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    U.K. Government Plans an Update to Its Tax and Spending Agenda

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    After an earlier announcement sent markets into a tailspin, the prime minister and the chancellor are under pressure to restore fiscal credibility.After days of confusion, Britain’s government said on Monday that the date for its next fiscal policy announcement would be moved up nearly a month and that it would provide, at the same time, a much-anticipated independent assessment of the policies’ impact on the nation’s economy and public finances.The chancellor of the Exchequer, Kwasi Kwarteng, said he would publish his “medium-term fiscal plan” on Oct. 31, which would show how the government, under the new prime minister, Liz Truss, would bring down debt levels despite large spending plans and tax cuts that would be funded by borrowing.New economic and fiscal forecasts from the Office for Budget Responsibility, a government watchdog, are to be published the same day.The move is aimed to reassure financial markets and the public of the new government’s fiscal credibility. Its first major economic announcement, a speech by Mr. Kwarteng on Sept. 23, was dominated by unfunded tax cuts at a time of high inflation, and it quickly sent markets into a tailspin: The British pound hit a record low against the dollar, and turmoil in the bond market led to higher mortgage rates and intervention from the Bank of England to protect pension funds.Since then, the government has canceled its plan to abolish the top income tax rate for the highest earners — the most surprising tax-cutting measure announced last month — and tried to restore its fiscal credibility, while maintaining its commitment to an agenda of using tax cuts and deregulation to speed economic growth.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Truss’s Experiment Stumbles: Prime Minister Liz Truss says a mix of tax cuts and deregulation is needed to jump-start Britain’s sluggish economy. Investors, economists and some in her own party disagree.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.Part of this rehabilitation effort included a promise to publish a more detailed fiscal plan focused on reducing debt and provide an independent analysis by the Office for Budget Responsibility. But the date was set for Nov. 23 — too long to wait, said fellow Conservative Party members, opposition lawmakers and investors.Liz Truss, the prime minister, with Mr. Kwarteng visiting a construction site last week. Pool photo by Stefan RousseauLast week, it was widely reported that the date would be moved forward, and Mr. Kwarteng denied this. On Monday, he confirmed that the announcement would indeed arrive on Oct. 31.Two weeks ago, in the immediate aftermath of Mr. Kwarteng’s policy speech, the pound plummeted to $1.035 and speculation grew that it could reach parity with the dollar. The cancellation of the top tax rate cut, which the government argued had become a distraction from its overall growth plan, helped the currency rebound a bit.But that recovery has stalled. On Monday, the pound was trading around $1.10 amid skepticism that the government’s plan would expand the economy as promised, and that instead large public spending cuts would be necessary.Fitch Ratings said on Monday that it expected the British economy to contract 1 percent next year, after “extreme volatility” in British financial markets and the prospect of “sharply higher” interest rates. Last month, it forecast a 0.2 percent decline for next year.“Rising funding costs, tighter financing conditions, including for mortgage borrowers, and increased uncertainty will outweigh the impact of looser fiscal policy” next year, analysts at the ratings agency wrote. They expect Britain’s economy to enter a recession in this quarter. The agency has already changed its ratings outlook for Britain to negative.That was just one of many rebukes of the government’s plans. For example, the International Monetary Fund encouraged the government to re-evaluate the tax cuts, which it said would increase inequality.But Ms. Truss, seeking to reverse years of sluggish growth and weak productivity, has been clear that she wants to run the economy differently than her predecessors. One early decision was to fire the top civil servant in the Treasury, Tom Scholar, a move that rattled some analysts. On Monday, the government announced his successor, James Bowler, who will transfer from the international trade department but spent two decades at the Treasury previously.Even as the government makes conciliatory moves, there are signs of distress in financial markets. On Monday, the Bank of England said it would expand its intervention in the bond market. The bank will increase the size of the daily auctions in a bond-buying program that was set up to support pensions funds, after tumult in this market threatened Britain’s financial stability.Over the last eight trading days, the bank bought only about 5 billion pounds of long-dated government bonds in total, despite setting a limit of £5 billion a day. With markets wondering what will happen when the bond-buying operation ends on Friday, the central bank announced that it would expand its support. As well as increasing the auction sizes, it will set up a new collateral facility to try to ease liquidity problems faced by the pension funds. That facility will continue beyond this week.The announcement appeared to do little to ease the markets. On Monday, Britain’s bond prices kept falling, while the yield on 30-year bonds rose to 4.72 percent, once again approaching highs seen during the worst of the bond rout after the last fiscal statement.The financial district in London. The new government’s first major economic announcement, on Sept. 23, quickly sent markets into a tailspin.Alex Ingram for The New York Times More

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    Economists Nervously Eye the Bank of England’s Market Rescue

