New UK leader Liz Truss finalizes massive power subsidy scheme

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  • It will announce the energy support program on Thursday
  • New Prime Minister rejects wind tax on power companies
  • Sterling has fallen to its lowest level against the US dollar since 1985
  • Borrowing will be high, says Kwarteng
  • BoE says energy support will help curb inflation

LONDON, Sept 7 (Reuters) – Britain’s new Prime Minister Liz Truss on Wednesday prepared the final details of a plan to tackle rising energy bills that will reduce inflation but add more than 100 billion pounds ($115 billion) to the country’s debt. .

In her first full day as Britain’s leader since replacing Boris Johnson, Truss told parliament she would support businesses and households as they weather the recession predicted to start later this year.

Sterling fell to its lowest level against the US dollar since 1985, amid concerns among investors about the amount of debt Britain will have to sell to fund an energy bailout and tax cuts promised by the Treasury.

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A source familiar with the situation told Reuters that Truss is considering freezing energy bills in a plan that could cost up to £100 billion, a major turnaround from her rejection of “manuals” in the early stages of her Conservative leadership campaign.

Deutsche Bank said the 179 billion pounds, or half of Britain’s historic pandemic spending stimulus, for energy price support and promised tax cuts would be a blow to the country’s public finances.

Truss rejected calls from opposition Labor to fund some of the spending by raising taxes on energy companies.

“I am against windfall tax. I believe it is the wrong thing to put companies away from investing in the UK,” Truss told lawmakers.

He is due to present details of the energy support program in Parliament on Thursday.

More borrowing

His finance minister, Kwasi Kwarteng, said throughout his first day on the job that short-term borrowing would be high to support households and businesses and fund tax cuts. read more

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

The pound fell to $1.1407, its lowest level against the dollar since 1985 and almost 1% against the euro.

While sterling’s fall will add inflationary pressures to the economy, the expected price freeze will help ease cost-of-living pressures on consumers that are shaping up to be the toughest in decades.

BoE chief economist Huw Pill said the plan could slow inflation – which topped 10% in July – although it was too soon to say what the implications would be for the central bank’s rate hikes. read more

Some economists recently said the BoE forecast inflation would exceed 13% in August, and gas prices – if boosted by Russia’s invasion of Ukraine – could be as high as 20%.

Bill also said the BoE would not allow a surge in government spending to increase demand in the economy to the point of raising inflation.

Nevertheless, investors recalibrated their bets on a 75-basis-point rate hike at the BoE’s next scheduled monetary policy announcement on September 15. Two-year British government bond yields also fell.

Kwarteng met with BoE Governor Andrew Bailey and said “independence is really a cornerstone of managing the economy”, comments that appeared aimed at reassuring investors that the new government would not pressure the central bank.

Early in the Conservative leadership campaign, Truss said the government needed to set a “clear direction of travel” for monetary policy, although he struck a less interventionist tone.

Quarteng said he and Bailey regularly meet twice a week to coordinate economic support.

($1 = 0.8721 pounds)

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Additional reporting from the UK Bureau was written by William Schomberg and edited by Hugh Lawson

Our Standards: Thomson Reuters Trust Principles.

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