Liz Truss’ honeymoon cancelled as pound plummets and UK borrowing costs soar

Not sure it ever started – Owl

Bank of England forced to issue emergency statement after UK leader’s mini-budget triggers market turmoil.

Esther Webber, Emilio Casalicchio 

LIVERPOOL, England — As an inexperienced leader taking charge of a country in crisis, Liz Truss knew she needed to hit the ground running this month.

But three weeks into her fledgling premiership, the new U.K. prime minister finds herself scrambling to stay ahead of events as last Friday’s tax-cutting mini-budget spooked financial markets, sending Britain’s borrowing costs soaring and the pound tumbling to an all-time low.

“If you start going off on a dangerous tangent,” one former Tory Cabinet minister mused, “the markets will intervene.”

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

Chancellor Kwasi Kwarteng was forced to issue an emergency statement late Monday, promising a fresh package of supply-side reforms over the coming weeks and a fully costed “fiscal plan” on November 23 to get U.K. debt levels falling over the medium term.

Bank of England Governor Andrew Bailey offered no immediate rates rise, but warned the bank’s monetary committee “will not hesitate to change interest rates as necessary” to push down double-digit inflation. The pound rallied somewhat later in the day, but nowhere near enough to recover recent losses.

The economic turmoil set nerves jangling on the Conservative backbenches, with MPs fearing their party’s long-held reputation for sound economic management is now at serious risk. Traditionally the Tories have found political success in painting their Labour opponents as high-spending and economically illiterate.

“[I’m] very worried,” said one of the dozens of Tory MPs who backed Truss’ opponent, Rishi Sunak, in the summer-long leadership contest. “It’s the effect on interest rates that scares the bejeezus out of me. If you think things are bad now, just wait till we see home repossessions.”

Such trepidation about Truss’ approach is commonplace on the Tory backbenches. The new PM entered Downing Street three weeks ago in a precarious political position, having failed to secure support from the majority of her own MPs in the parliamentary stage of the leadership race.

Her friends and critics alike suggested she may only have two or three weeks to prove to the party she has what it takes to lead the country through a time of economic crisis. 

But while a multibillion-pound energy bailout announced on Truss’ third day in office went down reasonably well, she did not get the chance to sell it to the country as her planned agenda was overtaken by the death of Queen Elizabeth II.

Her first big appearance on the world stage then fell somewhat flat after she was offered a graveyard 9 p.m. slot for her speech at the U.N. General Assembly. And her domestic position appears to have weakened further in the wake of last week’s much-hyped mini-budget. 

“It’s worse than Black Wednesday,” said another Sunak-backing Conservative MP., referring to the infamous Sterling crisis of September 1992. “This is self-inflicted and without a mandate, whereas at least [Black Wednesday] was perceived as a bid to manage a crisis.”

Another MP said: “This is dangerous territory … What the PM hasn’t realized is that any gains made by the tax cuts will be more than outweighed by increased mortgage payments.”

Nor is disquiet in the Tory ranks confined to Truss’ sworn opponents.

One former minister who backed her in the leadership race said the decision not to publish official economic forecasts alongside last week’s tax cuts was “a bit of an own goal.”

“The Chancellor should have set out the fiscal position last week,” the MP said. “Markets hate uncertainty.”

Part of the markets’ reaction has been sparked by the absence of any clues from the government about where they might make spending cuts to reduce levels of borrowing.

“You can’t just borrow your way to a low-tax economy,” former Tory Chancellor George Osborne told Channel 4 News. “Fundamentally, the schizophrenia has to be resolved — you can’t have small-state taxes and big-state spending.”

Some fear, in addition, that Truss’ top team lacks the savvy to deal with multiple economic crises. 

“They look lightweight to me,” said a former Downing Street aide of the new-look No. 10 operation. “There’s not a lot of experience in there.”  

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

Others heaped fresh criticism on Kwarteng’s decision to dismiss Tom Scholar, the long-serving top official at the Treasury, as one of his first acts in office. 

“To fire your only official with serious experience of crisis management and then precipitate a crisis a fortnight later brings postmodernism to a new level,” tweeted former Treasury Permanent Secretary Nick Macpherson.

Typically a new prime minister can at least expect a significant, if temporary, poll bounce on entering office — but no such phenomenon appears on the cards for Truss, with the Labour Party maintaining a 12-point lead.

Yet Truss’ supporters are urging their colleagues to be patient, arguing that party members picked someone offering a radical change for a reason.

One Truss-backing minister said: “The dollar is strong, and we have just seen a significant change in economic policy. It is inevitable that would have an impact on trading. Things will settle when the markets get used to it.”

And another Sunak-supporting MP insisted that excitable Westminster chatter of a further leadership challenge so soon after the ouster or Boris Johnson was overblown.

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

“We haven’t got any choice. We have got to get behind this. Governments who get things wrong tend to lose elections but governments that are split definitely lose elections.”

