After the Bank of England was forced to make an embarrassing emergency intervention in the UK gilt market to prevent a complete collapse of the country’s financial system, Liz Truss decided to forge ahead with the government’s disastrous mini-budget after all.
On Wednesday, the UK government reversed its earlier decision to scrap Kwasi Kwarteng’s tax cuts and unfunded public spending, despite widespread criticism and unprecedented turmoil in the UK financial system. Both Truss and Kwarteng insist the unorthodox economic measures will help boost growth and improve the country’s public financial position over the medium-run, despite surging inflation. Truss faced pressure in parliament over how, exactly, she plans on funding her fiscal policies, but she maintained her campaign pledge to not reduce government spending nor scrap the proposed tax cut plans.
“What we will make sure is that over the medium term the debt is falling, but we will do that not by cutting public spending but by making sure we spend public money well,” Truss assured parliament. Her spokesperson later conceded that there will be an overall increase in public spending, but “there will be deeply difficult decisions to be taken given some of the global challenges we’re facing.” Truss and Kwarteng did however, decide to axe their original plan to scrap tax cuts for the highest income bracket.
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Kwarteng’s fiscal policy package immediately sent bond markets into turmoil, after pension funds embarked on a fire-sale of long-dated gilts. The Bank of England was forced to intervene via quantitative easing, one day after raising interest rates to stave off historically-high inflation.
Information for this briefing was found via Reuters. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
