Former Bank of England Deputy Governor Charlie Bean said investors are starting to see UK assets as more risky because of the signals coming from Liz Truss’s supporters about plans to cut taxes and raise spending.
Bean said investors would be concerned about the Treasury running a “large sustained deficit in the medium term along with suggestions that Truss would change the Bank of England’s mandate if she won the race to replace Boris Johnson as prime minister. The UK faces a deeper and longer recession than some people fear,” he said.
Bean added that the £30 billion in fiscal headroom it was estimated the Treasury had earlier this year has now evaporated with a surge in inflation, which is driving up both debt costs and welfare payments. Truss has earmarked that cash to fund her policies, leaving her potential government little room to maneuver with fiscal giveaways and the need to shore up confidence among investors, he said.
“I could see investors starting to think the UK doesn’t look such a good place to invest,” Bean said in an interview on Bloomberg Television on Wednesday. “You’ll see a risk premium reemerging on gilts, which is just starting to happen.”
The remarks indicate the scale of the economic crisis facing whoever wins the competition to lead the ruling Conservative Party and the nation. Truss is the front runner with less than a week until the decision is announced and has wooed the party’s faithful with promises of tax cuts to boost growth.
With the leadership race clouding the economic outlook, UK assets have had a torrid summer. The yield on 10-year gilts surged about 1 percentage point in August alone while the pound plunged 4.4 percent against the dollar. Meanwhile, overseas investors sold UK government bonds at the fastest pace in four years in July, according Bank of England data released on Tuesday.
Bean served at the BOE as both chief economist and deputy governor for monetary policy before completing a tour at the Office for Budget Responsibility, the government’s fiscal watchdog.
His comments chime with those of Rishi Sunak, the former chancellor of the exchequer who is trailing Truss in the contest.
Sunak warned in an interview with the Financial Times that the next prime minister faces the risk of markets losing confidence in Britain’s economy.
“In the worst case scenario you could see a very difficult situation for the government in the autumn or early next year when it finds it much more expensive to finance its borrowing and sterling is coming under pressure, which forces the bank to run a tighter monetary policy,” Bean said.
He said it would be “problematic for a Truss administration to run ongoing deficits to finance tax cuts and that lower economic growth is also likely to eat into the Treasury’s revenue. The Bank of England would also have to keep rates higher for longer,” he said.
“What worries me about what she’s proposed so far is that the tax cuts that are the centerpiece of what she’s offering aren’t really targeted at households that are suffering most, does relatively little for small businesses – and more particularly they’re intended to be permanent,” Bean said.
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