Liz Truss’s Historic Gamble With the UK Economy Is Already Unraveling
Philip Aldrick
Fri, September 23, 2022
(Bloomberg) -- 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 defended her plan in comments to CNN’s “State of the Union,” saying “we absolutely need to be incentivizing growth at what is a very, very difficult time for the global economy.”
At the same time, government measures to limit energy prices for consumers are “very important as well,” she said in excerpts from an interview for broadcast on Sunday.
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.
Even the government’s fans were lukewarm in their support. Crispin Odey, a Tory backer and founder of the hedge fund Odey Asset Management where Kwarteng once worked as an analyst, said: “They are trying the right things, but there has to be a risk we are going into a Barber boom, by pushing the button on inflation.”
That’s reference to the ill-fated 1972 budget drawn up by Kwarteng’s Tory predecessor Anthony Barber. Barber, like Kwarteng, delivered a massive package of unfunded tax cuts which, in his case, saw the economy overheat and inflation soar before collapsing into recession. Barber’s boss, Edward Heath, was defeated by the Labour opposition two years later, and the UK had to seek a bailout from the International Monetary Fund in 1976.
What Bloomberg Economics Says ...
“The policies announced in Chancellor of the Exchequer Kwasi Kwarteng’s mini-budget will provide the economy with a sugar rush over the next year, but we highly doubt it’ll deliver the gear shift in growth that the government is banking on. That means it will lift inflation at a time when the Bank of England is trying to cool price pressure and, because the policy package is unfunded, put debt on an unsustainable path.”
--Dan Hanson, Bloomberg Economics. Click for the INSIGHT.
Truss similarly may have less than two years before she also has to call an election.
Truss has been clear that what matters to her is increasing the economic pie, rather than worrying about how it is divided.
That boldness is most evident in the central gamble at the heart of the mini-budget. Success hinges on a single number: Kwarteng’s 2.5% growth target, which is almost a whole percentage point above the official forecast for the next three years and a level last seen before the 2008 financial crisis.
If the government can lift GDP growth by a percentage point, the tax cuts will pay for themselves by the end of five years, according to the Treasury documents published on Friday. At that point, the government will have stabilized the national debt, fixed the UK’s productivity conundrum and given the country the competitive advantage of lower taxes.
Martin Weale, a former Bank of England rate setter now at King’s College London, described the growth target as “pie in the sky.” The government can’t be sure it will get 2.5% growth, but it can be sure that the tax cuts put the public finances in a perilous position, he said.
The Resolution Foundation projected that government borrowing as a share of GDP will rise for the next five years, adding a total of £411 billion to the existing £2.3 trillion debt pile.
At the same time, the benefits of the tax cuts are skewed toward the highest earners -- who traditionally are more likely to vote Conservative. Someone earning £200,000 will be £5,220 a year better off as a result of the tax cuts, while a worker on £20,000 will gain just £157.
“After 12 years of running the country, the Tories desperately need to establish a record of delivery quickly if they want to cling on to power,” said Ryan Shorthouse, chief executive of the Bright Blue think tank. “The prime minister and chancellor are going for broke.”
‘Nothing but fear in the UK’: Top US economist slams Liz Truss tax cuts and warns pound could plunge below dollar
Nadine Batchelor-Hunt and Connor Parker
Fri, September 23, 2022
Larry Summers painted a bleak picture of the UK economy. (Reuters)
A former US Treasury secretary has condemned the huge tax cuts unveiled by Liz Truss and Kwasi Kwarteng, branding them "naive and wishful thinking".
On Friday, chancellor Kwarteng announced the steepest tax cuts in a generation and said they were crucial to stimulate economic growth amid a stark cost-of-living crisis. He also announced a lift on banker's bonuses.
Among the measures included cutting National Insurance Contributions (NICs) by 1.5% - giving £1,800 to the richest households and just £7.66 a year to the poorest.
Cuts to income tax, including the top rate from 45p to 40p, have been met with incredulity by critics and will mean that two-thirds (65%) of the gains from Kwarteng's personal tax cuts will go to the richest fifth of households.
