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Things are going from bad to worse for Britain as investors, bankers and economists file scathing reviews of new Prime Minister Liz Truss’s plans to slash taxes and indulge in massive borrowing at a time of historically high inflation.
The pound has crumbled to historic lows. The housing market is on edge as mortgage lenders withdraw offers. Government borrowing costs have risen enormously. And investors are fleeing U.K. assets as quickly as they can.
Truss’s administration, says billionaire investor Ray Dalio, is acting “like the government of an emerging country.”
Central bank intervention
On Wednesday, the Bank of England stepped in to calm the market chaos, announcing it would immediately begin purchasing long-dated U.K. government bonds. The intervention would be temporary, the bank said, with the program set to end on Oct. 14.
“The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome,” the central bank said, echoing Mario Draghi’s 2012 promise to do ‘whatever it takes’ to save the Euro.
The Bank of England also reiterated that it would “not hesitate to change interest rates by as much as needed” to bring inflation closer to its 2% target, after its chief economist warned policymakers may need to deliver a “significant” monetary policy response to protect the value of the pound.
The Bank of England’s Wednesday announcement sent the pound tumbling further. By 1 p.m. London time, sterling was trading at less than $1.06.
Trussonomics
All of this is happening days after newly appointed Finance Minister Kwasi Kwarteng announced a $48 billion package of tax cuts—and as the country grapples with its worst cost of living crisis for decades.
The Liz Truss-led government’s risky fiscal decisions—dubbed “Trussonomics” by the British press—sent the pound to an all-time low of $1.0327 on Monday, and have led to warnings that the new Prime Minister is on a collision course with the Bank of England.
Experts all over the world have condemned the tax cuts—the biggest seen in the U.K. for half a century—which have been announced as the government gears up to spend an estimated $60 billion on helping households with their energy bills over the winter.
According to respected thinktank The Resolution Foundation, Kwarteng’s tax cuts will require the government to borrow almost half a trillion dollars, with the wealthiest 5% of the U.K. population being the main beneficiaries of the overhaul.
On Tuesday evening, the International Monetary Fund (IMF) issued a statement criticizing the policies, marking a rare intervention in a G7 country from the organization.
“Given elevated inflation pressures in many countries, including the U.K., 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,” a spokesperson said.
“Furthermore, the nature of the U.K. measures will likely increase inequality. The Nov. 23 budget will present an early opportunity for the U.K. government to consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners.”
Meanwhile, credit rating agency Moody’s warned on Tuesday that Kwarteng’s “unfunded” tax cuts were “credit negative” for Britain, adding that the plans risked “permanently weakening the U.K.’s debt affordability.”
U.K. ‘operating like an emerging country’
The interventions from the IMF and Bank of England added to blunt condemnations from across the Atlantic.
On Tuesday, Ray Dalio—who in 1975 founded Bridgewater Associates, the world’s largest hedge fund—argued that “mechanistically, the U.K. government is operating like the government of an emerging country.”
He criticized the U.K. government’s massive tax cuts as a move that would produce “too much debt in a currency that there is not a big world demand for.”
“That makes people want to get out of the debt and currency,” he said. “I can’t understand how those who were behind this move didn’t understand that. It suggests incompetence.”
Dalio’s opinion on the matter echoes concerns voiced by former U.S. Treasury Secretary Larry Summers, who said earlier this week that the U.K. was “behaving a bit like an emerging market” and “turning itself into a submerging market.”
“This is simply not a moment for the kind of naïve wishful thinking supply side economics that is being pursued in Britain,” Summers said in an interview with Bloomberg. “I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.”
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