Amid crisis, Truss needs to show competence

A rush to dump UK government bonds following a botched budget announcement forced a dramatic intervention by the Bank of England on Wednesday. The central bank promised to buy long-term bonds “on whatever scale is necessary” to restore order in the market.
It amounted to an official declaration of imminent financial crisis, apparently centered on pension funds facing insolvency as bond prices dropped. The intervention seemed to help: The pound regained some of the value it lost earlier in the week. Still, a clearer indictment of economic mismanagement would be hard to imagine. Having started so calamitously, what can Britain’s new prime minister, Liz Truss, do to repair the damage?
First, she’ll need to avoid further political grandstanding and start demonstrating humdrum executive competence. Truss should’ve made this pivot as soon as she won the party contest to succeed Boris Johnson as leader on Sept. 5. Instead, she and her new finance minister, Kwasi Kwarteng, almost immediately announced big tax cuts and spending increases — making light of the implications for public finances, repudiating the previous finance minister’s commitment to fiscal sustainability, and for good measure sidelining the Office for Budget Responsibility, the UK’s independent fiscal watchdog.
This fit the broader pattern established before and during her campaign of caring less about consequences than looking radical and brave. In the past few days, investors have taken fright at what this new leader might be capable of.
With so much damage already done, there’s no straightforward fix. The past week won’t be forgotten and will make the rest of Truss’s premiership much more difficult than it already promised to be. An array of commentators have urged the government to simply scrap the budget proposal and start again. Yet too abrupt a reversal might not work. If it signals panic, it could make things worse.
The best advice for Truss comes down to this: Stop trying to be exciting. This means coordinating quietly with — and if necessary deferring to — the officials at the Bank of England who are responsible for curbing inflation and restoring financial stability. The perception that the Treasury and the central bank are at odds over macroeconomic policy is fatal to both aims.
Next, she’ll need to prudently communicate a course correction. The government has pledged to lay out its plans in more detail on Nov. 23. That’s too long to wait. A new proposal that “clarifies” its fiscal intentions should be announced now. It needn’t repudiate everything in the original budget, but the emphasis should switch to what used to be called fiscal conservatism. Make further tax cuts and other budget changes contingent on progress in curbing inflation and affirm that public debt will be put back on a falling path as soon as possible.
Amid calls for Kwarteng to be sacrificed to ensure Truss’s survival as prime minister, many Tories must be missing Johnson, the leader they belatedly sacked for serial mismanagement. If that doesn’t induce Truss to reset, what will?
—Bloomberg