Promises of overarching tax cuts and massive state loans to fund welfare programs sent international investors running as the sterling and British pound saw some of their worst declines in decades. As Truss and Kwarteng suddenly go back on those promises, investors are left with an uncertain road ahead as the British economy trembles.
Turbulence on the foreign exchange market as Truss trickles down
The political turmoil began just a month after Truss’ appointment as Prime Minister, as she and Chancellor of the Exchequer Kwasi Kwarteng put forth their emergency mini budget. The budget consisted of a large range of tax cuts, including a drop from 45% to 40% for the top income earners. To make up for the tax cuts, the state would borrow up to 6 billion pounds to ensure the economy and welfare systems are kept going.
The budget was seen as irresponsible by both politicians and fx brokerages, and the loss of international investors quickly soured the sterling and British pound on the foreign exchange market. For example, the pound hit an all-time low against the American dollar as it declines 16,5% against the American currency this year.
“Growth, growth, and growth” and a conservative “iron grip” on the market becomes the new strategy
During the Conservate Party Conference last Wednesday, Truss reflected on the budget debacle in her first ever speech as party leader. Amongst other things, she made references to previous leader Margaret “Iron Lady” Thatcher in that the party needed to maintain an “iron grip” on the economy to get the British economy out of the fifteen year decline and current inflationary period.
She also sought to gain back the party’s favour by taking responsibility and fostering trust in her leadership by saying: “I am ready to make hard choices. You can trust me to do what it takes. The status quo is not an option.” Her speech seemed to smooth over some of the conflict as the pound made a minor comeback on the forex market. However, there is still a divisive veil over the Conservative Party whose chances for a majority in the next election in 2024 seems to grow smaller by the minute.
Uncertainty and issues of credibility remain
Despite her conference speech, few seem convinced that it set everything right. Truss’ sudden drawback on the promises of the mini-budget has not only created a sense of uncertainty within the party, but also lowered her political credibility only one month into her leadership. While she demonstrates what she portrays as true values of the Conservative party, many members and non-members believe her policies may reignite a Thatcherite ‘trickle-down economy’ which is highly unbeneficial to lower class members.
Furthermore, her radical budget proposals – despite being u-turned – are likely to embolden factions within both parliamentary parties who are against cutting public spending. Drawn to its extreme, the bothersome start of the Truss leadership might lead to an early election if she doesn’t manage to regain in-party support.
