21st Century Business Herald reporter Wu Bin reported from Shanghai
After the capricious fiscal policy caused a huge market shock, the anachronistic "Truss nomics" came to an end.
On October 17, Truss herself apologized for the "mistakes" in the economic plan, but insisted she would not step down. "I want to take responsibility and say sorry for the mistake I made. I wanted to take action to help people deal with energy bills, high taxes, but we went too far and too fast. She insisted she would lead the Conservatives to the next general election and stayed because she was chosen to serve the country.
Before Truss's apology, early on the 17th, the newly appointed British Chancellor of the Exchequer Jeremy Hunt urgently put out the fire and announced a new version of the fiscal plan that would cancel almost all the tax cuts in the September 23 "mini budget". Hunt said plans to scrap indefinite income tax cuts, shorten the energy support scheme until April 2023, and a series of latest measures would add £32bn to revenue.
It should be noted that the announcement on the 17th is only part of the fiscal plan, and Hunter will submit a more comprehensive medium-term fiscal plan on October 31 as scheduled, as well as the forecast of the independent Office for Budget Responsibility (OBR).
The latest fiscal plan was recognized by the market, British assets rose sharply, and the stock market, bond market and foreign exchange market rose en masse. The much-watched British gilt rebounded sharply on the 17th, yields retreated, but the damage remained, with the 10-year bond yield falling below 4%, still about 46 basis points above the closing level on September 22.
In addition, Mel Stride, a Conservative MP and chairman of the Finance Committee of the House of Commons, also gave a positive assessment, Hunter was clear and quick to act, and the statement also made the financial market behave positively, which was a wise move.
Cao Hongyu, a researcher at the Bank of China Research Institute, analyzed the 21st Century Business Herald reporter that the British government's change of the chancellor of the treasury sent a signal to the outside world to turn fiscal policy, and the British government bond and exchange rate markets picked up, and the new chancellor of the exchequer Hunter announced a new fiscal plan on the 17th, focusing on supporting fiscal sustainability, and the original tax reduction measures were basically all canceled, which helped further stabilize the performance of the British financial market.
Previously, the market had partially expected a "big reversal" in fiscal policy. Joe Perry, a senior analyst at GAIN Group, told the 21st Century Business Herald reporter that former British Foreign Secretary Hunter succeeded Kwarten as Chancellor of the Exchequer, and if he wants to please the market, Hunter will face a tough battle. After Kwarten's dismissal, more of the mini-budget is likely to be withdrawn.
Why Truss economics quickly "died"
In September, British Prime Minister Truss tried to boost the economy through fiscal stimulus, unveiling the most aggressive tax cuts in 50 years, hoping that the economy would grow faster than the debt burden.
The ideal is very full, and the reality is very skinny. The tax cuts in the "mini-budget" were virtually unfunded, and Truss and Kwarten were heavily criticized by investors, the International Monetary Fund and credit rating agencies, and the British bond market plummeted, triggering an emergency bailout by the Bank of England.
However, the bell must be solved, and the Bank of England has not been supporting the market. On October 11, Bank of England Governor Bailey told pension fund managers that the rebalancing of positions should be completed by October 14, when the central bank will end its emergency support program for the UK bond market. Bailey stressed that the plan is part of the Bank of England's financial stability action, not a monetary policy tool, and therefore must be temporary.
Charlie McElligott, a strategist at Nomura Securities, pointed out that the Bank of England was clever and that Bailey's warning was a declaration of war on Truss: let the market decide whether the tax cuts would survive. The Bank of England risked increased bond market turmoil by increasing the British public's vote of "no confidence" in the Truss government, forcing it to cancel or modify unfunded tax cuts or even resign altogether.
Under pressure, Truss finally announced on the 14th that he would resume the plan to increase corporate tax, and raise the corporate tax from the current 19% to 25% from April next year. This is the second reversal of the "mini-budget" policy after the UK government abandoned the abolition of the top income tax rate of 45%. In addition, Truss sacked Kwarten, who had been in office for only 38 days, and former Foreign Secretary Hunt was immediately appointed as the new Chancellor of the Exchequer.
Truss also acknowledged that the tax cut plan that triggered the financial market turmoil on September 23 was "partly too aggressive" and would do whatever is necessary to reduce medium-term debt, while still saying it "wants to achieve a low-tax UK economy".
On the whole, the demise of Trussomics is almost inevitable. Cao Hongyu analyzed to reporters that the current British inflation has continuously broken through a record high, and there is no trend of relief, in order to curb high inflation, the Bank of England raised interest rates 7 times this year. The Truss government's new fiscal stimulus policy is aimed at expanding the economy, which will make the high inflation situation more severe, and the fiscal measures are contrary to monetary policy, and the market has a negative response to it. On the other hand, Truss's New Deal would require a substantial increase in government bonds to obtain fiscal funds, which would put more pressure on the already weak public financial burden and increase market concerns about the British government's ability to repay debt. Under the interweaving of multiple adverse factors, Truss's New Deal could not escape the "premature death" end.
