British Prime Minister Liz Truss created further uncertainty about her economic plans this week. Photo / AP
UK Prime Minister Liz Truss appeared to rule out cuts in public spending, as doubts about the fiscal soundness of the government’s programme continued to roil the markets.
When Liz Truss ran for leader of the Conservative Party last year, she issued a clarion call for tax cuts and other supply-side measures to jump-start Britain’s economy. Less than three weeks after that agenda was rolled out, it has dissolved into confusion and mixed messages.
On Wednesday, confronting a restive Parliament, Prime Minister Truss created further uncertainty about her plans. Pressed on how the government would pay for the tax cuts, she appeared to rule out a reduction in public spending, a pledge that most economists find difficult to square with her promise not to blow out the deficit.
Doubts about the fiscal soundness of the government’s economic plan continue to reverberate in the financial markets. Truss’ latest comments came after the British pound slumped again against the dollar, fuelling speculation that the government might delay, water down or scrap its free-market proposals.
Last week, the government reversed course on one of the programme’s central pillars, a reduction in the tax rate for high-earning individuals, after it became clear that Conservative lawmakers would vote against the measure in the House of Commons.
Truss, who denounced the economic orthodoxy of Britain’s Treasury during her victorious leadership campaign, showed no sign of giving up the other tax cuts in the package, including corporate and income taxes. Analysts said, however, that the continued market turbulence might force her hand, necessitating another retreat to restore her government’s credibility.
“I don’t see how they can do it without bringing at least some of those tax cuts back into play,” said Jill Rutter, a senior research fellow at UK in a Changing Europe, a research institute. “The only way they can do that is to say, ‘Look, none of the tax cuts that we announced in the minibudget have taken place yet, so we are going to put those all on ice.’”
In the meantime, Rutter said, the government should review government spending, obtain an updated forecast from the Office for Budget Responsibility — an independent watchdog — and promise that future plans would meet credible fiscal rules.
Such a retreat would deal a huge blow to Truss’ authority, and on Wednesday, there was little sign that she was ready for such a political humiliation. Her unequivocal comments on spending were not likely to reassure investors.
Asked by Keir Starmer, the leader of the opposition Labour Party, if she planned to stick to her statement during the campaign — “I’m not planning public spending reductions” — she replied, “Absolutely.”
“What we will make sure is that, over the medium term, the debt is falling,” she added to a chorus of catcalls from the opposition. “We will do that not by cutting public spending but by making sure we spend public money well.”
One research institute has estimated that the government could have to make £60 billion (about $118.7 billion) in spending cuts if it is to stick to its tax-reduction plans.
Asked to clarify Truss’ comments, Downing Street later refused to confirm that budgets for government departments would increase in line with inflation. That raised the possibility of spending increases being outpaced by rising prices, producing reductions in real terms. Truss’ officials also denied reports that she was preparing to scrap — or at least delay — the tax reductions that have spooked investors.
Critics say the prime minister is increasingly boxed in, confronting a rebellious Conservative Party, a sceptical public that is leaning heavily in the direction of the Labour Party, and an unforgiving market. Mollifying one of those constituencies would most likely mean alienating one, or both, of the others.
“They are in sort of a trilemma,” said Jonathan Portes, a professor of economics and public policy at Kings College London.
Truss could stick to her mantra of tax cuts with no spending cuts, he said, which might appear politically palatable. But it is unlikely to pass muster with the Office of Budget Responsibility. And that would cause more tremors in the market, further driving down the pound and causing a rise in interest rates on home mortgages.
Alternatively, Portes said, Truss could impose spending cuts deep enough to offset the lost revenue from the tax cuts. That would calm the markets but anger voters who are already suffering through a cost-of-living squeeze. That approach, he predicted, was “politically undeliverable” with lawmakers from her own party.
Last, he said, Truss could backtrack on the tax cuts. That might soothe the markets and voters, but it would shatter the government’s credibility. Some analysts predicted it would mean the resignation of her chancellor of the Exchequer, Kwasi Kwarteng, who announced the tax cuts and is viewed as the architect of the economic programme.
Truss was not the only source of confusion. The Bank of England has also sent mixed signals. On Tuesday, its governor, Andrew Bailey, said in Washington that by Friday, the central bank would wind down a costly intervention to stabilize the market for British government bonds.
That news sent the pound into another tailspin, even though The Financial Times later reported that bank officials were privately reassuring investors that they would continue to support bonds. On Wednesday, the bank insisted it would end its emergency bond-buying program on Friday, “as it made clear from the outset.”
For her part, Truss continued to blame not her fiscal program for the turbulence in the markets but the rise in interest rates engineered by the Bank of England and other central banks. “We are seeing interest rates rising globally in the face of Putin’s appalling war in Ukraine,” Truss said of the Russian president.
That seemed to contradict her previous admission that her government’s tax-cutting announcement had caught financial markets by surprise and that she could “have laid the ground better.”
As things stand, traders will have to wait until October 31 for an explanation of how the government intends to balance its books. By then, Kwarteng also hopes to introduce relaxed planning rules for construction, curbs on strikes and a more flexible immigration system.
Still, on Wednesday, Downing Street was unable to say when these policies would be unveiled, and given the resistance to some of them among Truss’ lawmakers, there is scepticism that they will be approved by Parliament.
That increases the prospect that Truss will have to try much harder to reassure financial markets that she has changed course and that she respects the traditional, unwritten rules of government taxation and spending.
Kwarteng’s first act as chancellor was to fire the Treasury’s most senior official, Tom Scholar. Kwarteng then ignored warnings that his tax announcement would alarm fragile financial markets while sidelining the financial watchdog.
But after the backlash against his policies, Kwarteng appointed James Bowler — a Treasury veteran, not an outsider — to replace Scholar, as well as shelve his tax cut for the highest earners.
“The deep irony is that, for their assault of a few days on economic orthodoxy, they are now absolutely taken hostage by it,” said Rutter. “They are going to have to be more orthodox than anyone now, because they’ve made such a mess of it.”
This article originally appeared in The New York Times.
Written by: Mark Landler and Stephen Castle
Photographs by: Alex Ingram and Mary Turner
©2022 THE NEW YORK TIMES
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