May 28, 2023

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New British leader Liz Truss finalizes massive energy subsidy plan

New British leader Liz Truss finalizes massive energy subsidy plan

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  • Truss will announce his energy support plan on Thursday
  • The new prime minister excludes a windfall tax on energy companies
  • The British pound fell to its lowest level since 1985 against the US dollar
  • Kwarteng says borrowing will be higher
  • Bank of England says energy subsidies can help cool inflation

LONDON (Reuters) – Britain’s new Prime Minister Liz Truss on Wednesday prepared the final details of a plan to tackle high energy bills that appear likely to cool inflation but add more than 100 billion pounds ($115 billion) to the country’s borrowing. .

On her first full day as Britain’s president after replacing Boris Johnson, Truss told Parliament she would support businesses and families preparing for a recession expected to start later this year.

Sterling fell to its lowest level against the US dollar since 1985, due in part to investor concerns about the amount of debt Britain would have to sell to fund its energy support plan, and the tax cuts that Truss also promised.

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A source familiar with the situation told Reuters that Truss was considering freezing energy bills in a plan that could cost around 100 billion pounds, a major turnaround after rejecting “handouts” during the early stages of the Tory leadership campaign.

Deutsche Bank said energy price support and promised tax cuts could cost 179 billion pounds, or about half of Britain’s historic pandemic spending boost that dealt a blow to the country’s public finances.

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Truss ruled out demands from the opposition Labor Party to fund part of the spending by raising taxes on energy companies.

“I am against a windfall tax,” Truss told lawmakers. “I think it would be a mistake to keep companies away from investing in the UK.”

Details of the energy subsidy plan are due to be presented in parliament on Thursday.

More borrowing

Its finance minister Kwasi Quarting, who is also on his first full day on the job, said borrowing would be higher in the short term to provide support to households and businesses and fund tax cuts. Read more

He told business leaders: “We need to be assertive and do things differently. That means focusing relentlessly on how to unlock business investment and increase the size of the British economy, rather than how to redistribute what’s left.”

The pound fell to its lowest level against the dollar since 1985 at $1.1407 and fell about 1% against the euro as well.

While a fall in sterling could add to inflationary pressures in the economy, the expected price freeze scheme is likely to help ease the cost of living pressure on consumers that was shaping up to be the most severe in decades.

Bank of England chief economist Hugh Bell said the plan could slow inflation – which topped 10% in July – although it was too early to say what the implications of the central bank’s interest rate increases would have. Read more

The Bank of England in August forecast inflation to exceed 13%, and some economists recently said it could exceed 20% if gas prices – driven by Russia’s invasion of Ukraine – remain elevated.

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Bell also said that the Bank of England would not allow increased government spending to increase demand in the economy to the point that inflation had risen.

However, investors trimmed their bets on a 75 basis point rate hike in the Bank of England’s upcoming monetary policy announcement on September 15 to 60% from nearly 80% earlier on Wednesday. UK government bond yields for two years also fell.

Kwarteng met Bank of England Governor Andrew Bailey and told him that “independence is really the cornerstone of how the economy is run”, comments that appeared aimed at reassuring investors that the new government would not put pressure on the central bank.

Early in the Tory leadership campaign, Truss said the government should set a “clear direction for travel” for monetary policy although it later took a less intrusive tone.

Quarting said he will meet with Bailey regularly, initially twice a week, to coordinate economic support.

(dollar = 0.8721 pounds)

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Additional reporting by UK Office Writing by William Schomberg Editing by Hugh Lawson

Our criteria: Thomson Reuters Trust Principles.