Can emergency "abandonment" "keep the handsome"
Despite British Prime Minister Truss abandoning the car and reversing the tax plan, the phase is still in jeopardy. Opinion polls show that Conservative support has plummeted, prompting many fellow Conservatives to try to force Truss out of office, and calls for her to resign as prime minister have intensified.
Several lawmakers have publicly called for Truss' resignation. In a letter calling for her resignation, British Tory MP Jamie Wallis said Truss had "undermined Britain's credibility as a trustworthy, responsible developed economy and divided our party in a way that could not be repaired... You no longer have the trust of the state or parliamentary parties. ”
Conservative pollster Lord Hayward said it would be difficult for Truss to remain prime minister and the Conservatives were looking around for a successor. If the market calms down, the new prime minister will win praise; And if the unrest cannot be quelled, it will be entirely blamed on Truss.
Similarly, Dame Alison Carnwath, a senior adviser at investment bank Evercore, said Truss's lack of support in parliament, her economic policies were puzzling and her lack of authority could "become the shortest-serving prime minister in history." George Osborne, who was Chancellor of the Exchequer under Cameron, even publicly predicted that Britain would have a new prime minister before Christmas.
On the other hand, the quick removal of a newly appointed prime minister is not an easy task. Under current Conservative Party rules, Truss's position is protected by a one-year exemption, and about two-thirds of the nearly 360 members of the Conservative Party would need to ask the "1922 Commission" to amend the rules before the committee would operate, and Truss may not be removed immediately. The "1922 Commission" is made up of ordinary members of the lower house of Conservative Parliament and is charged with overseeing the election or removal of party leaders.
Late on the night of the 17th, officials of the "1922 Committee" held a meeting and decided that there was no need to change the current rules preventing a new vote of no confidence in the prime minister until September next year. Moreover, if Truss is dismissed, there is little agreement on who will take her place.
Perry told reporters that Truss "kicked away" Kwarten and slashed the mini-budget, but it is still unknown whether it can be broken. After all, the tax cut plan was made by Truss and Kwarten together, and only Kwarten is currently leaving. Truss is unlikely to step down anytime soon, but there is still a lot of pressure ahead, and subsequent performances will be crucial.
There are still tough battles to be fought
Despite the "Great Reversal" in UK fiscal policy, the days ahead may still be difficult.
Goldman Sachs lowered its forecast for British economic growth after Truss sacked Kwarten as chancellor and made a major reversal on the tax cut program. Goldman Sachs lowered its 2023 UK growth forecast to -1% from -0.4% and expects core inflation to be 3.1% by the end of 2023, compared to a previous forecast of 3.3%. "Given the weakening of growth momentum, the apparent tightening of financial conditions, and the introduction of higher corporate taxes from next April, we have further lowered our UK growth forecasts and now expect a deeper recession in the UK."
The pound is also at risk under a weak outlook. Jordan Rochester, currency strategist at Nomura, said that growth expectations have fallen, risk sentiment remains subdued, and the UK is also facing the risk of a current account deficit and winter energy disruptions, and the pound may reach parity against the dollar at the end of November and fall to 0.975 at the end of December.
It should be noted that Hunter publicly stated on the 15th that the previous fiscal policy formulated by the British government was "wrong", too "blindly optimistic", and ignored the basic demands of ordinary people. He stressed that in the current complex and challenging international and domestic environment, using borrowing to finance tax cuts "does not work", and it is a mistake to reduce taxes on the rich.
Bank of England Governor Bailey said he spoke with Hunter about the need to repair public finances after the previous tax cut plan caused market turmoil, and the two sides "immediately reached a consensus", and Bailey hinted that the Bank of England would raise interest rates sharply next month.
In Cao Hongyu's view, in order to deal with inflation and enhance market confidence in assets such as British gilts, the Bank of England will continue to accelerate the pace of monetary tightening, and the rate hike in November may be further increased.
Overall, the reversal in fiscal policy also meant a slight easing of inflationary pressures, with Goldman Sachs cutting its expectations for the Bank of England to tighten monetary policy. Goldman Sachs expects the BoE to raise interest rates by 75 basis points each in November and December, compared with 100 basis points previously, followed by a 50 basis point hike in February and 25 basis points in March and May, and Goldman Sachs also lowered the BoE end rate forecast from 5% to 4.75%.
Looking ahead, Cao Hongyu believes that the British economy still faces severe internal and external challenges. First, the Fed is likely to maintain a rapid pace of interest rate hikes, and non-US currencies, including the British pound, will still face greater depreciation pressure. Second, the "circular escalation" of the Russia-Ukraine conflict, the increase in regional instability, and the intensification of geopolitics. Third, the European energy crisis continues to spread, and the cost of British energy remains high, which has severely damaged the performance of the British economy from many aspects such as raw material supply and consumer demand. The current recession situation in the UK is beginning to appear, and it may decline further in the future. UK GDP contracted by 0.3% month-on-month in August, and industrial output fell 5.2% year-on-year, slipping into negative territory for the first time in a year.
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