Truss’ plan to ‘turbo-charge’ the UK economy is already alarming the markets

Liz Truss is set to become Britain’s prime minister this week with her plan to “turbo-charge” the economy by cutting taxes that are already worrying investors amid double-digit inflation.

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(Bloomberg) – Liz Truss is set to become British prime minister this week with her plan to “turbo-charge” the economy by cutting taxes that are already worrying investors amid double-digit inflation.

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The Foreign Secretary is the favorite to replace Boris Johnson, and Conservative Party members are expected to name her as their leader on Monday.

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She would take office after declaring her desire to increase the budget deficit just as the Bank of England is raising interest rates and selling its own holdings of government bonds. She also indicated that she would review the mandate of the central bank.

Markets have already raised concerns about a Truss premiership as bond traders fear a flood of gilts will be too heavy to absorb, leading to higher debt-servicing costs.

Since July 7, when Johnson decided to pull out, borrowing costs for 10-year government bonds have risen faster than any of the other 22 major bond markets. The pound also lags behind 132 of the world’s 150 major currencies.

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“We have a number of concerns about reliance on the kindness of strangers to fund the UK at a time when public finances are likely to deteriorate significantly,” said Mark Capleton, strategist at Bank of America Corp.

Few leaders have taken over the UK with an economy in such dire shape. The most comparable moment is the early 1970s, when Labour’s Harold Wilson walked into Downing Street after an oil shock and miners’ strike left industry in a three-day week.

If Truss won, she would inherit inflation at 10.1% and be on track to top 20% for the first time since 1974, according to Goldman Sachs Group Inc. more familiar with rates below 1%.

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Energy costs are expected to absorb up to a tenth of household spending, pushing half of Britain’s 28 million households into fuel poverty.

While the BOE expects a recession by the end of the year, the industry has also been told to prepare for orchestrated blackouts this winter. And the unions are talking about the first national strike since 1926.

Truss believes that reducing taxes and regulations will unlock the productive potential of the nation and take advantage of the opportunities opened up when Britain left the European Union.

His plan is to make the public sector “more efficient” and get public finances under control by taking the UK’s average growth rate to 2.5% – a level not seen consistently since before the financial crisis of 2008. This will redress public finances by reducing debt as a percentage of GDP in the longer term.

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She was deliberately vague on the specifics, but in broad terms there are three strands:

  • Tackle the immediate cost of living crisis by supporting households and businesses
  • Kickstarting growth with £30bn in personal and business tax cuts
  • Raise the productive potential of the economy through supply-side reforms. The details, however, remain largely a mystery.

What Bloomberg Economics says…

“Defending a libertarian position, Truss’ plan to cut taxes will offer little support to those hardest hit by the worsening energy crisis, while creating additional long-term pressure on public finances. .”

—Ana Luis Andrade, Bloomberg Economics. Click for INSIGHT.

Read more: Even Liz Truss supporters fear she will wreak havoc in the UK

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Economists, opposition politicians and even some members of the ruling Conservative Party fear his tax cuts will be inflationary and loosen fiscal restraint too much, turning the market slowdown into a crisis. She has pledged “no new taxes” to pay for the freebies and says she “doesn’t want to cut government spending either.”

Former Bank of England Deputy Governor Charlie Bean, who was also a member of the government’s budget watchdog, the Office for Budget Responsibility, believes it is unwise to launch a political experiment in the midst of crisis.

“I could see investors starting to think the UK was not such a good place to invest,” Bean told Bloomberg Television. “You’ll see a risk premium reappear on gilts, which is just starting to happen.”

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His fear that investors will lose confidence in the UK is shared by Nicholas Macpherson, the former Permanent Secretary to the Treasury, who tweeted this week that ‘a rising cost of borrowing and a falling pound’ are the Treasury’s “worst nightmare”.

Plans to revise the BOE’s mandate are causing additional unease. The Treasury gave the central bank authority over interest rates in 1997, but Truss suggested the government needed more directive powers. If it continues, it could shake investor confidence in the institution.

Taken individually, none of Truss’ policy proposals is extraordinary. His promise to reverse April’s National Insurance increase and scrap the planned corporate tax hike next year has only put tax policy back where it started. of 2020. The UK has already reviewed the mandate of the BOE, and Canada does so regularly.

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But against the backdrop of the current energy and inflationary shock, and against populist language about breaking with “economic orthodoxy,” Truss has people worried.

“The UK government’s finances are a source of concern,” said Laureline Renaud-Chatelain, fixed income strategist at Pictet Wealth Management. “The deficit is very likely to increase significantly in the future.”

The Treasury is facing extreme strains. Support for households could reach £50 billion, according to Sanjay Raja, UK economist at Deutsche Bank. Others suggest more than £100billion will be needed to save businesses from bankruptcy and offset rising household bills.

As rates and inflation rise, the cost of servicing the national debt will rise to around £100billion this year, double the amount spent on transport.

Truss’s real test will come when investors react to the new Prime Minister’s first remarks in the coming days. As Bean, the former BOE economist, said, “markets are the mechanism that punishes bad policies.”

Read more:

  • Even Liz Truss supporters fear she will wreak havoc in the UK
  • Liz Truss is on course for a collision with British economic reality
  • Liz Truss tax cuts could bring rates closer to UK pain threshold
  • UK foreign economists question the radicalism of Trussonomy
  • Truss versus Sunak: Where do the contenders for British leadership on the economy stand?



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