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LONDON — Despite her best efforts, Liz Truss just can’t calm the markets.
Despite canceling his tax cut plan for top earners, presenting a more detailed budget statement nearly a month away and stopping the appointment of a controversial senior official to oversee the Treasury , the Bank of England was again forced to intervene to try to stabilize the turbulent market.
Insiders pointed to the surprise appointment of James Bowler to the Treasury leadership role, through Antonia Romeo, who was widely told she had gotten the role, as a sign of the No 10’s anxiety.
“The Prime Minister is panicking and looking for almost anything she can do to calm the situation. She was so burned by the fallout from the mini-budget that anything that seemed bold, she now wants to cut massively,’ a senior Whitehall official said.
Treasury officials say Chancellor Kwasi Kwarteng’s tone over the past week has become markedly more dovish as he tries to stabilize buffs.
But despite these flip-flops, the current market malaise may not be in the hands of the government.
The so-called mini-budget came at a particularly fragile time for the economy, caused by high inflation and attempts by the Bank of England to end a policy that has seen it buy back huge amounts of public debt, originally an attempt to stabilize the economy in the aftermath of the 2008 financial crisis.
The Kwarteng tax cuts, presented without any details on how they would be funded, spooked markets, triggering a crisis in UK pension funds because the huge spike in yields forced them to opt for bonds – but that then drove prices down further.
The Bank of England stepped in with a £65bn checkbook to give pension funds more time to raise funds and stop the so-called catastrophic loop. Governor Andrew Bailey said on Tuesday that the Bank’s emergency support will permanently end on Friday, raising concerns that that might not be enough time.
The resulting crisis leaves Britain’s new PM with an escalating political problem as support wanes as it takes time to tame the markets.
Jill Rutter, senior fellow at the Institute for Government and former Treasury official, said: “Paradoxically, having said they were the people to take on Treasury orthodoxy, they are now walking on such thin ice that they are completely prisoners of the most orthodox orthodoxy.”
The race is now on for Kwarteng and his Treasury team to find a way to restore credibility by the end of October, when he must explain how the tax cuts will be paid for.
“It’s really hard to see how you can have a loosely deliverable plan to bring this under control,” said IfG’s Rutter, who pointed out that trying to raise money from one-time events such as asset sales would not help the underlying budget. position.
“If you still have a pension fund problem with collateral issues, what [the government] giving you the 31 probably won’t be that relevant because you’ll still be facing a bigger problem,” said a market strategist, speaking on condition of anonymity.
“If you, as a government, have somewhat stabilized [pension funds] …the currency will react depending on how [the market] considers overall long-term fiscal sustainability.
But the government’s battered reputation will be hard to rebuild. “If the root cause is fiscal policy, then the problem is unlikely to go away until market concerns about fiscal policy subside,” said Paul Dales, chief UK economist at Capital Economics. .
“This makes the Chancellor’s medium-term budget plan of October 31 a very big event for the gilt market, the pound and the Bank of England. Our feeling is that the Chancellor will have to work very hard to convince the markets that his fiscal plans are viable. »
Ministers initially said their £43billion plan of tax cuts would be funded by borrowing and economic growth, but experts are now warning it will require public spending cuts.
The Institute for Fiscal Studies think tank has predicted the Chancellor is set to spend £60billion less by 2026-27, while the International Monetary Fund has released a report calculating high prices will last longer in the UK than in many other major economies.
Ahead of the mini-budget, Torsten Bell from the Resolution Foundation explained why it could have a lasting effect. “The situation in a world of rising interest rates and high inflation is that you don’t want to be seen as the only country that everyone sees as a bad bet.”
“Showing how serious you are is important,” he added. “If we really argue that our growth strategy is to borrow a lot more and it will pay off then they [the markets] don’t believe that.”
A government official speculated that to plug the hole in public finances and make the numbers add up, Truss and Kwarteng would be forced to flip-flop on other aspects of their mini-budget, such as the decision to reverse a planned corporate tax increase. .
Meanwhile, it’s not just the markets that aren’t convinced by Truss and Kwarteng’s approach.
During the Chancellor’s first session on Treasury issues in the House of Commons on Tuesday, senior Tory MPs lined up to openly criticize his strategy.
Former Cabinet Minister Julian Smith has asked for reassurance that tax cuts ‘will not be balanced on the backs of the poorest people in the country’ – normally a line of attack reserved for MPs in the ‘opposition.
Treasury committee chairman Mel Stride warned that if Kwarteng did not seek buy-in from fellow MPs in the next budget statement, it would upset markets again.
The Prime Minister’s spokesman reiterated on Tuesday that Truss is “committed to the growth measures set out by the Chancellor” and that “the fundamentals of the UK economy remain strong”.
While this statement will continue to be tested, so will the position of the Prime Minister and his Chancellor.
Annabelle Dickson contributed reporting.
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