How Liz Truss pushed the UK to the brink of recession in just one month | UK News

Britain’s new prime minister, Liz Truss, has been in office for less than a month, but her job as prime minister is already in crisis as Britain teeters on the brink of recession.

Truss took over from Boris Johnson in early September and was immediately thrown into the thick of things, with the death of Queen Elizabeth II. But the 10-day period of national mourning came to an abrupt end.

Determined to make her mark quickly, Truss announced a sweeping new economic package of tax cuts and spending worth tens of billions of pounds financed by borrowing – the true total of which is still not known.

The move, which also appeared to violate public sending restrictions, tore apart the orthodoxy established by the three Conservative prime ministers who preceded her for 12 years in office and who tried to emphasize fiscal prudence.

Truss’ drive for growth proved too drastic for traders. The pound was sent spiraling to its lowest value against the US dollar, an embarrassing intervention by the central bank – the Bank of England – was made to avoid a raid on pension funds and reprimands from Foreign observers, including the International Monetary Foundation, were quick.

A “new era” was promised – and it certainly did, but not in the way many expected.

The damage was done just a week ago when Chancellor Kwasi Kwarteng rose in the House of Commons to introduce what was billed as a ‘mini budget’.

As well as a huge energy support package for businesses fearful of being unable to pay high bills this winter, a number of controversial measures have also been announced, including the removal of the maximum tax rate and the removal of the cap on banker bonuses.

All in all, it was the largest tax reduction plan for 50 years.

From mini-budget to market turmoil: Kwasi Kwarteng week – video timeline

Because it was not technically a full budget, the watchdog who is legally required to review these plans and provide new forecasts to reassure investors and economists was prevented from doing so.

Kwarteng had also made clear his contempt for “Treasury orthodoxy”, a move that would send fresh worries through the markets.

“Having no OBR [Office for Budget Responsibility] forecast was a very deliberate decision to say “we’re not interested in these people who have this irritating insistence on having spreadsheets and figures and things like that,” said economist Jonathan Portes, of the UK in a think tank on changing Europe.

As the Chancellor took his aides to the pub to celebrate last Friday’s announcement, the pound swooped down in the currency markets, ending the day down 5c against the dollar at $1.08, near historic lows .

Government bonds, known as gilts, had also been sold. And markets were pricing in a sharp rise in interest rates as the Bank of England stepped in to offset the inflationary impact of the plans.

Kwasi Kwarteng, the Chancellor of the Exchequer, UK finance minister, suggested there was
Kwasi Kwarteng, Britain’s finance minister, suggested there was “more to come” on taxes despite the panicked reaction from markets. Photograph: Toby Melville/Reuters

Yet such was Kwarteng’s persistence in the face of market turbulence, when he appeared for an interview on the BBC’s Sunday morning political TV show he suggested there was ‘more to come’ on the tax cuts.

On Sunday evening, the liquidation of the pound sterling had resumed in earnest in the Asian markets; and when bond markets opened in London on Monday morning, it turned into a rout. Yields on 10-year bonds – the interest rate at which the government borrows – soared above 4% and continued to climb until Tuesday, hitting 5% – the highest level since the 2008 financial crisis .

Such was the chaos as government department Kwarteng leads and the independent Bank of England issued coordinated statements on Monday afternoon.

Kwarteng has promised to release fuller details of its budget plans on November 23 – much earlier than expected – and the Bank has said it “will not hesitate to change interest rates as much as necessary”.

But as the government tried to unblock the economy, the Bank was determined to keep the handbrake on to prevent inflation from spiraling out of control and warned against “significant” increases in interest rates.

Meanwhile, it was quickly becoming apparent that the tremors in the financial markets were being felt far beyond the City. By Tuesday, nearly 300 mortgage deals had been taken off the market as lenders reassessed rate outlooks. Estate agents were reporting that home buying channels were collapsing as lenders and buyers pulled out.

“It’s scary,” said housing analyst Neal Hudson of consultancy BuiltPlace, who previously predicted a market slowdown as interest rates rose to fight double-digit inflation.

“I think the events of the past few days really increase the likelihood of a worst-case scenario of a significant downturn in the housing market,” he said, pointing to how threadbare household finances are.

He suggested the number of transactions was likely to decline sharply in the coming months as potential buyers could no longer stretch to afford the home they were hoping for. Sellers unable to wait would be forced to lower their prices.

A perfect storm is also brewing, as many two-year mortgage deals were done at the time of the UK’s first Covid lockdown in March 2020, when interest rates fell to their lowest point. When these agreements expire, many may find themselves bitten by significantly higher interest rates.

The chorus of condemnation was joined by the International Monetary Fund (IMF), the global body that promotes sustainable economic growth. He warned the measures risked deepening inequality and urged the UK government to ‘reassess tax measures’.

Truss was ardently supported during the six-week leadership campaign over the summer by hardline economists and right-wing commentators. They reacted with increasing fury to each new voice condemning his plans. Tory peer Lord Frost dismissed ‘the international classes of hectoring’ – a group in which he included reputable publications such as The Economist, as well as former Labor Prime Minister Gordon Brown, who has been far from power for more of a decade.

As the crisis deepened, the sharp rise in yields, which had already risen sharply in recent months, was wreaking havoc on pension funds.

Amid fears the bond-selling panic is creating a self-fulfilling ‘catastrophic loop’, and with some funds warning they are in fact at risk of becoming insolvent, the Bank has stepped in to the rescue.

He said he would step in to buy gilts and promised to continue doing so for up to two weeks, to the tune of £65billion – an extraordinary about-face from an institution which, until the week last, hoped to sell its stock of bonds.

Meanwhile, Kwarteng and Truss were nowhere to be found, as the House of Commons is not in session. The main opposition Labor Party was holding its annual party conference with campaigners and members leaving government figures free to hide in their offices.

The Prime Minister finally emerged from his self-imposed isolation on Thursday morning with a disastrous series of interviews with local radio stations – something that normally happens in the run-up to the Conservative party conference, which begins on Sunday.

Grilled on the chaos of the market, she tried to focus on the generosity of the energy bailout, but seemed to flounder when asked about the housing market, pausing several times before answering.

Angela Rayner, deputy leader of the opposition Labor party, mocked Liz Truss at the party's annual conference in Liverpool.
Angela Rayner, deputy leader of the opposition Labor party, mocked Liz Truss at the party’s annual conference in Liverpool. Photography: Christopher Thomond/The Guardian

Truss was then mocked by the deputy Labor leader, who said she had ‘finally broken her long painful silence with a series of short painful silences’.

With the movements in gilt yields alone adding £18bn a year to the government’s interest bill, pressure was mounting on Kwarteng to identify cuts, according to calculations by the Resolution Foundation think tank. spending so that his plans add up.

When asked if he would increase benefits for the poorest people in society in line with inflation next spring, he said it was ‘premature for me to make a decision on this’ .

However, audiences already seem to have made up their own mind about Truss and Kwarteng’s plans. A series of damning polls released at the end of the week all showed Labor significantly extending its lead – the 33-point margin identified by YouGov indicating electoral annihilation for the Tories. The next general elections are to be held by January 2025.

On Friday morning, Truss’ avowed aversion to ‘abacus economics’ – as she described her rival’s approach to the party leadership race – had seemingly been forgotten, as she and Kwarteng invited VIPs from OBR to No. 10 for a pleasant conversation.

A semblance of calm had returned to the City at the end of the week, the beaten pound regaining some of its value. But many of Truss’ colleagues fear his “new era” is one in which their own party will be ignominiously ousted from power.

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