Liz Truss took the mantle three weeks ago to the very day and it has been a very ill-starred start.
The people cannot very well blame her for Queen Elizabeth’s untimely death after she was officially appointed prime minister at the royal residence in the Scottish Highlands. But the fall of the pound sterling to record lows yesterday is entirely another matter.
Her finance minister Kwasi Kwarteng’s budget last Friday has caused an international money-market firestorm just three days later.
This side of the Irish Sea, Messrs Donohoe and McGrath will hope for a kinder reception for their 2022/2023 financial plans to be unveiled at lunchtime today.
Sterling fell to an all-time low against the US dollar early yesterday in reaction to Mr Kwarteng’s promised rolling scheme of tax cuts. These have fed money market concerns about the London government’s economic policy just as the UK, like many other western economies, seems headed towards recession.
In fact the British currency has been hammered since Friday, when Mr Kwarteng announced the UK’s biggest tax cuts in 50 years.
The government plans to cut £45bn, almost €50bn, in taxes along with additional billions to help homes and businesses cover spiralling energy bills.
The difficulty is that this level of spending has in turn fuelled investors’ fears about the London government’s big-picture spiralling debt.
The weakening currency piles pressure on Ms Truss and her new Conservative government. Their gamble on slashing taxes, funded by increasing borrowing, stimulating economic growth is off to a very shaky start.
The bulk of orthodox economists insist that the “Trussonomics’ strategy” will only further fuel inflation. This in turn will increase international money markets’ jitters about UK borrowing, with a knock-on domestic effect for people trying to buy homes, and also employers contemplating potential investment in expansion and job creation.
All eyes are now on the Bank of England – the country’s independent central bank – on what it will do with interest rates. The only question now is when more hefty rate rises will happen. The bank raised rates just last Thursday, by a 0.5 percentage point to 2.25pc, and has said it will now
make a full assessment of economic trends ahead of its decision-makers’ next meeting in November.
The world money markets’ reaction to Mr Kwarteng’s vow to stick with his debt-financed tax cuts and energy subsidies is clear. And this rather un-Conservative shift has had a very mixed reaction from the party’s own MPs. The fall of sterling is a very bad look for this party by definition committed to keeping things between the ditches.
Former finance minister, George Osborne, was scathing. “You can’t just borrow your way to a low-tax economy – you can’t have small-state taxes and big-state spending,” he said.
Ms Truss’s press machine put out some government principals to defend the case.
UK farming minister Mark Spencer praised the agenda as “ambitious” and said it would “stimulate growth within the economy that benefits us all”.
Some UK economic analysts urged the Bank of England to act more swiftly – something which cannot be ruled out in the coming days.
Others totally blamed Mr Kwarteng, insisting this was the worst thing to happen since failed efforts to defend sterling in the crash of 1929, and that it was worse than the messed-up exit of Britain from the EU currency grid, the ERM, in 1992 and other subsequent financial calamities.
In efforts to calm the money markets, the London finance department announced it would set out a medium-term fiscal plan on November 23, and an economic forecast by the independent Office for Budget Responsibility.
Still, doubts are mounting that lower taxes and reduced bureaucracy will eventually generate enough additional tax revenue to cover huge rises in government spending.
Then enter the British Labour Party, which just happens to be holding its annual conference, and is now making a potentially successful bid to be the “economic grown-up”. Labour’s economy spokeswoman Rachel Reeves has accused the UK government of “a return to trickle-down economics” which she said failed in previous efforts.
“They are not gambling with their money – they are gambling with yours,” she told an audience at the party conference. Labour, often viewed as the tax-and-spend party, suddenly has real potential here.
Conservative Party jitters can only grow. Let’s recall there will be an election campaign within two years, and many MPs who took forever-Labour seats in the midlands and northern England are looking fretfully at their prospects.
Certainly, some Conservatives have welcomed the tax-cutting moves as a return to free-market values after years of state intervention in the economy during the coronavirus pandemic.
Many others worry it is un-Conservative for the UK government to rack up huge debts that taxpayers will eventually have to pay, while undermining sterling.
And the effect of all this upon Ireland? Unless it prompts a Brexit compromise, it is bad news for our near neighbour, and huge trading partner, to be in such a mess.