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    The Bank of England stepped in to save a critical market this week. Economists say it was necessary but also worry about the precedent.When the Bank of England announced last week that it would buy bonds in unlimited quantities in an effort to stabilize the market for U.K. government debt, economists agreed it was probably a necessary move to prevent a cataclysmic financial crisis.They also worried it could set a dangerous precedent.Central banks defend the financial stability of the nations in which they operate. In an era of highly leveraged and deeply interconnected markets, that means that they sometimes have to buy bonds or backstop lending to prevent a problem in one area from spiraling into a crisis that threatens the entire financial system.But that backstop role also means that if a government does something to generate a major shock, politicians can be fairly confident that the local central bank will step in to stem the fallout.Some economists say that is essentially what happened in the United Kingdom. Liz Truss, the new prime minister, proposed a huge package of tax cuts and spending during a period of already high inflation, when standard economic theory suggests governments should do the opposite. Markets reacted forcefully: Yields on long-term government debt shot up, and the value of the British pound fell sharply relative to the dollar and other major currencies.The Bank of England announced that it would buy long-term government debt “on whatever scale is necessary” to prevent a full-blown financial crisis. The move was particularly striking because the bank had been poised to begin selling its bond holdings — a plan that is now postponed — and has been raising interest rates in a bid to bring down inflation.Economists broadly agreed that the bank’s decision was the right one. The rapid rise in interest rates sent shock waves through financial markets and upended a typically sleepy corner of the pension fund industry, which, left unaddressed, could have carried severe consequences for millions of workers and retirees, destabilizing the country’s entire financial system.“You saw very substantial market dislocation,” said Lawrence H. Summers, a former U.S. Treasury Secretary who is now at Harvard. “It’s a recognized role of central banks to respond to that.”To some economists, that was exactly the problem: By shielding the U.K. government from the full consequences of its actions — both preventing citizens from feeling the painful aftereffects and keeping government borrowing costs from shooting higher — the policy demonstrated that central bankers stand ready to clean up messy fallout. That could make it easier for elected leaders around the world to take similar risks in the future.Those concerns eased somewhat on Monday when Ms. Truss partly backed down, reversing plans to abolish the top income tax rate of 45 percent on high earners.But she appears poised to go forward with the rest of her proposed tax cuts and spending programs, putting the Bank of England in a delicate spot.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.The “partial U-turn” from Ms. Truss “still leaves the Bank of England with a set of near-impossible choices,” analysts at Evercore ISI wrote in a note to clients. “The only way to alleviate this is for the government to take much bigger steps to restore credibility — but there is little sign this is imminent.”There’s a reason that the interplay between monetary policy and politics in the United Kingdom is garnering so much attention. Central banks have for decades closely guarded their independence from politics. They set their policies to either stoke the economy or to slow it down based on what was necessary to achieve their goals — in most cases, low and stable inflation — free from the control of elected officials.The logic behind that insulation is simple. If central bankers had to listen to politicians, they might let price increases get out of control in exchange for faster short-term growth that would help the party in power.Now, that independence is being tested, and not just in the United Kingdom. Central banks around the world are raising interest rates to try to fight inflation, resulting in slower growth and making it harder for governments to borrow and spend. That is likely to lead to tension — if not outright conflict — between central bankers and elected leaders.It is already beginning. A United Nations agency on Monday warned that the Federal Reserve risked a global recession and significant harm in developing countries, for instance. But the United Kingdom’s example is stark because the elected government is carrying out policy that works against what the nation’s central bank is trying to achieve.