Truss took over from Boris Johnson at the start of September and was immediately thrown into the deep end by the death of Queen Elizabeth II. But the 10-day national mourning ended abruptly. Determined to make her mark quickly, Truss has announced a radical new economic program of tax cuts and spending worth tens of billions of pounds financed by borrowing – the true total of which is not yet known. The move, which also appeared to breach public mission constraints, shattered the orthodoxy established by the three Conservative prime ministers who preceded her during 12 years in power who sought to emphasize fiscal prudence. Truss’ move to grow proved too radical for traders. The pound was sent spiraling to record lows against the US dollar, an embarrassing intervention by the central bank – the Bank of England – to avoid a raid on pension funds and criticism from foreign observers, including the International Monetary Fund. they were fast. He promised a “new era” – and that certainly happened, but not in the way many expected. The damage was done just a week ago when the head of the Treasury, Kwasi Kwarteng, stood up in the House of Commons to present what was billed as a “mini-budget”. As well as a massive energy support package for businesses fearing they won’t be able to afford soaring bills this winter, a raft of controversial measures were also announced – including scrapping the top tax rate and scrapping the cap on bankers’ bonuses . Overall, it was the biggest tax cut package in 50 years. Because it wasn’t technically a full budget, the watchdog who is legally required to scrutinize such plans and provide new forecasts to reassure investors and economists was prevented from doing so. Kwarteng had also made clear his disdain for “Treasury orthodoxy”, a move that would cause further turmoil in markets. “I don’t have an OBR [Office for Budget Responsibility] The forecast was a very deliberate decision to say ‘we don’t care about these people who have this irritating insistence on having spreadsheets and numbers and things like that,’ said UK-based economist Jonathan Portes at thinktank Changing Europe. As the chancellor took aides to the pub to celebrate last Friday’s announcement, the pound fell in foreign exchange markets, ending the day down 5 points against the dollar at $1.08, near historic lows. Government bonds, known as gilts, also saw a sell-off. And markets were anticipating a sharp rise in interest rates as the Bank of England stepped in to offset the inflationary impact of the plans. Kwasi Kwarteng, the UK Chancellor of the Exchequer, suggested “more” in taxes would follow despite panicked markets. Photo: Toby Melville/Reuters But such was Kwarteng’s persistence in the face of market turmoil that when he appeared for an interview on the BBC’s Sunday morning political show, he suggested there was “more” to come on the tax cuts. By Sunday afternoon, the sterling sell-off had resumed in earnest in Asian markets. and when the bond markets opened in London on Monday morning, it turned into a disaster. Yields on 10-year Treasuries – the rate at which the government borrows – jumped above 4% and continued to rise until Tuesday, reaching 5% – the highest level since the 2008 financial crisis. Such was the chaos that both the government department headed by Kwarteng and the independent Bank of England issued coordinated statements on Monday afternoon. Kwarteng promised to publish fuller details of his fiscal plans on November 23 – much earlier than planned – and the Bank said it “will not hesitate to change interest rates as necessary”. But as the government scrambled to unwind the economy, the Bank was determined to keep the handbrake on to prevent inflation spiraling out of control and warned of “significant” interest rate rises. Meanwhile, it quickly became clear that the tremors in the financial markets were being felt far beyond the city. By Tuesday, nearly 300 mortgage deals had been pulled from the market as lenders reassessed the outlook for interest rates. Estate agents reported that home buying chains were collapsing as lenders and buyers pulled out. “It’s scary,” said housing analyst Neal Hudson of consultancy BuiltPlace, who had already predicted a market slowdown as interest rates rose to counter double-digit inflation. “I think the events of the last few days really raise the possibility of a worst-case scenario of a major housing market downturn,” he said, pointing to how weak household finances are. He suggested that the number of transactions was likely to drop sharply in the coming months as potential buyers could no longer afford the home they were hoping for. Sellers who can’t wait will be forced to drop their prices. A perfect storm is approaching as many two-year mortgage deals were secured around the time of the UK’s first Covid lockdown in March 2020 when interest rates hit their lowest point. When those deals expire, many may find themselves bitten by significantly higher interest rates. The chorus of condemnation was joined by the International Monetary Fund (IMF), the global body that promotes sustainable economic development. He warned the moves risked worsening inequality and bluntly urged the UK government to “reassess tax measures”. Truss was fervently supported during the six-week leadership campaign over the summer by hard-right economists and commentators. They reacted with increasing fury to each fresh voice condemning her plans. Tory peer Lord Frost dismissed “the international ranks of the profession” – a group that included reputable publications such as the Economist, as well as former Labor prime minister Gordon Brown, who has been nowhere near power for more than a decade. As the crisis deepened, the vicious rise in yields, which had already skyrocketed in recent months, was wreaking havoc on pension funds. Amid fears that panic-selling bonds would create a self-fulfilling “doom loop” and some funds warning that they were actually at risk of becoming insolvent, the Bank led the bailout. He said he would step in to buy females and promised to continue to do so for up to two weeks, up to 65 billion pounds – an extraordinary display from an institution that until last week had hoped to sell bond stock. Kwarteng and Truss meanwhile were nowhere to be seen as the House of Commons is not in session. The main opposition Labor party held its annual party conference with activists and members, leaving government officials free to hole up in their offices. The prime minister finally emerged from her self-imposed isolation on Thursday morning with a devastating series of interviews on local radio stations – something that usually happens ahead of her own Conservative party conference, which starts on Sunday. Grilled by the market chaos, he tried to focus on the generosity of the energy bailout, but appeared to falter when challenged about the housing market, pausing repeatedly before answering. Angela Rayner, deputy leader of the opposition Labor Party, mocked Liz Truss at the party’s annual conference in Liverpool. Photo: Christopher Thomond/The Guardian Truss was then mocked by the deputy Labor leader, who said she had “finally broken her long painful silence with a series of short painful silences”. With the moves in gold yields alone adding £18 billion a year to the government’s interest, according to estimates by the Resolution Foundation thinktank, pressure was mounting on Kwarteng to identify spending cuts to complement his plans. Asked whether he would increase benefits for the poorest people in society in line with inflation next spring, he said it was “premature for me to come to that”. However, the audience seems to have already made up their minds about Truss and Kwarteng’s plans. A slew of damning opinion polls released as the week drew to a close showed Labor widening its lead dramatically – with the 33-point margin YouGov found suggesting an electoral wipeout of the Tories. The next general election must be held by January 2025. By Friday morning, Truss’s avowed dislike of “abacus finance” – as she described her opponent’s approach to the party leadership contest – had apparently been forgotten, as she and Kwarteng invited senior figures from the OBR to No 10 for a comfortable conversation. Some semblance of calm had returned to the City by the end of the week, with the battered pound regaining some of its value. But many of Tras’s colleagues fear her “new era” will be one in which their own party is ignominiously swept from power.
