Britain is in the midst of a self-inflicted financial crisis that could accelerate its plunge into recession. And Prime Minister Truss is facing intense pressure to revisit the big tax cuts that triggered the crisis.
The pound hits a record low against the dollar, showing the cost of guaranteeing British bonds, after the British government laid out its biggest tax cut since 1972 over the weekend, but gave few details on its financing. Credit default swap (CDS) spreads rose to their highest level since 2016. Concerns about the impact on pension funds also arose, forcing the Bank of England to intervene in the government bond market.
Future developments will likely determine how deep a recession the UK economy can slip into, and whether the Truss administration, which took office just over three weeks ago, can restore investor confidence. hold the big key.
With the Bank of England unable to control the first price rise in nearly 40 years, the supplementary budget announced on the 23rd has sparked investors’ short-term concerns over unfunded tax cuts. Not only It reiterated longstanding anxieties about the UK, including its current account deficit, difficult relationships with major trading partners such as the European Union, and especially distrust of the pledges of past political leaders.
Peter Kinsella, global head of FX strategy at Union Banker Prive (UBP) in London, said: “This is the latest in a series of decisions that have laid bare their own economic ignorance, starting with Brexit. example.”
The Bank of England was forced to act to prevent a crash in the bond market, mobilizing the kind of policy tools Prime Minister Truss has criticized in recent months. He promised unlimited purchases of long-term government bonds needed to restore order in the market. Long-term government bonds rallied in response to this, but increased two risks. The risk is that the Bank of England will be forced to raise interest rates further in the coming weeks, and investors will be wary of the central bank’s move to cover the government’s budget deficit.
Callum Pickering, senior economist at Berenberg, sees the Bank of England’s latest action as buying immediate “credibility time” for the government.
How the UK government uses that time will be crucial. Bank leaders in London’s City financial district appealed to Chancellor Kwartengu to reassure the market before announcing details of the financial plan due on 23 November. Prime Minister Truss, who has not been seen in public since 23rd of this month, is preparing to address a Conservative Party conference next week for the first time since he took office.
The International Monetary Fund (IMF), which set out to bail out Britain in 1976, has already called on the government to reconsider its tax cut proposals, and prominent economists have warned that Britain is becoming an emerging market nation.
The problem for Prime Minister Truss is that he made big tax cuts the centerpiece of his administration pledges. Mr. Truss won the party leader election and became prime minister thanks to the support of ordinary members of the Conservative Party, so a change in policy at the stage when the administration was just inaugurated would be politically fatal. A majority of the party’s MPs do not endorse Mr Truss in the leadership race and could provoke a backlash against the prime minister if they perceive that the government’s policies will lead them to lose in future general elections. .
Prime Minister Truss’ large-scale tax cut proposal is believed to be based on the “trickle-down theory,” which states that if the wealthy become wealthy, economic activity will increase and the poor will benefit as a result. It will be a wait and see whether the prime minister’s bet will bear fruit. But with borrowing costs rising dramatically, it could also face the prospect of a housing market crash, a deepening recession, and a series of public spending cuts.
The UK Treasury declined to comment when contacted for this article.
news-rsf-original-reference paywall">Original title:
news-rsf-original-reference paywall">Britain’s Crisis of Confidence Was Years in the Making(excerpt)