“One always worries that actions like these can affect incentives going forward,” said Karen Dynan, a Harvard economist who served as a top official in the Treasury Department under President Obama. “It’s basic economics: People respond to incentives, and fiscal policymakers are people.”Part of the issue is that it is hard for central bankers to single-mindedly focus on controlling inflation in an era when financial markets are fragile and susceptible to disruption — including disruptions caused by elected governments.Before 2008, the Fed had never used mass long-term bond purchases to calm markets in its modern era. It has now used them twice in the span of 12 years. In addition to last week’s moves, the Bank of England also turned to mass bond purchases to calm markets in 2020.Bank of England officials have stressed that the policies they announced last week are a temporary response to an immediate crisis. The bank plans to buy long-dated bonds for less than two weeks and says it will not hold them longer than necessary. The Treasury, not the bank, will be responsible for any financial losses. The bank said it remained committed to fighting inflation, and some economists have speculated that it could raise rates even more aggressively in light of the government’s growth-stoking policies.If the bank is able to hold to that plan, it could mitigate economists’ concerns about the longer-run risks of the program. If interest rates rise again and it gets more expensive for the government to borrow, Ms. Truss will still need to grapple with the costs of her proposed programs, just without facing an imminent financial crisis.But some economists warn that the Bank of England may find the situation harder to extricate itself from than it hopes. It may turn out that the bank needs to keep buying bonds longer than expected, or that it cannot sell them without threatening another crisis. That could have the unintentional side effect of giving the British government a helping hand — and it could demonstrate that it is hard for a big central bank to remove support from its economy when the elected government wants to do the opposite.Liz Truss, Britain’s prime minister, will still need to grapple with the costs of her proposed programs, but she won’t be facing an imminent financial crisis because of the Bank of England’s actions.Alberto Pezzali/Associated PressMs. Truss’s policies — particularly before her partial reversal on Monday — would work directly against the bank’s efforts to cool growth, stoking demand through lower taxes and increased spending. The rapid rise in bond yields last week suggested that investors expected inflation to rise even further.Under ordinary circumstances, these conditions would lead the Bank of England to do even more to bring down the inflation it had already been fighting, raising interest rates more quickly or selling more of its bond holdings. Some analysts early last week expected the bank to announce an emergency rate increase. Instead, the brewing financial crisis forced the bank to do, in effect, the opposite, lowering borrowing costs by buying bonds.While lowering rates and stoking the economy was not the point — just a side effect — some economists warn that those actions risk setting a dangerous precedent in which central banks can only tighten policy to control inflation if their national governments cooperate and do not roil markets in a way that threatens financial stability. That situation puts politicians more in the driver’s seat when it comes to making economic policy.Guillaume Plantin, a French economist who has studied the interplay between central banks and governments, likened the dynamic to a game of chicken: To avoid a financial crisis, either Ms. Truss had to abandon her tax-cut plans, or the Bank of England had to set aside, at least temporarily, its efforts to raise borrowing costs. The result: “The Bank of England had to chicken out,” he said.Policymakers have known for decades that when the government steps in to rescue private companies or individuals, it can encourage them to repeat the same risky behavior in the future, a situation known as “moral hazard.” But in the private sector, there are steps governments can take to offset those risks — regulating banks to reduce the risk of collapse, for example, or wiping out shareholders if the government does need to step in to help.It is less clear what monetary policymakers can do to prevent the government itself from taking advantage of the safety net a central bank provides.“There is a moral hazard here: You are protecting some people from the full consequences of their actions,” said Donald Kohn, a former Fed vice chair and a former member of the Bank of England’s Financial Policy Committee, who agreed that it is necessary to intervene to prevent market dysfunction. “If you think about the entities that benefited from this, one was the chancellor of the Exchequer, the government.”Some forecasters have warned that other central banks might have to pull back on their own efforts to fight inflation to avoid destabilizing financial markets. Some investors are speculating that the Fed will have to end its policy of shrinking government bond holdings early or risk stirring market turmoil, for instance.Not all of those scenarios would necessarily raise the same concerns. In the United States, the Biden administration and the Fed are both focused on fighting inflation, so any reversal by the central bank would probably not look like bowing to pressure from the elected government.Still, the common thread is that financial stability issues could become a hurdle in the fight against inflation — especially where governments do not decide to go along with the push to rein in prices. And how worrying the British precedent proves will depend on whether the Bank of England is capable of backing away from bond buying quickly.“Is this just an exigent moment that they needed to respond to, or does it give the fiscal authority room to be irresponsible?” said Paul McCulley, an economist and the former managing director at the investment firm PIMCO. “The question is who blinks.”Joe Rennison More

