaders to defend the case.
UK Agriculture Secretary Mark Spencer hailed the agenda as “ambitious” and said it would “stimulate economic growth that benefits us all”.
Some UK economic analysts urged the Bank of England to act faster – something that cannot be ruled out in the coming days.
Others blamed Mr Kwarteng outright, insisting it was the worst thing to happen since failed efforts to defend sterling in the 1929 crash and worse than Britain’s botched exit from the EU’s monetary grid, the ERM , in 1992 and other subsequent financial disasters.
In a bid to reassure money markets, the London Treasury announced that it would present a medium-term fiscal plan and economic forecast from the independent Office for Budget Responsibility on 23 November.
Still, there are growing doubts that lower taxes and less bureaucracy will eventually generate enough additional tax revenue to meet the government’s huge increases in spending.
Then join the British Labor Party, which is holding its annual conference and may now be successfully striving to become the ‘economic grown-up’. Labor spokeswoman Rachel Reeves has accused the UK government of “a return to trickle-down economics” which she says has failed in previous efforts.
“They don’t gamble with their money – they gamble with yours,” she told an audience at the convention. Labour, often seen as the tax-and-spend party, suddenly has real potential here.
The Conservative Party’s nervousness can only grow. Recalling that there will be an election campaign within two years and many MPs who have held forever seats in the Labor Party in the Midlands and North of England are concerned about their prospects.
Certainly some conservatives have hailed the tax cut measures as a return to free market values after years of government intervention in the economy during the coronavirus pandemic.
Many others fear it is unconservative for the UK government to run up huge debts that taxpayers will eventually have to pay while sterling is undermined.
And the effect of all this on Ireland? If this doesn’t result in a Brexit deal, being in such a mess is bad news for our closest neighbor and major trading partner.
https://www.independent.ie/opinion/comment/sterling-slide-uk-prime-minister-liz-trusss-slash-and-burn-gamble-risks-bringing-her-fledgling-leadership-to-a-halt-42018805.html Sterling foil: UK Prime Minister Liz Truss’ slash-and-burn gamble risks derailing her nascent leadership