Tag: Bonds

LONDON — A year is a long time in politics — but the reverberations of the surreal fall of 2022 are still being felt across the U.K.

Wednesday marks the first anniversary of Liz Truss’ ill-fated appointment as prime minister — a year on from that rainy day in September when she stood outside No. 10 Downing Street and vowed to “transform Britain” with free market shock therapy. 

Truss’ £45 billion package of unfunded tax cuts — with the promise of more to come — instead sunk the pound, sent interest rates soaring, caused chaos on the bond markets and forced the Bank of England to prop up failing pension funds.

Humiliated, Truss had little choice but to junk her entire economic program and less than four weeks later she was gone — the U.K.’s shortest-ever serving prime minister, famously outlasted by a supermarket lettuce.

The legacy of the period still is fiercely debated among Britain’s left and right-wing commentariat. In Westminster, some Tory factions still push for Truss’ successor Rishi Sunak to embrace her brand of free market economics.

But the period sticks in the memory of most ordinary Brits as one of high farce and incompetence and significantly, it’s a view shared in boardrooms across London and beyond.

“It was such a short, sharp, weird time. It had such a febrile sense of impending doom,” said one partner at a Big Four accounting firm who was granted anonymity — like other figures quoted below — to speak candidly about Truss for this article.

The money men

Senior employees of major financial and professional services firms say Truss’ brief period in office still taints Britain’s reputation around the globe.

Annual Foreign Direct Investment (FDI) into the U.K., already down significantly since the 2016 Brexit referendum, fell further — behind France — last year, according to an EY survey.

Britain has also been the second-worst performing G7 economy post-COVID, despite an upgrade in GDP growth figures by the Office for National Statistics last week.

The U.K.’s stuttering economic growth since the pandemic always was going to put a dent into Britain’s prospects for international investment. Experts give a myriad of reasons for Britain’s decreasing international competitiveness.

But a director at one U.S. investment bank said: “The No. 1 issue I hear from clients is that the U.K. is still un-investable because of what happened last year in Westminster, particularly with what happened during Liz Truss’ time in office.”

A managing director at another investment bank agreed. “This stuff matters for clients who are looking at the U.K., seeing three different prime ministers and four different chancellors in a matter of a few months, and saying ‘why on earth would we choose that place to build our new factory?’ The results of that will still be felt today.”

Such views are confirmed in a recent survey by transatlantic lobby group BritishAmericanBusiness and management consulting firm Bain and Co. 

The survey found U.S. business confidence in Britain has sunk for the third straight year, with political instability cited as a key factor.

BritishAmericanBusiness’ chief trade and policy officer Emanuel Adam said: “The instability in No. 10 last autumn, coupled with ongoing concerns over Brexit, growth prospects and taxation have led to a drop of confidence in the U.K. for a third year in a row.

“The message from U.S. investors is clear. They are calling for a stable political environment and business friendly policies from the U.K. government.”

But if foreign direct investors have been put off, the pound’s stronger-than-expected performance since Truss left office suggests they may have compensated with other forms of inward flows.

The Big Four partner quoted at the top of the article says Truss’ disastrous premiership was one of several factors making the British economy less competitive on the world stage.

“Trussonomics plus Brexit plus political uncertainty plus a misplaced sense of British exceptionalism are all contributing to making Britain a less attractive place than we ought to be,” they said.

“I’m aware of real-life examples of decisions being made to invest elsewhere, because they couldn’t be confident about the stability of their return on investment.”

Gloom in Westminster

But even more than the U.K. economy, it is Truss’ Conservative Party which is haunted most by the specter of her brief tenure.

Polling from Ipsos shows the British public’s trust in the Conservatives to manage the economy fell off a cliff during Truss’ time as prime minister, and has never recovered.

With an election looming next year, their Labour opponents — now 18 points ahead in the polls — cannot believe their good fortune.

“The two most important things for an opposition are to be able to show people that they can be trusted to protect the economy, and trusted with the defence of the realm,” said one Labour shadow Cabinet minister. “Liz Truss did a lot of the heavy lifting in allowing us to get a hearing on the economy from the public.”

One moderate Tory MP, and Sunak supporter, said “the damage done by the 49 days of Truss could still be the thing that loses us the next general election.”

“At least part of the party’s problem at the moment is that although the economy is starting to improve, no one is going to give us the credit for that because of the seismic events of last year,” they said.

Julian Jessop, an independent economist who acted as an informal adviser to Truss during her leadership campaign, agreed that the public became infuriated once mortgage rates began to surge during last September’s financial meltdown, but said “it is a bit much” to continue to blame the Tories’ poor polling on the former PM.

 “If that were the big problem, then confidence should have recovered,” he said. “We have a new prime minister in place.”

A different view

Indeed some economists — and Truss defenders — see the past 12 months in a very different light.

They point to bond yields which recently have hit similar levels to the worst moments of the Truss era, thanks to successive Bank of England rate rises.

Truss’ prediction that inflation would help the U.K. eat through some of its debt pile — used as justification for funding her tax cuts through borrowing — has also been borne out in reality. And tax receipts have come in higher than expected this year, thanks to larger than expected growth and inflationary pressures.

Truss’ former Chancellor Kwasi Kwarteng, speaking on a forthcoming episode of POLITICO’s Westminster Insider podcast, insisted that while he and Truss admittedly pushed it “too much, too far,” their overall policy direction was sound.

“I think there’s a big lesson in life,” he said. “It’s all very well thinking you’ve got the right answer, but you’ve also go to have a staged, methodical approach to getting to the answer.”

Russell Napier, author of The Solid Ground investment report, added the unexpectedly strong performance of sterling against the U.S. dollar and other major currencies this year indicates capital inflows into Britain must be stronger than expected.

“Is there something that’s unique and dangerous about the U.K.? No there isn’t,” Napier added. “Our bond yields are at a dangerously high level, but so is the bond yield of Sweden and France, and Canada and South Korea and Australia.

Some of Truss’ closest supporters on the Tory backbenches have now set up pressure groups to fight for the type of low-tax policies advocated in her time in office.

Truss, for her part, is writing a book which aides suggest will be “more manifesto than autobiography.” She is also giving a keynote speech on the economy this month — just five days after the anniversary of her ill-fated “mini-budget.”

But for many Tory MPs still feeling the political repercussions of her tenure and fearing a brutal defeat at next year’s election, a period of silence would be welcome.

“It could be worse,” notes one Tory MP, a minister under Sunak. “It could have been a lot worse if she’d stayed.”

Izabella Kaminska contributed reporting.