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    Liz Truss’ Woes Multiply After Media Blitz

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    In a round of interviews, the prime minister showed little sympathy for the pain that high interest rates could inflict on mortgage holders, critics said.LONDON — For Prime Minister Liz Truss, it was a chance to steady the waters after days of turmoil in the financial markets over her new fiscal plan: eight rapid-fire interviews with local BBC radio stations from Leeds to Nottingham.By the time Ms. Truss signed off from the last one on Thursday morning, her political woes had multiplied, leaving her new government in a state of disarray almost without precedent in recent British politics.She was, critics said, robotic in defending a tax-cut plan that had been eviscerated by the markets, and showed little sympathy for the pain that high interest rates could inflict on mortgage holders. One host described her as a “reverse Robin Hood.” A listener on another station asked, “Are you ashamed of what you’ve done?”Barely three weeks into her job, Ms. Truss has suffered a dizzying loss of public support. Her Conservative Party now trails the opposition Labour Party by 33 percentage points, according to a new poll by the market research firm YouGov. That is the largest Labour lead since Tony Blair’s early days as prime minister in 1998, and the kind of gap that usually results in a landslide election defeat.Her plunging poll numbers have badly damaged Ms. Truss’s standing in her party, which is gathering on Sunday in Birmingham for what promises to be an anxious annual conference. Some speak openly of the party ousting her before the next election, though the mechanics for doing that remain complicated.“This is by far the biggest and swiftest hit to a party’s opinion poll rating that British politics has ever seen,” said Tim Bale, a professor of politics at Queen Mary University of London. “For Tory MPs, this is like realizing on your wedding night that you’ve made a truly terrible mistake.”Matthew Goodwin, a politics professor at Kent University and an expert on the Tory Party, said, “I can’t think in my lifetime of any British prime minister who has mismanaged her first few weeks in office like Liz Truss.”What makes Ms. Truss’s predicament so difficult is that none of the escape hatches are appealing. Reversing some of her tax cuts — particularly the one for the top income bracket of people earning more than 150,000 pounds, or about $164,000, a year — would mollify the markets and probably some voters.Tax cuts announced last week by Kwasi Kwarteng, Britain’s chancellor of the Exchequer, threw the markets into turmoil.Clodagh Kilcoyne/ReutersBut it would be a heavy psychological blow for a leader who ran her campaign, and has built her government, on the conviction that tax cuts and supply-side policies will reignite growth. Giving that up, Professor Bale said, would vitiate the ideological rationale of her government and potentially turn her into a lame-duck leader until the next election, which she will have to call by early 2025.Sticking to her guns, which has been Ms. Truss’s response so far, leaves open the chance that Britain’s economy will pick up by the time she faces voters. But the stubborn threat of inflation all but guarantees that the Bank of England, Britain’s central bank, will keep raising interest rates. That will hurt people who need to refinance home mortgages and likely throw the broader economy into a recession.More on Politics in BritainPrime Minister Liz Truss was chosen by a divided British Conservative Party to lead a country facing the gravest economic crisis in a generation.A Domestic Push: After a period of mourning for the death of Queen Elizabeth II, the new government led by Ms. Truss began to work in earnest, announcing several initiatives to address Britain’s economic and social problems.A Turn Toward Thatcherism: Ms. Truss bet on a heavy dose of tax cuts, deregulation and free-market economics to reignite growth. The negative reaction from financial markets underscored the extent of the gamble.Seizing the Moment: Accusing Ms. Truss of losing control of Britain’s economy, the leader of the opposition Labour Party, Keir Starmer, staked his claim as the guardian of sound fiscal policy.Energy Policies: The British government said it would freeze electric and gas bills for households and cut energy costs for companies in an effort to mitigate the effects of Russia’s restriction of gas supplies to Europe.When she was asked by BBC Radio Stoke about her fiscal plan’s impact on the housing market, Ms. Truss paused before saying, “Interest rates are a matter for the independent Bank of England.” She added that “interest rates have been rising around the world” and blamed much of the crisis on Russia’s war in Ukraine.For the last few days, the bank has actually helped Ms. Truss by intervening in the market to buy British government bonds. That brought down interest rates and strengthened the pound, which had tumbled to its lowest level against the dollar since 1985. On Friday, the pound traded up to $1.11.But the intervention, which was driven by fears of the damage done to British pension funds by the turbulent market, has put the Bank of England in an awkward position, economists said. It runs counter to the bank’s monetary policy of raising interest rates to cool inflationary pressures.“The bank has had to reverse course on its objectives practically overnight,” said Eswar Prasad, a professor of economics at Cornell University. “It looks like the bank is being forced to clean up the adverse consequences of the U.K. Treasury’s actions.”“This could have some longer-term implications for the bank’s independence, credibility, and effectiveness,” Professor Prasad continued. “That really hampers it in its ability to fulfill its objectives.”Once the Bank of England completes its bond-buying program on Oct. 14, economists said they expected it to revert to its tighter monetary policy, which would suggest another increase in interest rates at its November meeting. The only government action that could forestall, or even moderate a sharp spike in rates, economists said, would be if the government reversed one of more of its tax cuts.“Absent that U-turn, the bank is going to have to raise interest rates a lot,” said Adam S. Posen, who served on the Bank of England’s monetary policy committee. He said the bank needed to curb both the inflation from an expansionary fiscal budget and the additional inflation caused by a devalued pound.Once the Bank of England completes its bond buying program, economists expect it to revert to its tighter monetary policy by possibly raising interest rates at its November meeting.Hannah Mckay/ReutersBeyond the tug-of-war between fiscal and monetary policy, critics say Ms. Truss faces a more elemental problem: her chancellor of the Exchequer, Kwasi Kwarteng, has lost the faith of the markets in his economic stewardship.That is partly because when Mr. Kwarteng announced the tax cuts last week, he did not submit the package to the scrutiny that a government budget normally receives. That fed fears that the tax cuts were “unfunded,” meaning that they would not be matched with cuts in spending and so would require massive borrowing.On Friday, Mr. Kwarteng and Ms. Truss met at Downing Street with officials from the government’s forecasting agency, the Office of Budget Responsibility — a move designed to signal they now welcomed the scrutiny. The office will submit its projections for the cost of the fiscal program and its effect on Britain’s growth on Oct. 7, but the government will not publish the numbers until Nov. 23.For Ms. Truss, the political fallout from her program’s botched rollout has been profound. Political analysts point out that she won the support of only a third of Conservative Party lawmakers in the first stage of the leadership contest. Now, the collapsing polls have left the lawmakers angry, fearful, and divided.Unless the trends are reversed, many of the party’s members in Parliament will be swept out of their seats in the next election, particularly in the “red wall” districts of the Midlands and the North, where Ms. Truss’s predecessor, Boris Johnson, lured traditional Labour voters to switch to the Tories with his promise to “Get Brexit done.”That realignment of British politics is in jeopardy. Professor Goodwin, of the University of Kent, said these voters did not want Ms. Truss’s low-tax, neoliberal economic policies. Adding to the alienation, he said, she was determined to relax immigration laws, another core issue for working-class voters.“We’re seeing the complete implosion of the Conservative vote,” Professor Goodwin said. “They’re losing middle-class voters who are alienated by Brexit, and working-class voters who are alienated by their economic policy.”For all the hand-wringing, it is not immediately clear what the Tories can do about it. Three months after evicting Mr. Johnson from Downing Street, few people want to go through with another protracted, divisive leadership contest.Professor Bale said another option would be for the party to settle on a consensus alternative to Ms. Truss and then pressure her to step down, so the new leader could be crowned without any delay. The problem with this scenario, he said, is a lack of obvious candidates to step into the role of the party’s savior. More

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    Britain’s Gamble on Tax Cuts has Economists Warning of Past Mistakes

