Liz Truss panics as markets continue to deteriorate – Politico

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LONDON – Try as hard as you can, Liz Truss can’t calm the markets.

Despite reversing its plan to cut taxes on high-income earners, submitting a more detailed budget statement for about a month and halting the appointment of a controversial senior government employee to oversee the Treasury, the Bank of England was once again forced to step in to try to stabilize the market turmoil.

Insiders pointed to the surprise appointment of James Bowler to the highest position at the Treasury, bypassing Antonia Romeo, who was widely reported to have landed the role, as evidence of the No. 10’s concern.

“The Prime Minister is panicking and is looking for almost anything he can do to calm the situation. I have been so moved by the fallout from the mini-budget that anything looks so bold, they now want to downsize dramatically,” said a senior Whitehall official.

Treasury officials say the tone of Chancellor Kwasi Kwarting last week has become noticeably more conciliatory as he tries to stabilize forces.

But despite these shifts, the current market anxiety may be out of the government’s control.

The so-called mini-budget came at a particularly fragile time for the economy, due to rising inflation and attempts by the Bank of England to end a policy that saw huge purchases of government debt, originally an attempt to stabilize the economy in the wake of the 2008 financial crisis.

Kwarteng’s tax cuts, which were offered without any details of how they would be funded, spooked the markets, triggering a crisis for UK pension funds as a massive rise in returns forced them to use bonds – but that pushed prices further. from decline.

The Bank of England stepped in with a £65bn checkbook to give pension funds more time to raise money and stop the so-called cycle of agony. Bank Governor Andrew Bailey said on Tuesday that emergency support for the bank would surely end on Friday, raising concerns that this may not be enough time.

The resulting crisis leaves Britain’s new prime minister facing a deepening political problem, with support waning the longer it takes to tame markets.

“Ironically, having said that they are the ones with the orthodoxy of the Treasury, they are now walking on such thin ice that they are complete prisoners of most orthodoxy,” said Jill Ratter, a senior fellow at the Institute of Government and a former Treasury official.

Survival

The race is now on for Quarting and his Treasury team to come up with a way to restore credibility by the end of October, when he is set to explain how the tax cuts will be paid for.

IfG’s Rutter, who noted that trying to find money from one-off events like asset sales, won’t help the core financial site, said IfG’s Rutter.

“If you’re still having trouble with your pension fund regarding security issues, what [the government] One market strategist, speaking on the condition of anonymity, said your 31st filing would likely be irrelevant, because you would still be dealing with a bigger problem.

“If it stabilizes somewhat as a government [pension funds] … the coin will react based on how [the market] It looks at long-term fiscal sustainability.”

But it is difficult to rebuild the government’s tarnished reputation. “If the root cause is fiscal policy, it is likely that the problem will not go away until markets’ concerns about fiscal policy have subsided,” said Paul Dills, chief UK economist at Capital Economics.

This makes the Chancellor’s medium-term financial plan for October 31 a very big event for the gold market, the British pound and the Bank of England. We feel that the chancellor will have to work hard to convince the markets that his financial plans are sustainable.”

Ministers originally said their plan for £43 billion in tax cuts would be funded by borrowing and economic growth, but experts now warn it will require cuts in public spending.

The Institute for Fiscal Studies has predicted that the chancellor will need to spend £60 billion less by 2026-2027, while the International Monetary Fund has released a report calculating that high prices will last longer in the UK than in many other major economies.

Before the mini-budget, Resolution Foundation’s Torsten Bell explained why this could have a lasting impact. “The big picture in a world where interest rates are high and inflation is high, is that you don’t want to be seen as the only country that everyone decides is a bad bet.”

“Showing you are serious is important,” he added. “If we were really arguing that our growth strategy is to borrow a lot and then that would pay for itself. [the markets] Don’t believe it.

One government official speculated that in order to plug the fiscal hole and get the numbers to add to Truss, Truss and Quarting would have to get around other aspects of their mini-budget, such as the decision to scrap a planned increase in corporate tax. .

Meanwhile, it’s not just markets that aren’t convinced by Truss and Quarting’s approach.

At the chancellor’s first session on Treasury questions in the House of Commons on Tuesday, senior Tory MPs lined up to publicly express sidelining over his strategy.

Former Cabinet Secretary Julian Smith asked for reassurance that tax cuts “will not be balanced on the shoulders of the poorest people in the country” – usually a line of attack reserved for opposition MPs.

Treasury Committee Chairman Mel Stride warned that if Kwarteng did not seek a buyout from fellow Parliament members in the next financial statement, it would disrupt markets again.

The Prime Minister’s spokesman reiterated on Tuesday that Truss is “committed to the growth measures outlined by the chancellor” and that “the fundamentals of the UK economy remain strong”.

And while this statement continues to be at stake, so will the position of the Prime Minister and her adviser.

Annabelle Dixon contributed reporting.

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