LONDON – For Liz Truss, the end came on Thursday during a midday meeting with Conservative Party delegates. But Ms Truss’ fate as chancellor was completely sealed three weeks earlier when currency and bond traders reacted to her new fiscal program by destroying the pound and other British financial assets.
The market’s swift verdict on Ms Truss’ tax cut has discredited her, damaged Britain’s credibility with investors, raised home mortgage rates, pushed the pound. fell to near par with the US dollar and forced the Bank of England to intervene in favor of British bonds.
That rejection, as measured by the second-to-second swings in bond yields and exchange rates, is more important than the noisy departures of ministers in Ms. Truss’ cabinet or the anxiety of lawmakers. The Conservative approach ultimately rendered her position untenable.
For that reason, world leaders, stricken by economic challenges, are watching the tumultuous situation in Britain with anything but amusement, concern about their own stability. Older brother. Interest rates, energy costs and inflation are rising around the world. Labor unrest is growing across the border. Non-UK pension funds likely to face same financial stress that affects people in the UK. The last thing the leaders want is for Ms. Truss’ woes to be a harbinger for other countries.
President Emmanuel Macron of France, who recently mended the fence with Ms Truss after she refused last summer to consider him friend or foe, said: “In any case, I wish that the King Britain will find stability and move on, as soon as possible. It’s good for us, and it’s good for our Europe. “
Ms. Truss, economists say, is right to argue that markets are driven by broader global trends than by her tax cuts. Central banks around the world are raising interest rates to combat inflation, which has been fueled by a surge in demand amid the coronavirus pandemic and soaring gas prices due to Russia’s war in Ukraine.
“It’s not all about what Truss is doing, but she should know that being blamed for everything goes,” said Kenneth Rogoff, Harvard economics professor and financial volatility scholar. with the territory”.
“What’s really worrying right now is that the situation in the UK” could be the canary in the coal mine as global interest rates continue to soar, especially as they don’t appear to be coming down any time soon, he said.
Ms. Truss has long gained a reputation as a non-believer and a free-market evangelist in the traditions of Margaret Thatcher and Ronald Reagan. Her tax cuts proposals have made her more out of place among the leaders of major economies battling inflation. But she did not apologize for offending economic orthodoxy or financial market expectations by pursuing her vision of a “low tax, high growth” Britain.
“Not everyone is going to support change,” Ms Truss said defiantly a week ago at the Conservative Party’s annual meeting, despite one of her tax-cut plans for those high income, has been reversed. “But everyone will benefit from the outcome: a growing economy and a better future.”
The prime minister’s fatal miscalculation, experts say, is to believe that Britain can defy the allure of the market by passing sweeping tax cuts, without corresponding spending cuts. , at a time when inflation is in double digits and interest rates are rising.
“It’s a combination of fiscal policy at the wrong time – borrowing when interest rates are rising rather than in the 2010s,” said Jonathan Portes, professor of economics and public policy at Kings College London. when they’re low.”
He cited what he called Ms Truss’ “institutional sabotage”, particularly how she and the ousted Exchequer prime minister, Kwasi Kwarteng, broke with practice by announcing tax cuts without It is overseen by the government’s financial watchdog, the Office of Budget Responsibility.
In that sense, he said, Ms Truss was following in the footsteps of her predecessor, Boris Johnson, who had resigned as prime minister just three months earlier after a series of scandals led to the departures of his ministers. .
Mr. Kwarteng’s budget maneuvering led many in the market to suspect the government is engaging in a kind of fiscal maneuver that will inevitably require massive debt financing to cover an estimated budget loss of around 72 billion pounds ($81.5 billion).
Mr Kwarteng, who studied the history of financial crises as a PhD student at Cambridge University, dismissed the failure in financial markets as a temporary phenomenon. Like Miss Truss, he is a believer in disruptive change. Together, they are one of the authors of “Britannia Unchained,” a manifesto for a Thatcher-style, free-market revolution in post-Brexit Britain. Among other things, the authors have described the British as “one of the worst idlers in the world.”
When, or even whether, will be able to fully recover from this period of political and economic uncertainty remains unclear. On Thursday, when news of Ms Truss’s resignation was announced, the pound rose against the dollar and yields on UK government bonds fell.
Almost all of the government’s tax cuts have been reversed and the next prime minister, regardless of his or her politics, will have no choice but to pursue a policy of spending cuts. spending and strict fiscal discipline. Some fear a return to Prime Minister David Cameron’s dismal austerity in the years following the 2008 financial crisis.
“Rishi or someone else can stabilize the ship and appease the market,” said Prof Portes, referring to Rishi Sunak, a former prime minister who has unsuccessfully fought against Ms Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Conservative Party, any Tory prime minister could repair the more lasting damage.”
Much of that damage was to Britain’s once-reputation in the market. Economists have begun to refer to Britain in the same breath as financially stubborn countries like Italy and Greece. Lawrence H. Summers, former US Treasury Secretary, told Bloomberg News, “I’m sorry to say, but I think the UK is behaving a bit like an emerging market that is turning itself into a market. sank.”
It’s an amazing deal of humor for a country that in 2009 announced a $1.1 trillion emergency fund to bail out the global economy.
Jonathan Powell, who was Prime Minister Tony Blair’s chief of staff, said: “If you were an American fund manager, you wouldn’t put the UK in the super-safe category that you might have before. “It’s not about Britain’s place in the world, it’s about what category we’ve placed ourselves in.”