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    The International Monetary Fund is just one of the many voices that have criticized a plan to cut rates for high earners.WASHINGTON — A stunning rebuke from the International Monetary Fund this week underscored one of the biggest risks of the new British government’s plan to slash taxes on high earners: It could exacerbate rapid inflation and destabilize markets at a precarious economic moment.The alarm from economists, central bankers, investors and top U.S. officials centered on the likelihood that the tax cuts could stoke consumer demand by giving people more money to spend, pushing crushingly high prices even higher. That would put the British government in direct conflict with aggressive efforts of the central banks around the globe — and in the United Kingdom — that are raising interest rates in a bid to bring inflation under control.Many economists say British officials are also ignoring the lessons of the most recent bout of tax cuts — those engineered in the United States by former President Donald J. Trump. Empirical research on the early results of those cuts suggests that they mostly helped the economy by temporarily increasing consumer demand, an outcome that could prove particularly damaging in the high-inflation environment that Britain and much of the world are experiencing.Liz Truss, Britain’s new prime minister, has staked her fledgling government on a oversize, once-in-a-generation package of tax cuts and deregulation meant to energize the economy. It includes a cut in rates for the country’s lowest income tax bracket — and, in what was a surprise move, a five-percentage-point cut in the country’s top income tax rate, which applies to those earning more than 150,000 pounds, or about $164,000, a year.The International Monetary Fund responded to those proposals with the sort of pointed criticism it typically reserves for an emerging-market economy, not for the economy of one of the wealthiest nations in the world.“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the I.M.F. said in a news release on Tuesday.The statement noted that the tax cuts would most likely increase economic inequality, and it urged the British government to “provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners.”More on Politics in BritainPrime Minister Liz Truss was chosen by a divided British Conservative Party to lead a country facing the gravest economic crisis in a generation.A Domestic Push: After a period of mourning for the death of Queen Elizabeth II, the new government led by Ms. Truss began to work in earnest, announcing several initiatives to address Britain’s economic and social problems.A Turn Toward Thatcherism: Ms. Truss bet on a heavy dose of tax cuts, deregulation and free-market economics to reignite growth. The negative reaction from financial markets underscored the extent of the gamble.Seizing the Moment: Accusing Ms. Truss of losing control of Britain’s economy, the leader of the opposition Labour Party, Keir Starmer, staked his claim as the guardian of sound fiscal policy.Energy Policies: The British government said it would freeze electric and gas bills for households and cut energy costs for companies in an effort to mitigate the effects of Russia’s restriction of gas supplies to Europe.Investors have also recoiled from the plan, sending British bond yields soaring — forcing the Bank of England to intervene to stabilize them — and causing the value of the pound to plummet.Ms. Truss is not the first conservative politician in recent years to come into office promising to slash taxes. Mr. Trump also campaigned on — and ultimately delivered — “massive tax cuts” in 2017, a package that only Republican lawmakers backed. Decades ago, President Ronald Reagan and Prime Minister Margaret Thatcher of Britain both pursued tax-cutting agendas that cemented their legacies in office.Ms. Truss has been cheered on by conservative champions of supply-side economics in the United States, including many of the chief backers of Mr. Trump’s tax cuts. Stephen Moore, who served as an outside economic adviser to the former president, praised Ms. Truss for her willingness “to challenge the reigning orthodoxy by sharply cutting taxes to boost growth,” calling the package “a gutsy and sound policy decision.”“By far the most important change is the reduction in the top income tax rate from 45 percent to 40 percent,” Mr. Moore wrote. “This will bring jobs, capital and businesses back to the U.K.”A host of critics, though, have lined up to denounce the tax package, warning it will provoke economic war with the Bank of England and risk a damaging combination of economic contraction and soaring prices, which could in turn hurt the global recovery.The impact of previous tax cuts, including those signed into law by Mr. Trump in 2017, provides fodder for those critiques.Much as Ms. Truss has proposed to do, Mr. Trump reduced tax rates for income earners across the spectrum, including those in the highest bracket. He also cut a variety of business tax rates — a contrast with the British plan, which cancels a planned increase in corporate taxes. Mr. Trump said his full package of cuts would jump-start economic activity by encouraging businesses to invest, hire and raise wages.Yet initial evidence, which includes studies from I.M.F. economists, suggests Mr. Trump’s cuts did not deliver the steep gains in investment and productivity that conservatives had promised. If such gains came to pass in Britain, they could help counter inflation there.Instead, the cuts increased consumer spending, an outcome that helped temporarily expand growth in the United States, the I.M.F. found, but which could be dangerous in a high-inflation environment.“The record through 2019 from the Trump tax cuts is not encouraging for the U.K.,” said William G. Gale, a co-director of the Urban-Brookings Tax Policy Center in Washington.Last year, Mr. Gale and a colleague, Claire Haldeman, published a study on the effects of Mr. Trump’s tax cuts up until the start of the pandemic recession. They looked for supply-side effects — whether the cuts increased investment incentives and other means of stimulating sustained economic growth — and found little evidence of such results.Instead, they found that the cuts did little to promote job growth or investment outside the oil and gas sector, which is highly correlated with the global price of fossil fuels. And they found that the cuts significantly reduced federal tax revenues, contrary to Republicans’ promises that the cuts would pay for themselves by inciting additional economic growth.Broader research suggests that Ms. Truss’s cuts for top earners are unlikely to drive significant gains in economic growth. In a recent study of decades of tax changes, Owen Zidar, an economist at Princeton, found that cuts for the top 10 percent of earners did little to prompt job gains.The hope that cuts in Britain’s top rate will supercharge the economy, Mr. Zidar said in an interview, “is completely at odds with the empirical record of the United States since 1950.”Mr. Gale, Mr. Zidar and other economists joined the I.M.F. in noting a particular challenge for the British tax cuts: the likelihood that they will be offset by interest rate increases from the Bank of England, as it seeks to bring down price growth.Other rounds of tax cuts, like those under Mr. Reagan, helped to increase growth by working in tandem with interest rate cuts taken by the Federal Reserve, according to economists who specialize in tax policy. In Britain’s case, the opposite appears to be true: The Bank of England has already been raising rates, and it appears ready to push them even higher to offset the effects of Ms. Truss’s policies. Those rate increases would negate a major goal of the tax cuts — to make it cheaper for companies to invest — by raising the costs of borrowing across the economy.Economists say faster rate increases also heighten the risk of recession in Britain.Supporters of the British tax cuts are already accusing the central bank of crippling them — much as Mr. Trump accused the Fed of undermining his tax cuts when it raised interest rates repeatedly after they were enacted.“It hasn’t helped that the Bank of England has launched a public campaign to sabotage the Truss agenda,” Mr. Moore wrote this week, echoing comments he made about the Fed in 2019.The actions of the British government could reverberate far beyond that country’s borders given the flows of international trade and the potential for a far-flung financial crisis. In recent days, President Biden has grown more concerned with the situation in Britain. On Wednesday, he met with members of his economic team to discuss developments in global financial markets, instructing them to brief him regularly on the situation.“We’re watching this very closely,” Jared Bernstein, a member of the White House’s Council of Economic Advisers, said on Wednesday at the Peterson Institute for International Economics. “The president’s being kept up on all the developments.”When asked about the cuts this week, the White House press secretary, Karine Jean-Pierre, said the administration would leave British policy to Ms. Truss’s government. But other administration officials have criticized the plan.Speaking at an event at the Brookings Institution on Wednesday, Gina Raimondo, the secretary of commerce, said Britain’s combination of cutting taxes and increasing spending would neither help the country fight inflation in the short term nor send it in the direction of long-term growth.“Investors, businesspeople want to see world leaders taking inflation very seriously, and it’s hard to see that out of this new government,” she said, adding, “We’re pursuing a different strategy.”Ana Swanson More