It means a worker on £1m per year will see an annual tax cut of £55,000.
The package of measures has been widely criticised as being unaffordable as well as disproportionately helping high earners over and above the most vulnerable at a time when the cost of living is set to bite.
Following the announcement, the pound dropped 3% to below $1.10 for the first time since 1985 as investors made their feelings clear.
Read more: 'Not a game': UK finances on unsustainable path, warns top economist
pound
One senior US economist warned that confidence in the UK could drop so low that the pound may slump below the dollar.
Former US Treasury secretary Larry Summers told Bloomberg that policies were "naive and wishful thinking".
“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market," he said.
"Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time."
"There’s nothing in the pattern of market response in the UK that suggests anything but fear rather than confidence in the policy approaches being taken.
“It would not surprise me if the pound eventually gets below dollar if the current policy path is maintained.“
In the UK itself, former prime minister Gordon Brown accused the government of being "heartless" and said the measures would overwhelmingly make the rich wealthier.
Gordon Brown has accused the government of being "heartless". (Getty Images)
In a Twitter thread, Brown warned that the gap between rich and poor continues to widen as "the government lavishes billions on the already wealthy at the expense of the new poor".
He added: "It's no longer the welfare state that's the last line of defence but charities. And yet charities find themselves broke.
Compassion isn’t running out but cash is. Churches are worried they won’t be able to afford to heat their halls for those who cannot heat their homes.
"The reversal of the NI rise will give £1,800 to the richest and just £7.66 a year to the poor.
"The removal of the bankers’ bonus cap, corporation tax cuts and the rejection of a further windfall tax will mercilessly underline that a winter of destitution is coming for millions not because we are a poor country but because we are an ever more unequal one.
"The coming battle must be against poverty, not against the poor. You cannot rely on a heartless government having a change of heart, but concerted action by the public can force a change of mind."
There was even the first signs of discontent on the Tory backbenches, with senior MP Julian Smith warning: "This huge tax cut for the very rich at a time of national crisis & real fear & anxiety amongst low income workers & citizens is wrong."
'A new era'
Announcing his mini-budget to MPs in parliament, Kwarteng said it was a "new approach for this new era" and claimed his plans would pay off with economic growth.
"We promised to prioritise growth," he said. "We promised a new approach for a new era.
"We promised to release the enormous potential of this country. Our growth plan has delivered all those promises and more."
Read more: Martin Lewis brands tax cuts and borrowing in mini-Budget ‘staggering’
Kwasi Kwarteng said the tax cuts which overwhelmingly benefit the wealthiest are necessary for economic growth. (Reuters)
Money Saving Expert Martin Lewis described the budget as helping "mega earners".
"From next April the 45% top rate of tax (applies to those earning £150,000) will be scrapped," he said. "So the top rate will be the 40% higher rate threshold. This means mega earners, pay the same rate as those on £50,000."
Elsewhere, think tanks focused on poverty and those on low incomes criticised the government for deciding to provide more money for the wealthy during the rising cost of living.
"This is a mini-budget that has wilfully ignored families struggling through a cost of living emergency and instead targeted its action at the richest," poverty charity the Joseph Rowntree Foundation said on Friday said following Kwarteng' announcements.
"It leaves those on the lowest incomes out in the cold with no extra help to get them through the winter."
It added: "This budget ignored millions of people on low incomes, struggling to afford essentials & unable to pay their bills. It’s left them out in the cold, facing an incredibly bleak winter."
Mia Fahnbulleh, CEO at the progressive think tank the New Economics Foundation (NEF), described Kwarteng's budget as a "massive transfer to the wealthy whilst families on low and modest incomes are left to take the hit during a cost of living crisis".
Nadine Batchelor-Hunt and Connor Parker
Fri, September 23, 2022
Larry Summers painted a bleak picture of the UK economy. (Reuters)
A former US Treasury secretary has condemned the huge tax cuts unveiled by Liz Truss and Kwasi Kwarteng, branding them "naive and wishful thinking".
On Friday, chancellor Kwarteng announced the steepest tax cuts in a generation and said they were crucial to stimulate economic growth amid a stark cost-of-living crisis. He also announced a lift on banker's bonuses.
