She has only been the Prime Minister of the United Kingdom for a month, and the position of Liz Truss is already under great pressure. This has to do with the economic situation in Britain, which has been precarious since Truss and its finance minister Kwasi Quarting announced their economic plans three weeks ago. “It’s a mess,” said Willem Buiter, a former economist at the Bank of England, the Bank of England.
Two weeks ago, this bank stepped in with a unique contingency plan by British standards. The bank promised to buy 5 billion pounds of government bonds every day for fourteen days to counteract the rapid rise in interest rates. The deadline for this plan expires tomorrow, although it is not yet clear if the bank will actually stop doing so. Because it is uncertain what will happen in this case.
According to the British government, the economic situation has nothing to do with government policy. But that’s “complete nonsense,” says Buiter. “This has to do with Truss’ policy.”
Back to the start
what is going on? It all began on September 23, when Truss and Quarting announced their economic plan. An important part of this was the massive tax cut of 45 billion pounds, including by eliminating the higher tax bracket. This should lead to more money being spent, which should lead to the growth of the economy.
The opposite happened. The pound fell sharply, government bond yields rose, and the value of stocks and bonds fell on the stock exchange.
“The tax cuts were very large and completely unfunded,” says Piotr. “They were based on the idea that economic growth would miraculously increase, generating higher revenues for the state treasury, despite lower rates of corporate and individual income tax.”
The prime minister quickly backtracked on some of her plans. But the turmoil in the financial markets continued.
It would greatly help if the government announced a sustainable fiscal plan.
“Rising interest rates caused problems for pension funds, among other things, which had to incur a lot of costs,” says ING economist Bert Cullen. “As a result, they have had to sell part of their investment themselves. This can lead to a downward spiral, which is why the Bank of England stepped in to buy the bonds themselves.”
Unprecedented action. Because buying bonds may dampen interest rates, but it also increases inflation. It is precisely the job of the central bank to keep inflation in check, especially at times when it is already high.
Bank of England President Andrew Bailey has set a strict deadline for the contingency plan. It was supposed to end tomorrow, but there is uncertainty about that. The Bank of England has given signals that it is moving forward with its contingency plan. So it is not clear what exactly will happen.
“It’s a loud game,” Colin says. “The Bank is trying, in the short term at least, to force pension funds to make themselves less vulnerable. Not to give the impression that pension funds can use the ‘training wheels’ that the Bank gives them for a very long time. They are worried about inflation, that’s their job. The first, and they want to be able to focus on that as quickly and in the best possible way.”
Meanwhile, eyes also remain on the British government. Will they modify the controversial tax plan?
“It will help greatly if the government The basics “It will change by announcing a sustainable tax plan. In other words, by announcing future tax increases or cuts,” Potter says.
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