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    To Calm Markets, Bank of England Will Buy Bonds ‘On Whatever Scale is Necessary’

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    The purchases are designed “to restore orderly market conditions,” the central bank said, after days of turmoil that followed the government’s plan for sweeping tax cuts and higher borrowing.The Bank of England said on Wednesday that it would temporarily buy British government bonds, a major intervention in financial markets after the new government’s fiscal plans sent borrowing costs soaring higher over the past few days.The news brought some relief to the bond market, but the British pound resumed its tumble, falling 1.7 percent against the dollar, to $1.05, back toward the record low reached on Monday.The British government’s plans to bolster economic growth by cutting taxes, especially for high earners, while spending heavily to protect households from rising energy costs has been resoundingly rejected by markets and economists, in part because of the large amount of borrowing it will require at a time of rising interest rates and high inflation. The International Monetary Fund unexpectedly made a statement about the British economy on Tuesday, urging the government to “re-evaluate” its plans.The sell-off in British assets since Friday, when the government’s plan was announced, has particularly affected bonds with long maturities, the Bank of England said. “Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” it said in a statement. This would lead to a reduction of the flow of credit to businesses and households, it added.“The purpose of these purchases will be to restore orderly market conditions,” the central bank added in its statement, which had an immediate effect on markets. “The purchases will be carried out on whatever scale is necessary to effect this outcome.”Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Energy Bills to Soar: Gas and electric charges for most British households are set to rise 80 percent this fall, further squeezing consumers and stoking inflation.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.Bond auctions would take place from Wednesday until Oct. 14.The yield on 10-year British government bonds on Wednesday climbed as high as 4.58 percent — the highest since early 2008 — before the central bank’s statement. Thirty-year yields had exceeded 5 percent for the first time since 2002.After the announcement bond yields dropped sharply, with the 30-year yield falling by more than half a percentage point to about 4.35 percent.The central bank’s statement has echoes of a famous promise by Mario Draghi in 2012, when as head of the European Central Bank he vowed to do “whatever it takes” to save the euro, which had come under severe pressure in the markets.Wednesday’s intervention in Britain came after a central bank committee had warned of the risks to Britain’s financial stability from dysfunction in the government bond market.The British government’s sweeping fiscal plan, presented without an independent fiscal and economic assessment, has sent investors fleeing from British assets. The pound fell to a record low against the U.S. dollar on Monday, and traders suspected that the central bank would be forced to raise rates quickly, which pushed up short- and long-term borrowing costs.The speed of the rise in bond yields had disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in” currency and bond markets, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a research note. “But its actions to date have eroded confidence among global investors, which cannot be easily restored. Accordingly, a painful recession driven by surging borrowing costs lies ahead.”The market turmoil and the central bank’s intervention reveal the extent to which the government’s plans are at odds with the bank’s monetary policy goals. The government is trying to quickly generate economic demand, while the bank is trying to cool it to lower inflation.On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November.Just last Thursday, the central bank said it would initiate its plan to sell bonds back to the market as it tried to end the long era of easy money in its fight against inflation. It had insisted there would be a “high bar” for the bank to deviate from the plan, which would over the next year reduce its holdings of bonds by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was postponing the start of sales until the end of October. More

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    Shock Waves Hit the Global Economy, Posing Grave Risk to Europe

