Financial Markets Tell Truss She’s Not Trusted

The UK government announced a change in fiscal policy on Friday with the intention of encouraging investment and growth. If the new prime minister, Liz Truss, had anticipated that the financial markets would celebrate this daring move, she was let disappointed. She received shocking criticism from investors. Interest rates increased and the value of the pound dropped to a 37-year low, a combination that belies her and her finance minister's lack of confidence in the plan they are putting together.

Truss must identify the causes of the disastrous start to her premiership and take swift corrective action. Note that, as bad as Friday's "mini-budget" was, the issue extends beyond its specifics. Truss had a history of irresponsible behavior as a minister and throughout her run to succeed Boris Johnson as prime minister. The new fiscal strategy appeared to support this. The situation must be resolved quickly by her because otherwise, it will just get worse.

The new economic strategy calls for the largest tax relief package for Britain since the 1970s, totaling about £45 billion over the following five years. It lowers the high income tax rate from 45% to 40% and lowers the basic income tax rate by one percentage point. In addition to offering considerable new investment incentives, it decreases the sales tax on real estate. To lessen the impact of high inflation, these cuts are being implemented coupled with a significant rise in public spending on energy subsidies. Together, these modifications are anticipated to result in an increase in public borrowing of almost 5% of GDP.