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The British economy is in freefall with a rare intervention by the Bank of England

LEILA FADEL, HOST:

The British economy has faced some significant challenges in the past few days.

RACHEL MARTIN, HOST:

The country's currency, the pound, weakened to a record low against the U.S. dollar while government borrowing costs shot up. All this happened after the new Conservative government, led by Prime Minister Liz Truss, announced new economic proposals.

FADEL: Willem Marx joins us from London with details. Hi, Willem.

WILLEM MARX: Hey.

FADEL: OK. So the British economy is in turmoil. The pound has slumped. And the new British prime minister, Liz Truss, she's been on the job less than a month and is already facing pressure from within her party to fire her finance minister. What's going on?

MARX: Well, you're right. It's been a very volatile few days on the markets since these economic proposals were unveiled by that finance minister, Kwasi Kwarteng, last Friday; the pound actually now slightly stronger this morning than it was on Monday, but not by much. The turmoil was essentially sparked when Kwarteng, the new finance minister, announced tax cuts in the last week. There was a nasty chain reaction. Very quickly, as you said, the pound weakened. The costs for British government borrowing, they've shot up. This, in turn, led to a warning from the International Monetary Fund, who issued a statement saying that the government's tax cut plans were economically risky. They were likely to create greater income inequality. And then yesterday, there was a very rare intervention by the central bank here, the Bank of England, which stepped in and promised to start buying up U.K. government bonds. And this, essentially, was to create an artificial demand for them so the interest rates on those bonds would not rise too high.

FADEL: But was this to be expected? I mean, this is what Liz Truss promised when she campaigned to replace Boris Johnson. She said she would lower taxes, and she did. Why did this make people nervous?

MARX: Well, part of the difficulty was that there was not a huge amount of detail when Truss' finance minister addressed Parliament about this last week. He promised a new economic era. He said British economic growth had been lower than it should have been in the past. His solution seemed to be to lower taxes slightly for everyone and lower them quite a bit, 5% for the country's highest earners, as well as end caps on bonuses for the very top earners in the financial sector. The thinking was that those high earners will invest more in Britain. They'd expand businesses; they'd create jobs - trickle-down economics. But the reaction focused on the fact that these ideas were not costed. That's to say there was no explanation given for how exactly the government planned to make up the shortfall in public funding these tax cuts would generate besides borrowing more money. And it was that plan to borrow so much more money, many tens of billions of dollars, without total clarity about long-term plans to repay that money that made investors so nervous.

FADEL: I guess it's a different economic era. So what are the political and social consequences of the government's actions over the past week?

MARX: Well, Conservative Party members of Parliament, they've already expressed unhappiness with Liz Truss' finance minister, but the government's insisting they're going to stick to these economic guns. One thing that's particularly spooked those Conservative legislators is the very strong showing in polls of the opposition Labour Party, the highest they've been in many years. And the party's leader, Sir Keir Starmer, he's accused Liz Truss and her Cabinet of having lost control of the economy. He said in an interview with the BBC yesterday he thought they should rethink these new proposals and suggested an early recall of Parliament to discuss the crisis. For ordinary people here, though, including many Conservative voters, the fallout will be in much, much higher mortgage payments in the months ahead. And with just two years till the next election here, that may still make Liz Truss and her finance minister rethink this policy move.

FADEL: Willem Marx, talking to us from London, thank you so much.

MARX: Thank you. Transcript provided by NPR, Copyright NPR.

Leila Fadel is a national correspondent for NPR based in Los Angeles, covering issues of culture, diversity, and race.
Willem Marx