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    The threat to Europe’s industrial might and living standards is particularly acute as policymakers race to decouple the continent from Russia’s power sources.Russia’s invasion of Ukraine and the continuing effects of the pandemic have hobbled countries around the globe, but the relentless series of crises has hit Europe the hardest, causing the steepest jump in energy prices, some of the highest inflation rates and the biggest risk of recession.The fallout from the war is menacing the continent with what some fear could become its most challenging economic and financial crisis in decades.While growth is slowing worldwide, “in Europe it’s altogether more serious because it’s driven by a more fundamental deterioration,” said Neil Shearing, group chief economist at Capital Economics. Real incomes and living standards are falling, he added. “Europe and Britain are just worse off.”Several countries, including Germany, the region’s largest economy, built up a decades-long dependence on Russian energy. The eightfold increase in natural gas prices since the war began presents a historic threat to Europe’s industrial might, living standards, and social peace and cohesion. Plans for factory closings, rolling blackouts and rationing are being drawn up in case of severe shortages this winter.The risk of sinking incomes, growing inequality and rising social tensions could lead “not only to a fractured society but a fractured world,” said Ian Goldin, a professor of globalization and development at Oxford University. “We haven’t faced anything like this since the 1970s, and it’s not ending soon.”Other regions of the world are also being squeezed, although some of the causes — and prospects — differ.Gazprom, Russia’s state-owned energy company, said this week that it would not resume the flow of natural gas through its Nord Stream 1 pipeline until Europe lifted Ukraine-related sanctions.Hannibal Hanschke/EPA, via ShutterstockHigher interest rates, which are being deployed aggressively to quell inflation, are trimming consumer spending and growth in the United States. Still, the American labor market remains strong, and the economy is moving forward.China, a powerful engine of global growth and a major market for European exports like cars, machinery and food, is facing its own set of problems. Beijing’s policy of continuing to freeze all activity during Covid-19 outbreaks has repeatedly paralyzed large swaths of the economy and added to worldwide supply chain disruptions. In the last few weeks alone, dozens of cities and more than 300 million people have been under full or partial lockdowns. Extreme heat and drought have hamstrung hydropower generation, forcing additional factory closings and rolling blackouts.A troubled real estate market has added to the economic instability in China. Hundreds of thousands of people are refusing to pay their mortgages because they have lost confidence that developers will ever deliver their unfinished housing units. Trade with the rest of the world took a hit in August, and overall economic growth, although likely to outrun rates in the United States and Europe, looks as if it will slip to its slowest pace in a decade this year. The prospect has prompted China’s central bank to cut interest rates in hopes of stimulating the economy.Understand the Decline in U.S. Gas PricesCard 1 of 5Understand the Decline in U.S. Gas PricesGas prices are falling. More

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    Trade Between Russia and Britain Falls to Lowest Level on Record

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    For the first time since records began, Britain had a month in which it imported no fuel from Russia, as trade between the two countries plummeted following Russia’s invasion of Ukraine, according to British government statistics released on Wednesday.In addition to a sharp decline in imports of Russian fuel in June, imports of other Russian goods also fell that month to the lowest level since Britain’s Office for National Statistics began recording the data in 1997. Imports decreased to 33 million pounds ($39 million), or 97 percent less than the average monthly imports in the year to February, the month when Russia invaded Ukraine.The figures show the extent to which the British government’s economic sanctions against Russia, which came into force in March, are having an effect. Self-sanctioning, where companies voluntarily seek alternatives to Russian goods, was also likely a factor in the steep decline in trade, according to the Office for National Statistics.Exports of most commodities to Russia from Britain also dropped significantly, led by a decline in exports of machinery and transport equipment. The exception was medicine and pharmaceutical products, which increased by 62 percent from the prewar average. These products are exempt from sanctions.Under sanctions, British companies have until the end of the year to end imports of Russian oil and coal and have been encouraged to find alternative sources until then. To make up for the decreased volumes of refined oil from Russia, British companies in recent months have increased imports from Saudi Arabia, the Netherlands, Belgium and Kuwait.Before Russia’s invasion of Ukraine, Britain imported nearly a quarter of its refined oil from Russia, 6 percent of its crude oil imports and 5 percent of its gas imports. (Britain gets about half of its total crude oil imports from Norway.)The European Union has also reduced its purchases of Russian gas ahead of a ban on the vast majority of the bloc’s imports of Russian oil, which will come into force at the end of the year. The European Union also agreed to curb natural gas consumption from Russia. In the final week of June, total E.U. gas imports from Russia were down 65 percent from a year earlier, according to a report by the European Central Bank.Russia is feeling the effect of sanctions. Its economy contracted sharply in the second quarter, declining 4 percent from a year earlier. Sanctions on Russia have led many American and European companies to exit the country and have cut off Russia from about half of its $600 billion reserves of foreign currency and gold.One boost for Russia’s economy has been higher oil prices, which have helped it make up for revenue that would have come from buyers in Europe. India, China and Turkey have stepped up their purchases of Russian crude, providing temporary relief, but once the European Union oil ban comes into full effect, Russia will need to find buyers for roughly 2.3 million barrels of crude and oil products a day, about 20 percent of its average output in 2022, according to the International Energy Agency. More

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    As Soaring Prices Roil Britain, Its Leader Vacations and a Likely Successor Sidesteps the Issue

