LONDON — For Liz Truss, the end came Thursday during a midday meeting with Conservative Party bigwigs. But Ms Truss’s fate as Prime Minister was all but sealed three weeks earlier when currency and bond traders reacted to her new fiscal program by torpedoing the pound and other British financial assets.
The market’s quick and scathing verdict on Ms Truss’ tax cut package shattered her credibility, damaged Britain’s reputation with investors, drove up mortgage rates, pushed the pound to near parity with the US dollar and forced the Bank of England to intervene to support UK bonds.
That repudiation, measured in the second-by-second swings in bond yields and exchange rates, mattered more than the vociferous departures of ministers from Ms. Truss’ cabinet or the anxieties of Conservative lawmakers that ultimately rendered her position untenable.
For this reason, world leaders, shaken by economic challenges, are watching the turmoil in Britain with anything but relish, concerned about the stability of Britain itself. Interest rates, energy costs and inflation are rising around the world. Labor unrest proliferates across borders. Non-UK pension funds potentially face the same financial constraints that have plagued those in Britain. The last thing leaders want is for Ms. Truss’ woes to be a harbinger for other countries.
French President Emmanuel Macron, who recently mended fences with Ms Truss after refusing to label him friend or foe last summer, said: ‘I want Britain to find stability in any case. and move on, as soon as possible. It’s good for us, and it’s good for our Europe.
Economists say Ms. Truss is correct that the markets are influenced by broader global trends than her tax cuts. Central banks around the world are raising rates to fight inflation, which has been fueled by a surge in demand as the coronavirus pandemic waned and a spike in gasoline prices driven by Russia’s war in Ukraine.
“The problems are by no means Truss’s sole responsibility, but she should have known that taking the blame for everything comes with the territory,” said Kenneth Rogoff, a Harvard economics professor and expert on financial disruption.
“What is really worrying now,” he said, is that the situation in Britain “could be the canary in the coal mine as global interest rates continue to soar, especially since they don’t seem likely to drop any time soon.”
Ms Truss has long cultivated a reputation as a disruptor and free-market evangelist in the tradition of Margaret Thatcher and Ronald Reagan. Her tax cut proposals have made her an outlier among leaders of major inflation-fighting economies. But she made no apologies for offending economic orthodoxy or financial market expectations in pursuing her vision of a “low-tax, high-growth” Britain.
“Not everyone will be in favor of change,” a defiant Ms Truss told the Conservative Party’s annual meeting a week ago, even though one of her planned tax cuts, for people high income, had already been cancelled. “But everyone will benefit from the result: a growing economy and a better future.”
Experts say the Prime Minister’s fatal miscalculation was to believe that Britain could defy the gravity of the markets by passing sweeping tax cuts, without matching spending cuts, at a time when inflation is in double digits and interest rates are rising.
“It was the combination of the wrong fiscal policy at the wrong time – borrowing when rates were rising rather than, like in the 2010s, when they were low,” said Jonathan Portes, professor of economics and public policy at the Kings College London.
He cited what he called Ms Truss’ ‘institutional vandalism’, in particular the way she and her ousted Chancellor of the Exchequer, Kwasi Kwarteng, broke with custom by announcing sweeping tax cuts without subject them to scrutiny by the government’s budget watchdog, the Office of Budget Responsibility.
In that sense, he said, Ms Truss was following in the footsteps of her predecessor, Boris Johnson, who resigned as Prime Minister just three months earlier after a series of scandals prompted a mass walkout. of his ministers.
Mr Kwarteng’s fiscal maneuverings led many in the markets to suspect that the government was engaging in some sort of fiscal sleight of hand, which would inevitably require massive borrowing to cover an estimated $72 billion hole in the budget. pounds ($81.5 billion).
Mr Kwarteng, who studied the history of financial crises as a doctoral student at the University of Cambridge, described the backlash in financial markets as a temporary phenomenon. Like Ms. Truss, he believes in disruptive change. Together they were among the authors of “Britannia Unchained”, a manifesto for a Thatcher-style liberal revolution in post-Brexit Britain. Among other things, the authors described the British as “among the worst idlers in the world”.
When, or even if, Britain will be able to fully recover from this period of political and economic turmoil is not yet clear. On Thursday, when news of Ms Truss’s resignation broke, the pound rose against the dollar and UK government bond yields fell.
Virtually all tax cuts planned by the government have been reversed and the next prime minister, whatever his policies, will have no choice but to pursue a policy of cutbacks and strict fiscal discipline. Some fear a return to Prime Minister David Cameron’s grim austerity in the years following the 2008 financial crisis.
“Rishi or another can stabilize the ship and calm the markets,” Prof Portes said, referring to Rishi Sunak, a former chancellor who ran unsuccessfully against Ms Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Tories, a Tory prime minister can undo the longer-term damage.”
Much of this damage is to Britain’s once reputation in the markets. Economists started mentioning Britain in the same breath as fiscally finicky countries like Italy and Greece. Lawrence H. Summers, the former US Treasury Secretary, told Bloomberg News: “It makes me really sorry to say this, but I think the UK is behaving a bit like an emerging market turning into a overwhelmed.”
It’s humbling for a country that in 2009 announced a $1.1 trillion emergency fund to bail out the global economy.
“If you’re an American money manager, you’re not going to put Britain in the super safe category that you might have had before,” said Jonathan Powell, who served as Prime Minister Tony Blair’s chief of staff. “It’s not about Britain’s position in the world, it’s about the category in which we have placed ourselves.”