The 'savage' market reaction to the UK budget plan reflected a loss of credibility, and Liz Truss won't be able to salvage the situation even with the recent U-turn, Paul Krugman says

Paul Krugman
Paul Krugman.BI
  • The market's reaction last week to the UK's tax cut plan indicates the government lost credibility, said economist Paul Krugman.

  • "What Britain got instead was a leader who seems to live in a fantasy world and is oblivious to concerns about social solidarity."

  • Even though the UK is walking back part of its plan, Prime Minister Liz Truss will have a hard time undoing the damage, he added.

The market's "savage" reaction last week to the UK's tax cut plan indicates the government lost credibility, and even though Prime Minister Liz Truss is walking back part of it, she will have a hard time undoing the damage, according to Noble Laureate Paul Krugman.

The top economist earlier slammed Truss' plan to cut taxes, noting that the resulting market turmoil was more characteristic of a developing economy, rather than an advanced nation. Announcement of the mini-budget caused the pound to plunge to a record low, and forced the Bank of England into emergency intervention to stabilize its debt market.

"The simple story — Truss proposed policies that would increase the budget deficit and feed inflation, and markets reacted by pushing interest rates up and the pound down — misses much of what really happened," Krugman wrote in an op-ed for the New York Times on Monday. "It was instead largely about a government squandering its intellectual and moral credibility."

Although the tax cuts won't trigger a global crisis, it speaks poorly on Truss' leadership — not to mention that cutting taxes for the rich sends the "message that only the little people will face hardship," he added.

Now, the UK government is scrapping the tax cut for top earners, while leaving other cuts in place, just 10 days after it was first announced. But that may be too little, too late, Krugman warned.

"The savage reaction to the new prime minister's plans was about more than money. In tough times, leaders need to be perceived as being both realistic and fair. What Britain got instead was a leader who seems to live in a fantasy world and is oblivious to concerns about social solidarity," he wrote. "And it's going to be very hard to make up for the damage she did in just a few days."

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