Liz Truss’ honeymoon canceled as pound crashes and UK borrowing costs soar – Reuters

LIVERPOOL, England — As an inexperienced leader taking charge of a country in crisis, Liz Truss knew she had to get started this month.

But three weeks into her prime ministership, Britain’s new prime minister is scrambling to stay ahead of events as last Friday’s mini-budget tax cut spooked financial markets, causing Britain’s borrowing costs to skyrocket and the pound to fall to an all-time low.

“If you start taking a dangerous tangent,” said a former Conservative cabinet minister, “the markets will intervene.”

And they intervened. The pound fell to a record low against the dollar on Monday morning as markets reacted to the biggest package of tax cuts in 50 years, a plan that has raised borrowing expectations.

Chancellor Kwasi Kwarteng was forced to issue an emergency statement on Monday evening, promising a new supply-side reform package over the next few weeks and a fully costed ‘fiscal plan’ on November 23 to bring levels down UK’s medium-term debt ratio.

Bank of England Governor Andrew Bailey offered no immediate rate hike, but warned that the bank’s monetary committee « will not hesitate to change interest rates if necessary » to drive down double-digit inflation. The pound rallied a bit later in the day, but not nearly enough to recoup recent losses.

The economic turmoil has put a strain on the nerves of Tory backbenchers, with MPs fearing their party’s long-standing reputation for sound economic management is now in serious jeopardy. Traditionally, the Tories have found political success by portraying their Labor opponents as spendthrift and economically illiterate.

« [I’m] very worried, » said one of dozens of Tory MPs who backed Truss’s opponent, Rishi Sunak, in the summer-long leadership race. « It’s the effect on interest rate which scares me. If you think things are bad now, just wait until we see home foreclosures. »

Such apprehension about Truss’ approach is commonplace on the Conservative benches. The new prime minister entered Downing Street three weeks ago in a precarious political position, having failed to win the support of a majority of his own MPs in the parliamentary phase of the leadership race.

Friends and critics have suggested she may only have two or three weeks to prove to the party that she has what it takes to lead the country through a period of economic crisis.

But while a multi-billion pound energy bailout announced on Truss’ third day in office has gone reasonably well, she hasn’t had a chance to sell it to the country as her planned program has been overtaken by death of Queen Elizabeth II.

His first major appearance on the world stage then fell flat after he was offered a 9 p.m. slot for his speech at the United Nations General Assembly. And its domestic position appears to have weakened further following last week’s highly publicized mini-budget.

« It’s worse than Black Wednesday, » said another Sunak-supporting Tory MP, referring to the infamous September 1992 sterling crisis. « It’s self-inflicted and warrantless, whereas in less [Black Wednesday] was seen as an attempt to manage a crisis.

Another MP said: « This is dangerous territory… What the Prime Minister has failed to realize is that any gains made from tax cuts will be more than offset by increased mortgage payments. «

The concern in conservative ranks is not limited to Truss’ sworn opponents either.

A former minister who backed her in the leadership race said the decision not to release an official economic forecast alongside last week’s tax cuts was « a bit of her own aim ».

“The Chancellor should have defined the budgetary position last week,” the MP said. « Markets hate uncertainty. »

Part of the market reaction was triggered by the lack of clues from the government about where it might make spending cuts to reduce borrowing levels.

« You can’t just take your way to a low-tax economy, » former Tory Chancellor George Osborne told Channel 4 News. « Fundamentally, schizophrenia has to be solved – you can’t have taxes in small states and spending in big states. »

Some fear, moreover, that the management team of Truss does not have the know-how necessary to face the multiple economic crises.

« They feel light to me, » said a former Downing Street aide from Operation No 10 to the new look. « There’s not a lot of experience in that. »

The former adviser questioned the organizational skills of new chief of staff Mark Fulbrook and pointed to the relative youthfulness of many of his Downing Street colleagues.

Others blasted fresh criticism of Kwarteng’s decision to fire longtime senior Treasury official Tom Scholar as one of his first acts in office.

“Sacking your only official with serious crisis management experience, then precipitating a crisis a fortnight later, takes postmodernism to a new level,” tweeted former Permanent Secretary of the Treasury Nick Macpherson.

As a rule of thumb, a new Prime Minister can at least expect a significant, albeit temporary, rebound in the polls upon taking office – but no such phenomena appear on the charts for Truss, Labor maintaining a 12 point lead.

Still, Truss supporters are urging their colleagues to be patient, arguing that party members picked someone proposing sweeping change for a reason.

A minister supporting Truss said: “The dollar is strong and we have just seen a significant change in economic policy. It is inevitable that this will have an impact on trade. Things will work out when the markets get used to it.

And another Sunak-supporting MP insisted the exciting chatter from Westminster about a new leadership challenge so soon after Boris Johnson was ousted had been overdone.

“There is a huge amount of unease,” said the Tory MP. « People are angry. But I think self-preservation is a much more motivating factor.

« We have no choice. We have to support this. Governments that get it wrong tend to lose elections, but governments that are divided absolutely lose the election.