Liz Truss’s Tax Cut Gaffe Hits Tories in the Pocket: Five Charts

(Bloomberg) —

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Liz Truss’ financial plans have already turned investors against her and given the Labor Party a massive lead in opinion polls. Things could be getting more serious for Britain’s new prime minister as her core constituents absorb the impact of her policies.

The wild market reaction sparked by their promise of huge, unfunded tax cuts is spreading through the real economy, causing key conservative constituencies such as retirees and homeowners to suffer. It will test the loyalty of the party loyalists who brought Truss to power less than a month ago and are gathering for their annual conference in Birmingham from Sunday.

Stocks tumbled and the pound hit record lows, devastating fortunes and making foreign goods and travel more expensive, while higher immigration and planning reforms could anger traditional Tories. It spells danger for a divisive prime minister who has yet to convince her party’s lawmakers that she has what it takes to lead.

Here’s how the fallout will hit the conservative base:

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pensions at risk

Retirees are a key constituency for Truss. According to polls, 57% of 60-69 year olds and 67% of over 70 year olds supported the party in the last elections. Every 10 years that a person ages, their chance of voting for Tory increases by about nine points.

All the more damaging for Truss are the risks to pension funds triggered by the rise in longer-term Gilt yields after the financial report. With the Bank of England finally stepping in to prevent a deeper crisis, accusations that the Prime Minister’s policies were jeopardizing pensions will be hard to shake.

Read more: The pension problem that threatened to ruin the gilt market

Mortgages in chaos

The tax giveaway not only sparked the sell-off in the Gilt market, but also increased bets that the BOE must counter the stimulus by raising borrowing costs faster, with traders now pricing in rates of around 6% next year.

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It’s wreaking havoc in the mortgage market, driving interest rates higher and forcing lenders to sell more than 1,600 mortgage products since Friday, accounting for 40% of the market, according to Moneyfacts Group Plc. According to Niraj Shah, economist at Bloomberg Economics, the cost of a two-year fixed-rate mortgage on an average home will rise to around £1,350 ($1,500) by March, from around £780 earlier this year.

That poses a problem for a party that has long touted the virtues of home ownership. In 2019, a majority of homeowners voted for Tory, while YouGov polls suggest most single-opinion voters think the party is close to homeowners.

collapse in house prices

The mortgage turmoil will be particularly damaging if it also feeds through to house prices. There are already signs that post-pandemic price surges are easing, with Nationwide reporting that last month levels were flat for the first time in more than a year. Things could get much worse, as analysts at Credit Suisse say house prices “could easily fall by 10% to 15%.”

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Stock portfolios hammered

The chaos has also hurt UK stocks and potentially reduced the value of wealthier voters’ personal portfolios. The FTSE 350 index is down more than 2% this week, bringing its monthly loss to around 6%, the second-worst drop since the Covid pandemic.

Building over the land

They may not have grabbed the headlines amid the market turmoil, but the Truss government’s other plans could also anger its constituents. A promise to tear up planning rules threatens to rekindle fears that England’s fields and forests will be sacrificed for houses, and that was one factor in a stunning 2021 by-election defeat to the Liberal Democrats.

A move to boost economic growth and ease hiring difficulties amid higher immigration could anger some of the party’s right and those who have supported Brexit to crack down on arrivals from outside the country.

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