Liz truss budget proposal

The embarrassing U-turn on the budget by British Prime Minister Liz Truss shows how markets can affect the way a government spends money.

Image Credit - google By Shivesh

The premier threw out her tax-cutting budget because it caused chaos on the markets and made traders question the government's ability.

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Last month, Truss was elected on a promise to cut taxes, so people in the ruling Conservative party were shocked by her change of heart.

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The Truss budget isn't the first time that governments around the world have failed to change what the markets say.

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In 1931, the Exchange Rate Mechanism (ERM) and the Asian financial crisis (AFC) both happened.

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This about-face by the British government is reminiscent of a similar move made by French President Francois Mitterand, a socialist, in 1983..

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Due to worries about debt, the yields on UK government bonds are going up and the pound is falling to a record low against the dollar.

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The Bank of England started an emergency plan to buy bonds to avoid a financial disaster.

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And the International Monetary Fund called for a budget rethink as mortgage rates rose

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Truss fired Kwasi Kwarteng as finance minister and replaced him with Jeremy Hunt.

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Hunt then got rid of most of the tax cuts, cut the cap on energy prices, and warned of tough cuts to spending.

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No government can control the markets, but every government can be sure that public finances will be able to last for a long time..

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Bouet said that the political and economic policies were not set by the markets, but rather that the markets responded to them..

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The Truss budget drama "showed what happens when you surprise markets and don't have a convincing plan for how to pay" for expensive measures.

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