Is it too late for Truss to repair the damage?

First impressions matter, especially when it comes to economic policy. Last week, British Prime Minister Liz Truss and Finance Minister Kwasi Kwarteng announced a fresh start for the country with a big shift in fiscal policy – ​​and hit the ground running first. Their plan crashed the pound, destroyed the government bond market and shattered the Bank of England’s efforts to tighten monetary policy.

After such a disastrous start, repairing the damage might be beyond them.

In a way, the reaction of the financial markets to Kwarteng’s mini-budget has been excessive. The plan was ill-conceived, of course, but a plausible forecast (before market chaos, that is) would have deemed tax cuts and spending increases affordable. The projected deficits and debt were not extravagant by current standards. Economists had debated the case for tax easing; Until a few days ago, the view that now was not the time to fuss over the public debt was respectable, if misguided.

The problem is the larger context – and Truss’ determination to ignore it.

The UK faces many challenges, each of which would put the most capable governments to the test and risk scaring off investors. The new administration has not proven itself in economic affairs. Truss took office after a long period of political turmoil, beating Rishi Sunak for the leadership in part by opposing his commitment to fiscal orthodoxy. Britain’s inflation problem is more serious than most due to the economy’s exceptionally heavy reliance on gas. And the UK economy is particularly burdened by the immediate impact and unfinished business of Brexit.

A little comfort was needed. Truss needed to show that she understood the seriousness of these issues and would work to resolve them. It would have been difficult, no doubt, because it meant turning her attention away from the excitable members of the Conservative Party who elected her and reaching out to everyone else – especially investors, who have the fate of governments from time to time. in their hands. Instead of reassuring, she stuck to the campaign.

She and Kwarteng ostensibly set aside immediate economic challenges and presented a plan that placed a strong emphasis on the long term. Tax cuts and tax incentives to promote investment and enterprise are good and good, if designed intelligently. But for now, long-term growth prospects are mostly irrelevant. As if to underline her contempt for budgetary orthodoxy, she also suspended the procedure allowing the Office for Budget Responsibility, the independent British budgetary watchdog, to examine the proposal.

The budget compounds short-term challenges by reducing the Bank of England’s efforts to fight inflation. Additional fiscal stimulus forces the central bank to raise its policy rate even further. The sharp drop in sterling, another symptom of collapsing confidence, is an additional complication. This is also pushing inflation higher, again calling on the BOE to tighten further. Suddenly it’s not so easy: the alarm in the financial markets is also raising long-term interest rates, drawing attention to the creditworthiness of private debtors (including holders of low-interest mortgages). variable).

These surging countercurrents make the task of the central bank almost impossible. This week, amid extraordinary turmoil in financial markets, the BOE reversed in the space of a day, promising to buy as many long-term government bonds as needed to restore order – in fact, resuming the quantitative easing it had planned to reverse. .

Recall that during his campaign, Truss had raised a question about the operational independence of the Bank of England, saying that its mandate might have to be changed. We can therefore say that she is coherent: her opinions on the independence of the central bank are as heterodox as her reflection on the independent control of the budget. The attention to detail is no less impressive: whatever it could do to make investors anxious and complicate the work of the BOE, it did.

On Brexit, his approach is closer to outright indifference. Restoring economic relations with the European Union, as far as possible, should be a top priority. The consequences of a collapse in trade are hardly foreseeable — and the war in Ukraine offers the chance for a reset, because it has shown the need for European solidarity. Yet the Prime Minister still seems to think that Brexit is going to be planned, that it is only a matter of time before the EU sees the meaning and submits to its demands on trade between Ireland North and the rest of the UK.

Add it all together, and investor alarm over the UK’s outlook no longer seems extreme. Maybe Truss is being chastised. But such bad beginnings are hard to reverse. Staying the course won’t work, because the course she’s set for herself is doomed. And sudden U-turns can make matters worse: incompetence and panic are scarier than incompetence. Is it too early to wonder if the Conservatives need a new leader?

More from Bloomberg Opinion:

• Financial markets tell Truss she doesn’t trust: Publishers

• UK should hope Liz Truss isn’t a laughingstock: Max Hastings

• Trussonomy can be a gift for the Labor Party: Martin Ivens

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Clive Crook is a Bloomberg Opinion columnist and editorial board member covering the economy. Previously, he was associate editor of The Economist and chief Washington commentator for the Financial Times.

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