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    Britain is facing multiple economic shocks, from soaring energy prices to the hollowing out of the labor market by Brexit. But these issues seem disconnected from the fight to replace Boris Johnson.LONDON — The last time Britain suffered double-digit inflation, in 1982, Margaret Thatcher was prime minister, the nation was about to go to war with Argentina over the Falkland Islands, nurses and miners went on strike, and Prince William was born to Prince Charles and his wife, Princess Diana.This week, Britain is again in upheaval, with an inflation rate of 10.1 percent in July, a looming recession and a Conservative Party in the throes of a rancorous campaign to choose a new leader. If, as expected, Liz Truss is elected next month, she would take power during a period of economic stress comparable to what Thatcher confronted. And yet the multiple shocks Britain faces — from soaring energy prices because of the war in Ukraine, supply-chain disruptions after the coronavirus pandemic, and the hollowing out of the British labor market by Brexit — seem strangely disconnected from the contest to replace Prime Minister Boris Johnson.The untethered nature of the campaign is all the more striking because Britain is faring worse economically than its major European neighbors, not to mention the United States. Stagflation, another bleak relic of Thatcher’s early years, seems likely to haunt whoever succeeds Mr. Johnson.Ms. Truss, the foreign secretary, has stuck to an agenda focused on cutting taxes, which could aggravate rather than help solve those problems. Her goal is to appeal to the affluent, older Conservative Party members who choose the leader — a strategy that has helped her amass a so-far-unassailable lead over her opponent, Rishi Sunak, the former chancellor of the Exchequer. In polls of party members, Ms. Truss has an advantage over Mr. Sunak of between 22 and 38 percentage points.Liz Truss, the foreign secretary and a Conservative candidate for prime minister, campaigning last week in Cheltenham.Neil Hall/EPA, via Shutterstock“The whole campaign has been conducted in this bubble of unreality,” said Tim Bale, a professor of politics at Queen Mary, University of London. He blamed the problem in part on the news media, which he said had failed to pin down the candidates on how they would confront inflation.“There’s also a degree of fatalism about the crisis,” Mr. Bale added. “It’s put down to external events, and — by some — to the Bank of England’s tardy response.”The blinkered nature of the debate, analysts say, also reflects the peculiarities of the British political system. Only rank-and-file members of the Conservative Party can vote for the next leader, a constituency estimated at around 160,000 people. Older, whiter, and wealthier than most Britons, these voters are far less vulnerable to the ravages of a cost-of-living crisis than the broader population. To this rarefied slice of the electorate, Ms. Truss’ promise of tax cuts is more alluring than stark warnings that Britain needs to batten down the hatches before an approaching storm.Mr. Johnson, for his part, is on vacation in Greece, having skipped the chance to hold a crisis meeting with his would-be successors, as George W. Bush famously did during the presidential campaign in 2008, when he summoned Barack Obama and John McCain to the White House to discuss an emergency plan to confront the financial crisis.Pedestrians walked past shuttered retail stores on Oxford Street in central London on Tuesday.Andy Rain/EPA, via Shutterstock“It is pathetic that we have a government in which the leader is on a paid holiday, while the candidates to succeed him are just talking about pure nonsense,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “The only person who seems to be thinking seriously about this is Gordon Brown.”Mr. Brown, a former Labour prime minister who led Britain’s response to the 2008 crisis, wrote recently that Mr. Johnson and the two candidates should agree on an emergency budget to cushion the blow of looming fuel price increases. Otherwise, he said, they would risk consigning “millions of vulnerable and blameless children and pensioners to a winter of dire poverty.”The inflation data, Mr. Portes said, showed that Britain was suffering from the “worst of both worlds.” It has been hit by the soaring fuel prices that have afflicted other European countries. The European Union said on Thursday that inflation in the 19 countries that use the euro rose to a record 8.9 percent in July. But it was lower in France, where the government has capped fuel prices.Britain also has the acute post-Covid labor market shortages that have plagued the United States, putting pressure on wages. In Britain’s case, those shortages have been aggravated by Brexit, which has reduced the influx of migrant workers from elsewhere in Europe.Ms. Truss has pledged aid to people who will be hard hit by the next planned increase in household fuel bills, in October, though she has refused to be drawn out on what such a package would look like. She has also raised the prospect of reviewing the anti-inflation mandate of the Bank of England, Britain’s central bank. It has come under fire in recent days for failing to act quickly enough to stem spiraling prices.Rishi Sunak, the other candidate to lead the Conservative Party, spoke during a campaign event last week in Cheltenham.Toby Melville/ReutersThe bank recently hiked interest rates sharply, and it is expected to double them again in the next six months. Yet the bank predicts that inflation will keep rising until it peaks at 13.2 percent in October, while it forecasts that a tighter money supply will plunge the economy into a recession that it says will last through 2023.Mr. Sunak also holds out the promise of lower taxes, though he argues that the government must tame inflation before it passes tax cuts. He has accused his opponent of fairy-tale economics. Ms. Truss counters that swift tax cuts will stimulate commercial activity and offer the surest path out of the economic wilderness.Economists, however, warn that cutting taxes would further strain Britain’s public services, most notably the National Health Service, which is already frayed after the pandemic.“It is hard to square the promises that both Ms. Truss and Mr. Sunak are making to cut taxes over the medium term with the absence of any specific measures to cut public spending and a presumed desire to manage the nation’s finances responsibly,” said Carl Emmerson, the deputy director of the Institute for Fiscal Studies, a research organization that just published a report on the government’s deteriorating finances.On Wednesday, as the new inflation numbers were announced, Ms. Truss was in Belfast, vowing to pass legislation on trade in Northern Ireland that is likely to ignite a new round of post-Brexit tensions with the European Union.Other than its effect on Northern Ireland, the role of Brexit in Britain’s woes is also largely absent from the campaign. Both candidates are appealing to the Brexiteer wing of the Conservative Party, especially Ms. Truss, who opposed the 2016 referendum to leave the European Union, but now displays the fervor of a convert.Prime Minister Boris Johnson, left, attempted to talk to a worker who spoke no English, as he helped to pack broccoli during a visit to a farm in southwest England in June. Brexit has caused a hollowing out of the British labor market.Justin Tallis/Agence France-Presse, via Pool/Afp Via Getty ImagesIn truth, there is lively debate among economists about how much Britain’s inflation can be blamed on Brexit. Mr. Portes said it was not a key driver but has “increased pressure on the margins” by worsening labor shortages, depressing the value of the pound, and raising the costs of imports, owing to customs paperwork.Adam Posen, an American economist who once served as an external member of the Bank of England’s Monetary Policy Committee, estimated in May that 80 percent of Britain’s inflation could be blamed on Brexit, mainly because of the loss of European migrant labor. This week, he stood by his aggressive claim.“Events have sadly played out about how I and others forecast,” Mr. Posen said. More