IMF says UK fiscal measures will ‘likely increase inequality,’ urges rethink

A couple of weeks ago Owl asked the question: are the Tories on course to crash the economy? 

Regrettably, we now know the answer is YES, and we are all going to suffer.

The IMF usually reserves criticism of this sort for “basket case” economies.

Seems hard to see the economy growing when underlying borrowing costs are twice that of Germany. Standby for consequences on mortgages and house prices. Where is the party of “sound money” – Owl 

WASHINGTON, Sept 27 (Reuters) – The International Monetary Fund on Tuesday took aim at new British financial plans that have roiled markets, warning that “large and untargeted fiscal packages” would likely increase inequality in Britain and could undermine monetary policy.

In its first comments on plans by Britain’s new finance minister Kwasi Kwarteng, which have sent sterling and bonds into free fall, the IMF urged UK authorities to consider providing more targeted support to families and business instead of sizable tax cuts and sharply higher government spending.

“We are closely monitoring recent economic developments in the UK and are engaged with the authorities,” an IMF spokesperson said, in response to a query from Reuters after the British pound hit an all-time low amid spiking market concerns.

“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the spokesperson said in the IMF’s first public reaction.

Kwarteng, who on Friday unveiled a budget aimed at growing the economy by cutting taxes and sharply increasing government borrowing, responded to market mayhem by promising to roll out medium-term debt-cutting plans on Nov. 23.

The global lender understands that Britain’s “sizable fiscal package” was intended to help residents deal with higher energy prices and to boost growth via tax cuts and supply measures, but such measures could put fiscal policy at cross purposes with monetary policy, the spokesperson said.

“The nature of the UK measures will likely increase inequality,” it added.

Kwarteng’s Nov. 23 budget would provide an “early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners,” the spokesperson added.

Britain was forced to apply for an IMF loan of nearly $4 billion during the 1976 financial crisis, with IMF negotiators insisting on deep cuts in public expenditure at the time.

IMF officials have warned repeatedly in recent months of the need to carefully calibrate fiscal and monetary policy as central bankers raise interest rates across the globe to get inflation under control.

Meanwhile the cost of borrowing increases:

10 year gilt yield is now higher than that of Greece and Italy and more than twice the equivalent borrowing cost for Germany.


Former Ofsted inspector to lead independent Devon County Council review into failure to act over Humphreys

An ex-Ofsted inspector will lead an independent review into how Devon County Council failed to properly deal with concerns made in 2014 about a former school governor from Exmouth who was later jailed for historic sex offences, writes local democracy reporter, Ollie Heptinstall.

[Rather undermines EDDC Chief Executive Mark Willliams’ criticism of Cllr Jess Bailey’s suggestion that a specialist investigative company, rather than a “Legal 500 recommended firm of solicitors” should conduct the EDDC investigation. One wonders whether DCC is “sufficiently sighted on the legal framework, issues and implications of this issue”, to quote again from MW. Horses for courses? – Owl]

Watch the EDDC debate on whether or not to conduct an investigation on the EDDC Youtube channel 6.00pm tonight. 

John Humphreys, who also previously served as an East Devon district Councillor and mayor of Exmouth, is just over a year into a 21-year prison sentence for sexually assaulting two teenage boys in the early 1990s and early 2000s.

It was revealed in June that the National Society for the Prevention of Cruelty to Children (NSPCC) had raised concerns about him in 2014, when allegations had already been made to the police.

But Devon County Council chose not to take any action after officers discussed the case with police, a decision the council’s cabinet member for schools, Councillor Andrew Leadbetter (Conservative, Wearside and Topsham) has admitted was wrong, and that it should have shared the concerns more widely.

In his written response in June to county and district councillor Jess Bailey, Cllr Leadbetter said: “I can confirm that the local authority designated officer (LADO) received a referral via the NSPCC in 2014. As part of the LADO process, our officers discussed the case with the police.

“The police were already aware of the individual and the allegations that had been made and advised us that there was not enough evidence to investigate further, and it was agreed that no further action would be taken.

“We have evaluated the response that was made in 2014 and concluded that we should have held a multi-agency meeting to share information and consider what, if any, next steps could be taken.”

After previously confirming the investigation would be undertaken, the council has now revealed it will be carried out by experienced social care practitioner and former Ofsted inspector Mike Ferguson.

Since 2018, he has worked as an independent children’s social care consultant, undertaking practice reviews with a range of local authorities.

Work has begun on the review and is expected to be completed later in the autumn.

East Devon District Council (EDDC) has also been looking into how Humphreys – despite his 2016 arrest – was allowed to carry on in his role as Councillor until May 2019, then awarded the honorary title of alderman later that year.

Later this week (Wednesday, September 28) EDDC will decide whether to conduct a formal investigation into why Humphreys was not removed from his position sooner.