Why UK Prime Minister Truss fired her finance minister — and what happens next as the economic storm worsens

Nikhil Kumar

Source Link

The news: Kwasi Kwarteng, Britain’s finance minister (or chancellor of the Exchequer, as the position is known there) was unceremoniously fired on Friday, just three weeks after he announced an emergency budget to boost economic growth that spooked the financial markets, led to a sudden drop in value of the British pound and set off a new wave of economic pain for ordinary Britons.

Kwarteng’s boss, the country’s recently installed Prime Minister Liz Truss, asked him to step down as she struggles to contain the fallout from the budget proposals — which Truss had signed off on and said was the way to get “our economy moving.”

But speaking after Kwarteng’s exit was confirmed, she admitted that the budget plans “went further and faster than markets were expecting”; it was the best gloss she could put on the fact that the proposals had been roundly voted down by economists and financial investors and — if opinion polls are a good judge — by the British public as well.

As he leaves, Kwarteng is assured an unhappy place in British political history: At 38 days, his was among the shortest tenures for any British chancellor. His only rival in modern times is Iain MacLeod, who died in office 30 days after being appointed finance minister in 1970.

Kwarteng’s exit might only heighten the sense of crisis now engulfing Truss’ six-week-old administration: The economic picture remains perilously fragile as the government’s accounting remains in question, and Truss herself is facing the prospect of an internal party rebellion that puts her own future as Britain’s leader in question.

Economy: Balancing the books

At the heart of the turmoil in Britain are wide-ranging tax cut proposals that, coupled with the new government’s plans to limit energy price rises for ordinary Britons, had raised a key question for economists and investors alike: How on earth was Truss going to pay for her plans?

For weeks now, both Truss and Kwarteng have insisted that the measures — dubbed by them the “Growth Plan 2022″ — would spur economic growth, which in turn would help balance the government’s books. Their logic: The revenue generated by growth would be enough to offset the costs of both the government’s proposals to cut taxes and its plans to limit sudden rises in energy bills.

The problem: Nobody believed them, even after they reversed one of the measures that would have lowered taxes for the richest Britons. One recent estimate from widely respected analysts suggested that Truss would have ultimately had to chop some 60 billion pounds, or more than $67 billion, from public spending over the next few years to balance the books. That would have been both politically tricky and economically damaging, necessitating deep reductions in the budgets that underpin critical public services.

The response from the financial markets was savage, as investors sold off the British pound and panic in the bond markets drove up interest rates, affecting the cost of housing loans for ordinary people and threatening the stability of the British economy. Such was the panic in the markets that the country’s central bank had to step in to calm nerves.

To be sure, economic storm clouds were already gathering over Britain when Truss was appointed prime minister by Queen Elizabeth II in early September, in what was the queen’s last public duty before her passing. A key factor here was the Ukraine War, which has driven up food and energy prices for countries around the world — including Britain. Truss had the additional challenge of dealing with the realities of Brexit and its impact on her country’s relationship with the rest of Europe, as well as the aftereffects of the covid-19 pandemic on Britain’s public sector. Its National Health Service in particular is still struggling to get back on its feet.

But market response to the Truss government’s plans to deal with these accumulating crises has only made things worse. It is why Truss fired Kwarteng and why on Friday she also reversed a second recently announced policy, saying she would scrap a proposed tax cut for companies. The U-turn will save her government around 18 billion pounds, less than half the amount analysts say she needs to balance the books.

That still leaves the door open to potentially deep public spending cuts. Meanwhile, the central bank in London is on track to end its emergency intervention in the financial markets. The measures, announced soon after the September Truss-Kwarteng budget, were put in place to calm market panic; they were set to expire on Friday.

The overall economic backdrop is only worsening. Earlier this week, official data showed that Britain’s economy had contracted in August. That dip means that the country is now very much on a path to recession, one that could last through to the end of next year, according to some analysts.

Prices are also expected to continue rising — hitting the wallets of ordinary people up and down the island nation. The International Monetary Fund, in its latest assessment of global growth prospects issued earlier this week, said it now expects inflation in Britain to peak at around 11.3 percent before the end of this year. The target of the country’s central bank? Two percent.

It’s a grim picture, set against what is already a dark global backdrop. As the IMF put it this week, globally, “this year’s shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.”

Politics: Truss holds on — but for how long?

Truss’ problems don’t stop with the economy.

Her ascent to the country’s top job came about because of a storm of controversy surrounding her predecessor, Boris Johnson. Revelations about law-breaching parties in 10 Downing Street during covid-19 lockdowns prompted Conservative lawmakers to question Johnson’s electability at the next national election, which is currently scheduled to be held no later than January 2025. Truss saw off a challenge from Rishi Sunak, Johnson’s finance minister, with the promise to right not just Britain’s economy, but also bring political stability to her party ahead of that vote. But the economic turmoil triggered by her policies have now led to questions about her own political currency.

Exhibit A, in this regard: The opposition Labour Party is now around 30 points ahead of the Conservative Party in public opinion polls. That’s its biggest lead in more than two decades.

This explains why Truss felt that it wasn’t enough to simply roll back some of her policy proposals. The firing of Kwarteng is, ultimately, a political act. His replacement, Truss confirmed on Friday, will be Jeremy Hunt, a veteran Conservative Party politician who has held several top government jobs over the years — and who was a prominent Sunak supporter in the recent Conservative Party leadership race.

But the risk for Truss is that the reshuffle at the top of the finance ministry, far from satisfying her critics, could have the opposite effect: Already, there are reports in the British press about a brewing internal party rebellion, with one account suggesting that a group of senior Conservative lawmakers could come out publicly as early as next week to call on Truss to resign. “There are serious people. The PM will find it difficult to survive,” one source told a BBC journalist as Kwarteng left office.

Truss, for her part, has said that she intends to stay the course — at least for now. “I am determined to deliver on what I set out when I campaigned to be party leader,” she said on Friday. “We need to have a high-growth economy but we have to recognize that we are facing very difficult issues as a country.”

The early verdict from the markets was, from her point of view, less than inspiring: As Kwarteng left and Truss mounted a new U-turn, the British pound continued its journey south, dropping by more than a percent against the U.S. dollar.

Further reading:

Thanks to Lillian Barkley for copy editing this article.