News Item: UK economy not out of woods despite tax U-turn
Britain’s debt-fuelled economy remains threatened by recession and the pound mired by trouble despite the government of new Prime Minister Liz Truss performing a swift tax U-turn.
Sterling was up slightly Monday, having recovered in recent days from a record dollar-low that followed the budget seen as benefitting the richest in Britain during a cost-of-living crisis.
London’s benchmark FTSE 100 index was down about half a percent, mirroring losses on global equity markets.
UK gilts, or government bonds, remain supported by an emergency Bank of England intervention after yields rocketed following the debt-fuelled budget late last month.
– ‘Outlook tweaked’ –
“The tax cut reversal gives the pound a bit more room to recover, but since it only really tweaks the fiscal outlook I don’t expect the recovery to go on for too long,” IG Index analyst Chris Beauchamp told AFP.
“Gilts continue to reflect this nervousness, and until we get a bigger reversal and/or more clarity on the fiscal outlook, they should remain under pressure.”
In a dramatic change of plan, Britain’s beleaguered finance minister Kwasi Kwarteng said Monday on Twitter that he would no longer be scrapping the 45 percent top rate of income tax levied on the highest earners.
“We get it, and we have listened,” said the chancellor of the exchequer.
No other changes were made to the budget, which includes axing a cap on bankers’ bonuses, reversing a planned rise on company profits and cutting taxes for all workers.
The intention to pay for the cuts with billions more pounds (dollars) in extra borrowing had a week ago sent sterling to an all-time nadir close to parity with the greenback and put pension funds at risk from soaring bond yields.
“The tax cut reversal… does not do much to boost the government’s credibility in the eyes of the market, though it does at least show they are paying attention,” noted Neil Wilson at Markets.com.
“Whilst the U-turn did produce a short burst of buying, sterling had pretty well recovered its losses last week — a tougher line from the Bank of England in terms of rate hikes and its intervention to shore up the gilt market were the key factors.”
Wilson said “sentiment remains pretty weak and there could be another lurch lower for the pound”, while the BoE’s intervention to buy gilts worth up to £65 billion ends next week.
– UK credit warnings –
Analysts have argued that the budget could fuel already sky-high UK inflation, forcing the Bank of England to raise its main interest rate even more aggressively than planned.
Mortgage deals, which are based on the BoE interest rate, have rocketed in the past week, offsetting financial benefit for households from a UK government’s cap on energy bills.
Ratings agencies have also voiced concern, with S&P on Friday revising its outlook for the UK from “stable” to “negative” following the markets fallout.
Moody’s had already warned that Kwarteng’s fiscal strategy was “credit negative” and could “permanently weaken the UK’s debt affordability”.
On a positive note, Britain is not yet in recession, revised official data showed Friday — but that could all change in the coming months.
“Confidence is still lacking in this government and there is a cliff edge in a couple of weeks when the Bank of England’s emergency bond-buying programme comes to an end,” said Philip Dragoumis at Thera Wealth Management.
UK's embattled govt stares at new U-turn on economy
Britain’s Prime Minister Liz Truss defended her contentious plan to kick-start economic growth through tax cuts, despite expectations Tuesday of a second damaging U-turn.
Fresh from a humiliating climbdown on cutting income tax for the richest, Truss and Chancellor of the Exchequer Kwasi Kwarteng were set to bring forward a major debt reduction plan, the Financial Times and others reported.
Its unveiling will come later this month rather than on November 23, and will be accompanied by independent forecasts from the Office for Budget Responsibility (OBR) in a bid to calm febrile financial markets, the reports said.
There was no immediate comment from the government, as Truss and Kwarteng prepared for another difficult day at the ruling Conservatives’ annual conference in Birmingham, central England.
But Mel Stride, the Tory chairman of the powerful Treasury committee in the House of Commons, said: “I have pressed the chancellor very hard on this and to his credit he has listened.”
Acting in advance of the Bank of England’s next rate-setting meeting on November 3 could “reduce the upward pressure on interest rates to the benefit of millions of people up and down the country”, he added.
Asked if any more U-turns were coming, Truss was evasive in an interview with LBC radio broadcast Tuesday but recorded on Monday.
“I’m determined to carry on with this growth package,” she said, stressing another component of the plan to cap soaring energy bills.
“That’s what’s important, but it’s also important that we do listen to people and we bring the country with us.”
However, Truss also refused to rule out cuts to benefits as poorer Britons struggle with the worst cost-of-living crisis in generations.
“I’m very committed to supporting the most vulnerable,” Truss told BBC radio in another pre-recorded interview aired Tuesday.
But she added: “We have to look at these issues in the round. We have to be fiscally responsible.”
– ‘Get a grip!’ –
Potential cuts to the welfare budget are shaping up as the next battle with dissident Tory MPs after the aborted tax cut, part of a package that relies on billions more in new borrowing.
Splits have also emerged in the cabinet.
Senior minister Penny Mordaunt, one of the candidates Truss beat in the Tory leadership race, said it “makes sense” that welfare should still rise in line with soaring rates of inflation.
“I have always supported –- whether it’s pensions, whether it’s our welfare system –- keeping pace with inflation,” she told Times Radio.
“That’s what I voted for before, and so have a lot of my colleagues.”
Media coverage of Monday’s volte-face was damning, with many commentators arguing Truss’s credibility was already in tatters less than a month since she succeeded Boris Johnson.
The Daily Mail newspaper, normally a trenchant voice in support of the new leader’s right-wing agenda, headlined its main story: “Get a grip!”
Coverage of Kwarteng’s lacklustre speech to the Tory conference on Monday, which had to be rapidly rewritten after the tax plan was ditched, was also damning.
There was particular criticism of the finance minister’s jocular tone, which he reinforced at an evening reception with the Policy Exchange think-tank.
Market reactions that saw the pound slump to an all-time low against the dollar last week had been “hullabaloo”, he said.
Policy Exchange, he also told his laughing hosts, was “twice as old as the OBR — that gives you huge authority”.
Elsewhere at the Birmingham conference, Foreign Secretary James Cleverly was Tuesday to declare that Britain has the “strategic endurance” to see Ukraine “through to victory” over Russia.
And Home Secretary Suella Braverman was readying new measures to tackle migrants crossing the Channel from France on rickety boats, as Truss’s government seeks to shore up its right-wing credentials.