U.K. Prime Minister Defends Tax Cuts as Market Turmoil Continues

The plan has led to days of turmoil on U.K. financial markets, causing the pound to slump, the cost of borrowing to surge for the U.K. government, and the Bank of England to launch an emergency program to buy government bonds to calm the markets.

Ms. Truss largely laid the blame for the financial fallout on high global inflation and energy prices caused by Russia’s invasion of Ukraine. “This is a global financial situation. Currencies are under pressure around the world,” she said. Ms. Truss argued that the big package was needed to jolt the U.K. out of a coming recession.

Tensions in the markets continued Thursday. Yields on U.K. government 10-year bonds rose 100 basis points to 4.19%, likely setting the stage for another intervention later in the trading day by the Bank of England to buy bonds. The bank said it spent 1 billion pounds, equivalent to $1.08 billion, on Wednesday and would spend “on whatever scale is necessary” to calm the markets and prevent the turmoil from spiraling into a financial crisis.

The pound meanwhile was down 0.9% to $1.08.

Mark Carney,

a former governor of the Bank of England, questioned the assertion by top government officials—including the U.K.’s Chancellor of the Exchequer Kwasi Kwarteng—that the slump in the pound and government bond prices were due to global factors. Mr. Carney said the budget was largely responsible for recent turmoil.

“It’s been a response to the budget and to some extent policy working at some cross-purposes, monetary policy needing to be tight and fiscal policy being loosened quite considerably, but loosened in a way that left substantial uncertainty about the actual stance of that policy,” Mr. Carney said Thursday. His comments came before Ms. Truss spoke.

Earlier in the week, the International Monetary Fund took the unusual step of saying it was closely monitoring the brewing troubles in the U.K., and expressed concern about the government’s fiscal policy working against monetary policy in a time of high inflation.

The government plan, presented by Mr. Kwarteng last Friday, aims to boost growth to 2.5% a year in the medium term by cutting income tax, payroll tax and a 45% tax on those who earn over £150,000 a year. It is part of a broader package to spend scores of billions of pounds subsidizing energy bills for households and businesses.

The proposal to stimulate the economy came as the Bank of England said it sees inflation hitting 11% at the end of the year and the economy rapidly slowing, causing fear in the markets over both the long-run sustainability of government finances and the more immediate prospect that the package would prompt the central bank to raise rates higher than they otherwise would have, hitting growth.

“At some point, those higher costs of borrowing undo the positive impact of any tax reductions,” Mr. Carney said.

Across the U.K., there has also been anxiety among voters who worry that mortgage payments will soar if a tumbling pound and rising bond yields prompt the central bank to raise interest rates even more aggressively.

The government has also promised regulatory changes and other moves to boost business investment and confidence in the U.K., and said cutting taxes was a crucial part of that. “That means taking controversial and difficult decisions,” Ms. Truss said. “It is important that the U.K. is on the front foot, we are pulling all the levers we can to drive economic growth,” she said.

The government plan wasn’t accompanied by an independent analysis by the Office for Budget Responsibility—an independent government funded entity that analyzes state spending—raising fears about how or when the money borrowed to fund the program will be repaid. Mr. Kwarteng has promised the OBR that he will produce an analysis of the plan by Nov. 23.

Investors say they want either more clarity on cuts to government spending to fund the plan or taxes to be raised to help pay for it.

Chris Philp,

a senior Treasury official, said Thursday that the government had asked its departments to look for cost cuts and that it was committed to keeping spending under control.

Write to Max Colchester at [email protected] and Paul Hannon at [email protected]

The plan has led to days of turmoil on U.K. financial markets, causing the pound to slump, the cost of borrowing to surge for the U.K. government, and the Bank of England to launch an emergency program to buy government bonds to calm the markets.

Ms. Truss largely laid the blame for the financial fallout on high global inflation and energy prices caused by Russia’s invasion of Ukraine. “This is a global financial situation. Currencies are under pressure around the world,” she said. Ms. Truss argued that the big package was needed to jolt the U.K. out of a coming recession.

Tensions in the markets continued Thursday. Yields on U.K. government 10-year bonds rose 100 basis points to 4.19%, likely setting the stage for another intervention later in the trading day by the Bank of England to buy bonds. The bank said it spent 1 billion pounds, equivalent to $1.08 billion, on Wednesday and would spend “on whatever scale is necessary” to calm the markets and prevent the turmoil from spiraling into a financial crisis.

The pound meanwhile was down 0.9% to $1.08.

Mark Carney,

a former governor of the Bank of England, questioned the assertion by top government officials—including the U.K.’s Chancellor of the Exchequer Kwasi Kwarteng—that the slump in the pound and government bond prices were due to global factors. Mr. Carney said the budget was largely responsible for recent turmoil.

“It’s been a response to the budget and to some extent policy working at some cross-purposes, monetary policy needing to be tight and fiscal policy being loosened quite considerably, but loosened in a way that left substantial uncertainty about the actual stance of that policy,” Mr. Carney said Thursday. His comments came before Ms. Truss spoke.

Earlier in the week, the International Monetary Fund took the unusual step of saying it was closely monitoring the brewing troubles in the U.K., and expressed concern about the government’s fiscal policy working against monetary policy in a time of high inflation.

The government plan, presented by Mr. Kwarteng last Friday, aims to boost growth to 2.5% a year in the medium term by cutting income tax, payroll tax and a 45% tax on those who earn over £150,000 a year. It is part of a broader package to spend scores of billions of pounds subsidizing energy bills for households and businesses.

The proposal to stimulate the economy came as the Bank of England said it sees inflation hitting 11% at the end of the year and the economy rapidly slowing, causing fear in the markets over both the long-run sustainability of government finances and the more immediate prospect that the package would prompt the central bank to raise rates higher than they otherwise would have, hitting growth.

“At some point, those higher costs of borrowing undo the positive impact of any tax reductions,” Mr. Carney said.

Across the U.K., there has also been anxiety among voters who worry that mortgage payments will soar if a tumbling pound and rising bond yields prompt the central bank to raise interest rates even more aggressively.

The government has also promised regulatory changes and other moves to boost business investment and confidence in the U.K., and said cutting taxes was a crucial part of that. “That means taking controversial and difficult decisions,” Ms. Truss said. “It is important that the U.K. is on the front foot, we are pulling all the levers we can to drive economic growth,” she said.

The government plan wasn’t accompanied by an independent analysis by the Office for Budget Responsibility—an independent government funded entity that analyzes state spending—raising fears about how or when the money borrowed to fund the program will be repaid. Mr. Kwarteng has promised the OBR that he will produce an analysis of the plan by Nov. 23.

Investors say they want either more clarity on cuts to government spending to fund the plan or taxes to be raised to help pay for it.

Chris Philp,

a senior Treasury official, said Thursday that the government had asked its departments to look for cost cuts and that it was committed to keeping spending under control.

Write to Max Colchester at [email protected] and Paul Hannon at [email protected]