Liz Truss’s plan for growth, melding the biggest tax giveaway in half a century with Thatcherite deregulation, is a straight-up gamble with Britain’s future, and even before her chancellor of the exchequer had finished delivering it on Friday the bet was starting to sour.
The market’s verdict on the £220 billion policy blitz set out by Kwasi Kwarteng was swift and devastating. Sterling crashed below $1.11 for the first time since 1985, taking its slump for the year to date to 19%. Five-year gilts posted their biggest ever daily decline.
“The markets will do what they will,” Kwarteng, 47, said when challenged in the House of Commons over the mayhem that he had unleashed.
Even before the chancellor’s statement, former Bank of England policy makers were warning that Prime Minister Liz Truss’s determination to cut taxes regardless of the circumstances risked pushing the UK into a sterling crisis.
There was still a sense of shock in how far her chancellor went, scrapping the top rate of income tax in a boost to the highest earners, as well as delivering on cuts to corporate taxes, national insurance contributions and levies on home purchases that had been flagged in advance.
The final total didn’t even include the full cost of capping household energy bills for the next two years. That could add another £100 billion to taxpayers’ liabilities.
The tax cuts will cost the Treasury around £161 billion over the next five years. A further energy guarantee will add about £60 billion to that sum in the next six months, the only figure the Treasury provided.
Those eye-watering figures had analysts reaching for the history books to compare the package with famous policy errors of the past. The reaction -- with the pound falling even as traders priced in steeper hikes in interest rates to offset the increase in inflationary pressures -- is the sort of movement that is usually limited to emerging market currencies.
“Investor confidence is being eroded fast,” George Saravelos, global head of foreign exchange research at Deutsche Bank. He called for an emergency interest rate hike from the Bank of England.
The reaction leaves Truss and Kwarteng in a terrible bind. Truss, also 47, took office less than three weeks ago. Her efforts to stamp her authority on the government were interrupted by the death of Queen Elizabeth II, which brought politics to a halt for 10 days. And Truss has a desperate need to show that she can steer the UK through the global energy crisis.
She was elected Tory party leader over the summer due to her popularity with the membership. But two thirds of her lawmakers voted against her, and there were mutterings of a potential no-confidence vote before she’d even taken office.
The fear among investors is that Truss’s tax cuts will give the economy no more than a quick sugar rush, sending the debt ballooning and inflation spiraling, before a crash that leaves no lasting improvement on longer term growth.