Truss toils to stop UK market turmoil from turning into economic tailspin

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By Alasdair Sandford  with Reuters, AP
Britain's Prime Minister Liz Truss
Britain's Prime Minister Liz Truss   -   Copyright  Credit: AP

Liz Truss faced her first Prime Minister's Questions in parliament on Wednesday since her government's mini-budget sent markets into turmoil, borrowing costs rising, and ratings plunging in a disastrous first month in office.

It comes amid more bad news on the financial and economic fronts despite government efforts — and U-turns — to try to halt the slide since Chancellor (finance minister) Kwasi Kwarteng announced his plan for unfunded tax cuts.

The pound fell again against the dollar early on Wednesday after the Bank of England said it would not extend its debt-buying intervention to stabilise financial markets.

Meanwhile, official figures show the UK economy shrank unexpectedly in August, reinforcing fears of an impending recession. 

As the government struggles to steady the listing ship, the UK's international reputation has taken a hammering. Investors are wary and the International Monetary Fund (IMF) has repeated rebukes for fiscal mismanagement.

What's the latest on the UK economy?

Wednesday's report by the Office for National Statistics (ONS) shows there was a 0.3% fall in Gross Domestic Product (GDP) in August from the previous month, while July's increase in output was revised down to 0.1% from a previous estimate of 0.2%.

A decline in manufacturing caused production to fall, while services also slumped. 

"Many other consumer-facing services struggled, with retail, hairdressers and hotels all faring relatively poorly," ONS Chief Economist Grant Fitzner said.

Some analysts say the figures show the rapid increase in prices is having an impact on consumer spending, compounding the cost-of-living crisis. A further sharp slowdown is expected as surging inflation hits households and rising interest rates put mortgages up.

The Bank of England (BoE) confirmed on Wednesday that it will stop supporting the bond market on Friday - having intervened to bring stability and support pension funds in the wake of the mini-budget. Governor Andrew Bailey said on Tuesday that pension funds now had to manage their own affairs and "sort it out".

However, there have been signs of mixed messages from the BoE, with the Financial Times reporting that its buying programme could continue depending on market conditions.

This week's disclosure of the lowest unemployment rate since 1974 offered cold comfort, revealing a record exodus of people from the labour market and raising fears that the shrinking workforce will further fuel inflation.

The government's economic plan sparked market upheaval amid serious concerns over how it would fund the tax cuts, given its other obligations including a commitment to a massive energy support programme.

What action has the government taken?

The turmoil has prompted Liz Truss' government to take emergency action to plug the holes in public finances and stabilise the markets.

Late on Tuesday, it said that renewable power companies in England and Wales will face what has been described as a windfall tax from early next year.

On Monday the finance minister said he would release the government’s detailed fiscal plans on 31 October, three weeks earlier than scheduled. This follows an earlier move to ditch a plan to scrap the top 45% rate of income tax.

The government's failure to detail how it will pay for its tax cuts — except to say faster economic growth will increase tax revenue — has been blamed for the rollercoaster ride on the markets.

Truss told the House of Commons on Wednesday that she would not cut public spending, but the government would make sure that public money was spent well.

Business Secretary Jacob Rees-Mogg caused astonishment on Wednesday morning by blaming the recent turmoil on interest rates, not the government's mini-budget. He also refused to accept that the action taken on renewable energy amounts to a windfall tax  — prompting withering criticism from the opposition Labour Party.

"Such ludicrous evasion simply further erodes confidence in a government that looks like it is totally clueless," tweeted Labour's climate spokesman Ed Miliband.

How much trouble does this spell for the Truss government?

Truss took office promising a radical shake-up of economic policy and challenging establishment orthodoxy. She told last week's Conservative Party conference that she would prioritise "growth, growth, growth".

At the outset, she promised to do this through tax cuts and deregulation.

But the market and economic turmoil has brought a series of U-turns and massively reduced the government's room for manoeuvre.

Some of the strongest criticism has come from Truss' own backbench MPs, a majority of whom did not support her in the summer leadership contest.

Many believe her economic ultra-liberalism is at odds with the Conservatives' 2019 manifesto pledges under previous leader Boris Johnson to "level up" Britain's poorer areas.

Leading voices spoke up against the tax-cutting plan, and the prime minister's refusal to commit to increasing benefits in line with inflation has brought rumblings of further rebellion.

Opinion polls have given Labour a lead of over 30 percentage points, and the latest YouGov assessment puts the government's public approval rating at only 13%, with 70% expressing disapproval of its performance.