Fri | Dec 2, 2022

UK’s Truss defends economic plan that sent pound tumbling

Published:Thursday | September 29, 2022 | 6:46 AM
British Prime Minister Liz Truss visits Berkeley Modular, in Northfleet, Kent, Britain, Friday, September 23, 2022. (Dylan Martinez/Pool Photo via AP)

LONDON (AP) — British Prime Minister Liz Truss on Thursday defended her divisive economic plan and shrugged off the turmoil it has stirred in financial markets, saying she's willing to make “controversial and difficult decisions” to get the economy growing.

In her first public comments since her government announced billions in unfunded tax cuts Friday that drove the pound to record lows, Truss said Britain was facing “very, very difficult economic times.”

But she said the problems, namely high inflation driven by soaring energy prices, were global and spurred by Russia's invasion of Ukraine.

She spoke after the Bank of England took emergency action Wednesday to stabilise UK financial markets and head off a crisis in the broader economy after the government spooked investors with sweeping tax cuts that many see as benefiting the wealthy, to be paid for by a surge of public borrowing.

Truss told BBC local radio that she had to “take urgent action to get our economy growing, get Britain moving and also deal with inflation.”

“Of course, lots of measures we have announced won't happen overnight. We won't see growth come through overnight,” she said. “What is important is that we are putting this country on a better trajectory for the long term.”

In a series of radio interviews, Truss said her government's decision to cap energy bills for households and businesses would help tame inflation and help millions of people facing a cost-of-living crisis.

But it was not that decision that alarmed the markets. It was the government's announcement last week of an economic stimulus programme that included 45 billion pounds ($48 billion) of tax cuts and no spending reductions — without an independent economic assessment of the cost and impact.

The Bank of England warned that crumbling confidence in the economy posed a “material risk to UK financial stability” and said it would buy up to 65 billion pounds ($70 billion) in long-term government bonds, known as gilts, over the next two weeks to counter “dysfunction” in the bond market.

The central bank made the emergency move after the pound touched a record low against the US dollar and government borrowing costs spiked on concerns the tax cuts would fuel inflation and drive up interest rates. It stepped in amid a run on pension funds, which were forced to sell government bonds to head off worries over their solvency, which threatened severe losses to workers' retirement funds.

The bank's action helped stabilise the British currency and the bond markets. The pound traded at around $1.08 on Thursday, above its record low of $1.0373 on Monday. It has lost some 4% of its value since Friday and 20% in the past year.

But many economists say the relief will only be short term unless the government acts to restore confidence in the markets.

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