“As strong as the storm may be, I know that the British people are stronger,” says Britain’s new Prime Minister Liz Truss in a brief address to the nation as Country faces looming recession, high inflation, a historic energy price shock, and a sinking currency.

By Max Colchester and David Luhnow

Liz Truss became Britain’s third prime minister in just over three years on Tuesday, taking power in a nation that faces a toxic brew of looming recession, high inflation, a historic energy price shock, and a sinking currency.

Ms. Truss, 47, met Queen Elizabeth II in Balmoral, Scotland, to be formally appointed to form a government, taking over from Boris Johnson. Hours later, standing on a rain soaked Downing Street in London, she outlined an ambitious agenda of tax cuts and greater spending to boost sluggish growth in the world’s sixth-biggest economy.

“As strong as the storm may be, I know that the British people are stronger,” she said in a brief address to the nation.
The former foreign minister, a member of the ruling Conservative Party, faces as difficult an economic challenge as any recent British leader, troubles of the country’s own making and the result of Europe’s biggest conflict since World War II, in Ukraine. The pound this week sank to its lowest level against the U.S. dollar since 1985, and the currencies could reach parity for the first time in their more than two-century pairing.

Economists expect the British economy to fall into a mild but relatively long recession. Inflation is at a 40-year high at 10.1% and could hit 13% by year-end, according to the Bank of England. Unions are increasingly striking as real wages fall at their fastest rate in 20 years. Public school teachers and doctors are among those threatening strikes in coming months.

The ruling Conservatives, who have been in power for 12 years, trail the opposition Labour Party by roughly 10 percentage points in leading opinion polls.

“For the Tories, it’s taking on the multiheaded hydra,” including inflation, recession, an energy shock, mounting debt, and a sense that government services including the public health system are breaking down, said Tony Travers, the director of LSE London, a research group at the London School of Economics.

Ms. Truss is expected to continue some policies of Mr. Johnson, who stepped down as party leader in early July following a series of scandals. Among those policies is a strong defense of Ukraine against Russia and an endorsement of Britain’s departure from the European Union.

President Biden congratulated the new British leader in a tweet Tuesday, saying, “I look forward to deepening the special relationship between our countries and working in close cooperation on global challenges, including continued support for Ukraine as it defends itself against Russian aggression.”

Ms. Truss must quickly make a policy decision that could shape the rest of her tenure: how to protect businesses and individuals from soaring energy prices caused by the war in Ukraine. Household energy bills are set to rise by 80% next month, proving unaffordable for many and pushing up inflation to the highest level among large Western economies.

The longtime government minister has marketed herself as a libertarian in the mold of former Conservative leader Margaret Thatcher. But the expected economic fallout of the energy crisis is prompting the new leader to consider a £100 billion government bailout—the equivalent of about $115 billion—of consumers and businesses to avoid a wave of bankruptcies and deeper economic pain, according to economists and people close to the government.

In coming days, Ms. Truss is expected to announce a cap on household and business energy bills, officials close to her say. That would represent a major surge in government spending after the government’s Covid-19 effort to help pay furloughed workers, which cost £70 billion. The new program is likely to dwarf that.

One option under consideration is capping wholesale gas prices, according to one official close to Ms. Truss. The government would compensate energy companies for the difference between the price they can charge customers and the cost of gas on the wholesale markets. The cap is expected to keep energy prices at around £2,500, or around $2,883, a year for households and will be funded by taxation, this person said. Details of the plan would come in the next several days.

Any additional government spending could help cushion consumers and businesses from high energy costs and possibly even prevent a recession. But it will come at a cost. Since Ms. Truss is promising lower taxes, any new spending would add to debt and widen a budget deficit that stood at 6.4% of annual economic output in the fiscal year that ended March 2022.

While Britain’s world-class economy is a leading destination for investment, the country now has a broader shortfall between the money it sends to the rest of the world—for trade—and what it takes in at 8% of GDP. That makes it more reliant on capital inflows than any major European country.

If investors start to lose faith in Britain’s ability to finance itself, the pound could fall further, spurring inflation and a vicious cycle.

“If the government is going to come out with a very generous fiscal stimulus, it needs to be financed by foreign capital,” said Antoine Bouvet, senior rates strategist at ING. That could be difficult at a time when investors have been dumping U.K. government bonds. “Ultimately, they will find buyers, but at what price?” he said. The U.K.’s benchmark 10-year borrowing cost rose above 3% on Tuesday for the first time since 2014.

To bolster the U.K. economy more widely, Ms. Truss is looking to administer a dose of Reaganomics. She is pledging to borrow to fund tax cuts, slash regulation and increase military spending, while seeking free-trade deals across the globe. The hope is that this can jolt productivity growth in a country where output per worker has slowed by half in the past decade. “What makes the United Kingdom great is our fundamental belief in freedom of enterprise,” she said Tuesday.

The Conservative Party under Ms. Truss will seek to achieve a fifth consecutive term in office, something never achieved in modern British political history. Mr. Johnson won the last election resoundingly in 2019 by touting Brexit and then guiding the U.K. out of the EU. It isn’t clear what Ms. Truss will pitch to an electorate that stretches across former industrial towns and more traditional Conservative districts. Given the economic woes facing the country, she also appeared to rule out a snap election. During a speech she pledged to fix problems facing the country in time for a vote in 2024.

To help deliver her overhauls, Ms. Truss put in place a cabinet packed with loyalists who are on the libertarian wing of the Conservative party. The prime minister, who is the country’s third female leader, appointed Britain’s first black Chancellor of the Exchequer Kwasi Kwarteng. Mr. Kwarteng had previously been business secretary and is a long time ally of Ms Truss.

The new leader has pledged to rebuild relations within her Conservative Party. Ms. Truss, who has served in a series of government roles since 2014, was backed by only a third of Conservative lawmakers in the first rounds of voting, so she lacks a large support base in the House of Commons.

Ms. Truss also faces poor approval ratings among the public more widely. Only one in seven voters expect her to perform better than Mr. Johnson as prime minister, according to pollster YouGov.
“Of course it won’t be easy,” said Ms. Truss, promising to leave Britain a more dynamic economy. “But we can do it.”

Courtesy:Wall Street Journal