Is It Too Late for Truss to Repair the Damage?
First impressions count, especially when it comes to economic policy. UK Prime Minister Liz Truss and Finance Minister Kwasi Kwarteng last week announced a fresh start for the country with a big shift in fiscal policy — and hit the ground face first. Their plan has crashed the pound, wrecked the government bond market, and destroyed the Bank of England’s efforts to tighten monetary policy.
After such a disastrous start, repairing the damage might be beyond them.
In one way, the financial markets’ reaction to Kwarteng’s mini-budget has been excessive. The plan was poorly designed, for sure, but a plausible forecast (before the market mayhem, that is) would have deemed the tax cuts and spending increases affordable. Projected deficits and debt weren’t outlandish by prevailing standards. Economists had been debating the case for fiscal relaxation; until a few days ago the view that this is no time to be fussing about public debt was respectable, albeit wrong.
The problem is the broader context — and Truss’s determination to ignore it.
The UK faces numerous challenges, any one of which would strain the most competent of governments and risk scaring investors. The new administration is untested in economic affairs. Truss took office after an extended period of political turmoil, defeating Rishi Sunak for the leadership in part by opposing his commitment to fiscal orthodoxy. Britain’s inflation problem is more serious than most because of the economy’s unusually heavy dependence on gas. And the UK economy is uniquely burdened by the immediate impact and unfinished business of Brexit.