Here is a summary of the current British Prime Minister’s first weeks in office:
+++How did Liz Truss become Prime Minister?+++
Truss’s predecessor, Boris Johnson, was forced out of office after scandals that culminated in the sacking of more than 50 members of the government. The crisis prompted an internal election to lead the Conservative Party.
The election split the Conservative Party. Truss was the party’s second choice of parliamentarians behind former finance minister Rishi Sunak, but won 57% of the party’s rank-and-file vote and became leader and prime minister on 6 September.
+++What is the government’s economic plan?+++
On September 23, (now deposed) Finance Minister Kwasi Kwarteng announced plans to cut taxes while cutting red tape and encouraging investment to spur economic growth. The cost of the tax cut package was estimated at £45 billion (€52 billion at current exchange rates).
Kwarteng also said the government would borrow at least 60,000 pounds (69,000 million euros) to offset high energy prices for homes and businesses that have fueled the cost-of-living crisis.
The government has set a target of an average economic growth of 2.5% per year to increase tax revenue and fund public services.
++Why was this project well received by investors?++
Kwarteng did not provide any independent analysis of whether the government’s targets could be met or what the impact would be on public finances. This has fueled speculation that the government will have to finance the package with debt.
The strategy, which pumped billions of pounds into the economy, raised the risk of higher inflation, which would force the Bank of England to raise interest rates, impacting home loans.
The International Monetary Fund (IMF) criticized the government’s plans and the Fitch and Standard and Poor’s agencies downgraded the UK.
+++How did the financial markets react?+++
The pound fell to an all-time low against the US dollar and interest rates on sovereign debt rose on concerns about the stability of public finances, pushing up the cost of government borrowing.
The Bank of England announced a rare emergency intervention on September 28 to buy billions of pounds of long-term Treasury bills to stabilize markets and protect pension funds.
Funds were forced to sell bonds to avoid liquidity concerns, which threatened dire consequences for workers’ retirement pensions.
+++ How did the government cope? +++
Volatility in financial markets and internal criticism led Kwarteng to back away from abolishing the top 45% income tax bracket for wealthy taxpayers, which he described as a “distraction” from other measures.
It also agreed to release an analysis by the independent Office for Budget Responsibility later in October than previously planned, along with a “medium-term fiscal plan” on how the tax cuts would be paid for.
Threats of rebellion within the Conservative Party led to Liz Truss sacking finance minister, agreeing to raise it to 25% in April to shore up the public accounts and abandoning a pledge to keep corporate tax at 19%.
He warned that public spending could be reduced by anticipating “efficiencies” and that “spending will grow faster than previously expected.”
+++What’s next?+++
Financial markets will remain volatile until the government releases its full economic plan on October 31, which will include an independent analysis of the impact on public finances.
With the UK in economic trouble and at risk of falling into recession, investors want confirmation that the government is committed to reducing debt as a percentage of GDP.
The appointment of centrist Jeremy Hunt was welcomed by the Conservatives, but many MPs are angry at Liz Truss, who has blamed the fall in the polls, leaving her 30 percentage points behind Labour.
The British press has speculated about plots to remove and replace Truss before the next parliamentary election, but the rules state that there cannot be an internal audit movement until September 2023.
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