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Britain
OpinionComment
Andrew Hammond
Andrew Hammond

The View | UK budget debacle could turn the electoral tide against Liz Truss and the Tories

  • The budget crisis is the worst possible start to Truss’s premiership, fuelling concerns about the leadership’s political and economic judgment
  • The odds appear to be growing that the Conservatives could lose a large number of seats at the next election and cede control to Labour

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British Prime Minister Liz Truss (left) and Chancellor of the Exchequer Kwasi Kwarteng smile for the cameras during a visit to Berkeley Modular in Northfleet, England, on September 23. Photo: AFP
Andrew Hammond
Liz Truss was selected as UK prime minister less than a month ago by party activists who saw her as a safe pair of hands, yet her government already faces a potential full-scale loss of market confidence in its economic strategy.
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On Friday, new UK Finance Minister Kwasi Kwarteng launched an extraordinary emergency budget that turned on the fiscal taps with both massive new spending and also tens of billions of tax cuts in the largest dose of unfunded stimulus since at least the 1970s. Dramatically, markets have given Kwarteng’s proposals a big thumbs down with the most negative reaction to any UK fiscal event in living memory.
The crisis deepened after the Bank of England’s decision to rule out an emergency rise in interest rates prompted fresh selling of the pound. Financial markets remain far from clear about how the central bank will respond, as reflected by the pound’s movements on Monday as optimism over an interest rate intervention was followed by disappointment at the failure to deliver this. As of Tuesday, the pound was trading only marginally above parity with the US dollar, its lowest-ever rate with the US currency.

The Bank of England will hope the initial market panic eventually subsides as investors unpick the implications of Kwarteng’s budget. Yet, there is also a significant risk that the central bank and the government will lose control of fast-moving events.

In a sign that international policymakers are growing increasingly alarmed by the recent turmoil, Raphael Bostic, the president of the Atlanta Federal Reserve, spoke out on Monday. He said the sell-off in the pound reflected rising uncertainty about the direction of the UK economy, adding to concerns last week from former Treasury secretary Larry Summers.

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While Kwarteng must have anticipated a negative market reaction to his budget, he clearly did not appreciate the full depth of investor angst. This was a big oversight on his part; it has been clear for some time his announcement could trigger a serious financial meltdown.

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