Truss’ mini-budget was awkward, but discussions about the growth plan were still needed | Business News
Following criticism of ex-Prime Minister Liz Truss by former Bank of England governor Mark Carney, Sky’s Ed Conway writes that her main mistake was failing to recognize the unintended consequences of her growth plan.
From Ed Conway, Business and Data Editor @EdConwaySky
Monday, September 18, 2023, 12:28 p.m., United Kingdom
Firstly, it must be said that not everything that went wrong last autumn – with Britain’s financial markets plunged into chaos and the pound falling to its lowest ever level against the US dollar – can be blamed on Liz Truss.
There were many other explanations as to why the UK was vulnerable to a financial shock.
Most obviously, the Bank of England was in the process of reversing quantitative easing, its epic bond-buying program. Suddenly the financial markets were asked to buy an additional load of government bonds that they had sold to the bank years ago. It was a recipe for indigestion.
The Business was still recovering from the pandemic, lockdowns and resulting supply chain disruptions.
Public finances were in a particularly weak position as public debt had ballooned to finance the furlough scheme.
Much of the economic data at the time suggested that the UK had been hit harder than any other major economy and the pound was already devaluing, losing value against the US dollar from the start of 2022.
In other words, Britain appeared to be vulnerable. Bombs were buried all over the financial markets. But this is where things get less flattering for the former prime minister, because there is little doubt that the behavior of Ms Truss and her team has backed the UK into a corner.
This can be seen by looking at various measures of financial stress, from the strength of the pound to the level of government bond yields to loan default rates, which indicate how likely the UK is to default on its debts .
They all peaked in the days following the mini-budget. And everyone fell back again when it became clear that the Prime Minister was resigning. The pound has recovered and the main reason for higher government bond yields is not credibility but rising interest rates.
Ms Truss acknowledged her part in this on Monday when she said: “It is certainly true that not only did I try to fatten the pig on market day, but I also tried to raise and slaughter the pig. I confess.”
However, this is not a random problem. That was the biggest problem at the time. The markets did not appreciate the intricacies of the mini-budget and its various measures. They made a bigger, simpler statement: We don’t trust you.
The problem wasn’t Truss’s growth plan, but the clumsy way in which it went about it. At a time when the UK (like many developed economies) was on the financial brink, this sent the country into the abyss.
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In some ways, such a ruling should reassure right-wing Tory supporters. What happened last fall should not end long-standing debates about what we should do with taxes. It should not end the conversation about how to stimulate economic growth.
In fact, Britain still faces many of the same problems as last year: weak growth, large current account and budget deficits, wayward economic policies and some big question marks over monetary policy.
The markets have not made a judgment on any of these things. It is much easier. They lost trust in the government. It lost its credibility and for a few weeks we danced on the edge of crisis.
Then Liz Truss left office and the credibility crisis ended. Time to move on.