Among the measures included cutting National Insurance Contributions (NICs) by 1.5% - giving £1,800 to the richest households and just £7.66 a year to the poorest.
Cuts to income tax, including the top rate from 45p to 40p, have been met with incredulity by critics and will mean that two-thirds (65%) of the gains from Kwarteng's personal tax cuts will go to the richest fifth of households.
It means a worker on £1m per year will see an annual tax cut of £55,000.
The package of measures has been widely criticised as being unaffordable as well as disproportionately helping high earners over and above the most vulnerable at a time when the cost of living is set to bite.
Following the announcement, the pound dropped 3% to below $1.10 for the first time since 1985 as investors made their feelings clear.
Read more: 'Not a game': UK finances on unsustainable path, warns top economist
pound
One senior US economist warned that confidence in the UK could drop so low that the pound may slump below the dollar.
Former US Treasury secretary Larry Summers told Bloomberg that policies were "naive and wishful thinking".
“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market," he said.
"Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time."
"There’s nothing in the pattern of market response in the UK that suggests anything but fear rather than confidence in the policy approaches being taken.
“It would not surprise me if the pound eventually gets below dollar if the current policy path is maintained.“
In the UK itself, former prime minister Gordon Brown accused the government of being "heartless" and said the measures would overwhelmingly make the rich wealthier.
Gordon Brown has accused the government of being "heartless". (Getty Images)
In a Twitter thread, Brown warned that the gap between rich and poor continues to widen as "the government lavishes billions on the already wealthy at the expense of the new poor".
He added: "It's no longer the welfare state that's the last line of defence but charities. And yet charities find themselves broke.
Compassion isn’t running out but cash is. Churches are worried they won’t be able to afford to heat their halls for those who cannot heat their homes.
"The reversal of the NI rise will give £1,800 to the richest and just £7.66 a year to the poor.
"The removal of the bankers’ bonus cap, corporation tax cuts and the rejection of a further windfall tax will mercilessly underline that a winter of destitution is coming for millions not because we are a poor country but because we are an ever more unequal one.
"The coming battle must be against poverty, not against the poor. You cannot rely on a heartless government having a change of heart, but concerted action by the public can force a change of mind."
There was even the first signs of discontent on the Tory backbenches, with senior MP Julian Smith warning: "This huge tax cut for the very rich at a time of national crisis & real fear & anxiety amongst low income workers & citizens is wrong."
'A new era'
Announcing his mini-budget to MPs in parliament, Kwarteng said it was a "new approach for this new era" and claimed his plans would pay off with economic growth.
"We promised to prioritise growth," he said. "We promised a new approach for a new era.
"We promised to release the enormous potential of this country. Our growth plan has delivered all those promises and more."
Read more: Martin Lewis brands tax cuts and borrowing in mini-Budget ‘staggering’
Kwasi Kwarteng said the tax cuts which overwhelmingly benefit the wealthiest are necessary for economic growth. (Reuters)
Money Saving Expert Martin Lewis described the budget as helping "mega earners".
"From next April the 45% top rate of tax (applies to those earning £150,000) will be scrapped," he said. "So the top rate will be the 40% higher rate threshold. This means mega earners, pay the same rate as those on £50,000."
Elsewhere, think tanks focused on poverty and those on low incomes criticised the government for deciding to provide more money for the wealthy during the rising cost of living.
"This is a mini-budget that has wilfully ignored families struggling through a cost of living emergency and instead targeted its action at the richest," poverty charity the Joseph Rowntree Foundation said on Friday said following Kwarteng' announcements.
"It leaves those on the lowest incomes out in the cold with no extra help to get them through the winter."
It added: "This budget ignored millions of people on low incomes, struggling to afford essentials & unable to pay their bills. It’s left them out in the cold, facing an incredibly bleak winter."
Mia Fahnbulleh, CEO at the progressive think tank the New Economics Foundation (NEF), described Kwarteng's budget as a "massive transfer to the wealthy whilst families on low and modest incomes are left to take the hit during a cost of living crisis".
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