Truss has now put the country on an economic path at odds with, if not most, major global economies.
Hannah McKay | Reuters
LONDON — New British Prime Minister Liz Truss may have talked big about the “trickle-down economy” during her campaign this summer, but no one could have predicted the flurry of tax cuts that have come within weeks of her tenure in Downing Street.
Friday’s fiscal announcement, billed as a “mini-budget” by Finance Minister Kwasi Kwarteng, was nothing short of a scale of tax cuts not seen in Britain since 1972.
Truss, who likened his “Trussonomics” policy stance to that of his political idols Ronald Reagan and Margaret Thatcher, now that inflation is over, has set the country on an economic path that is at odds with most, if not all, major global economies. Europe has a cost of living crisis.
It was even seen by some of his advocates as a political and economic gamble with Truss, unlike his predecessor Boris Johnson, not facing the wider British electorate in a nationwide vote.
Market players immediately predicted that Britain would have to expand bond issuance and significantly increase its debt load to pay for the cuts – not typical of low-tax Conservative governments of the past.
UK bond markets fell on Friday as investors shied away from the country’s assets. Yields on the 5-year gold (which moves inversely to prices) rose half a percentage point — the biggest one-day gain since at least 1991, Reuters reported.
Sterling has also been sent into a free fall after hitting a 37-year low against the dollar in recent weeks as bonds piled up. It fell about 3.6% against the dollar on Friday. It lost 5% on the week and was down 27% just before the 2016 Brexit vote.
Wall Street banks are seriously considering a move below parity with the US dollar for the first time in history, and many commentators have likened the pound to an emergency market currency.
The left-leaning Guardian called it a “budget for the rich” on its front page on Saturday, while The Times called it a “huge tax gamble”. While the right-wing Daily Mail called it “a true Tory budget”, Kwarteng himself said it was “a very good day for the UK” and declined to comment on currency movements.
ING analysts said in a research note that investors are concerned that the UK Treasury is effectively committing to open-term borrowing for these tax cuts, and that the Bank of England will have to respond with more aggressive rate hikes.
“For us, the magnitude of the jump in gilt yields is more about a market becoming dysfunctional,” ING chief rates strategist Antoine Bouvet and global head of markets Chris Turner said in a note.
“A number of indicators…suggest that liquidity is drying up and market activity is faltering. A signal from the BOE that it is willing to end gilt sales would go a long way to restoring market confidence, especially if it wants to maximize its return on inflation through traditional tools like interest rate hikes.” chances to fight.QT [quantitative tightening] The war, in short, is not worth fighting for the BOE,” they added, referring to the Bank’s move to normalize its balance sheet after years of stimulus.
ING also noted that the UK’s long-term sovereign outlook is currently stable with the three major rating agencies, but there is a “risk of a possible shift to negative outlook” when they are reviewed (October 21 and December 9).
Deutsche Bank analysts, meanwhile, said on Friday that “the price of easy fiscal policy has been revealed by the market”.
“[Friday’s] Market moves suggest there may be a credibility gap, Sanjay Raja, chief economist at Deutsche Bank, said in a research note.
“A plan to access public finances on a sustainable basis will be necessary, but not sufficient, for markets to restore confidence in an economy with large twin deficits. [the U.K.’s fiscal and current account balances]” he added.
“Importantly, with monetary policy moving into easier territory, the task of stabilizing the economy, along with the MPC, may now fall to the Bank of England. [Monetary Policy Committee] More needs to be done to bridge the gap between expansionary fiscal policy and tight monetary policy.”
—CNBC’s Karen Gilchrist contributed to this article.