Can you turn on the spending tap full and slash taxes, adding to an already mountainous public debt? That’s the novel experiment British Conservative Prime Minister Liz Truss and her Chancellor of the Exchequer Kwasi Kwarteng, both neophytes in power, are trying. They’ve pledged £45-billion worth of income and corporation tax cuts. Simultaneously, they’re offering subsidies for soaring power prices at a cost of up to £150 billion. (For comparison, bear in mind the National Health Service’s budget is £140 billion).
Well, the answer to the government’s sweeping plans outlined in Kwarteng’s mini-budget last week has been swift and brutal. Sterling has plunged, at one point to 1.03 against the dollar, its lowest since 1985, and the gilt market has crashed. (The pound Tuesday got a slight reprieve, firming to 1.06 against the dollar), Now, though, some of the biggest mortgage lenders have suspended offering new home loans due to market volatility.
Truss had already flagged her plans to kickstart growth and lead the UK out of a decade of economic underperformance before winning the Conservative leadership race. But economic observers were “shocked at just how large and radical” the mini-budget was, says Thomas Pope at the Institute for Government. Inevitably, critics are asking if the government has discovered a magic money tree. Controversially, it has abolished the 45 per cent top income tax rate, as well as removed the cap on bankers’ bonuses, so the wealthiest will benefit most. The idea is ‘trickle-down economics’ will leave the country awash with money to spend which will generate growth, an old theory rubbished by most economists.
Opposition Labour is gleefully branding itself as the party of fiscal responsibility and declared it will restore the 45 per cent tax rate if it wins power in the slated 2024 elections (it’s now 17 points ahead of the Conservatives in polls). Rachel Reeves, Labour’s shadow chancellor, is an ex-central bank economist, and she’s savaged the economic blueprint as “reckless” and compared Truss and Kwarteng to “two desperate gamblers.”
Markets are betting the pound’s fragile state will force the Bank of England to impose a never-before “unscheduled” interest rate hike. But higher rates carry their own dangers. Economists reckon rates could rise from the current 2.5 per cent to over 6 per cent, steeply pushing up government borrowing costs and almost doubling payments for homeowners whose fixed-rate mortgages are expiring. To quell rising panic, Kwarteng promised there would be “a medium-term fiscal plan” on November 23 but commentators called it too little, too late.
As one of the side-effects of the plunging pound, it turns out Kwarteng’s old employers, Odey Asset Management, has profited handsomely from being bearish on sterling, though it denies it had a trading advantage due to its connection with the chancellor, saying it had just been able to “catch the wind.”
Truss and the 6ft-4in Kwarteng have long been tight allies and been brewing their ambitious plans for over a decade since becoming MPs. They even co-edited a book outlining their ideas.
These huge moves to overhaul the British economy couldn’t have come at a worse time, though. The strong dollar is playing havoc with global currencies, including the rupee, though analysts say sterling’s meltdown is of the UK’s own making. At heart, Truss is a libertarian but add to the mix the fact she’s got a reputation of producing zany ideas apparently without the slightest thought. Times columnist Matthew Parris described her memorably as “crackers”. Ex- Daily Telegraph editor, Max Hastings, was equally dismissive, saying she’s “bereft of convictions save about her own fitness for power.”
Former US Treasury Secretary Larry Summers has also heaped scorn, saying Britain’s “behaving a bit like an emerging market turning itself into a submerging market.” Many say Britain may be forced to go cap-in-hand to the IMF when the entire Truss plan falls badly apart.
Even Monday, in the midst of enormous chaos, there was no reassuring statement from the prime minister’s office. Just total silence. The fate of the Truss-Kwarteng plan will fare will become clear in the coming weeks. But nobody expects any miracles. Unless the situation improves, bookmakers say Truss may not last as premier even until Christmas.