A package of tax cuts announced by the government last week caused the pound to plunge against the dollar and U.K. government bond yields to soar.
Truss told the BBC she was prepared to take “controversial and difficult decisions” to grow the economy and support households with higher energy bills.
She said she was “working closely” with the Bank of England but it was important to retain its independence.
LONDON — British Prime Minister Liz Truss on Thursday defended the fiscal policies announced last week which sparked chaos in U.K. markets, saying the country had been put on a “better trajectory.”
Speaking on a round of interviews across local BBC radio stations, she said her government’s “decisive action” would curb inflation by up to 5 percentage points, reduce taxes for people and businesses, provide support with rising energy bills and avoid a projected economic slowdown.
“I understand that families are struggling with their fuel bills, and we had to take urgent action to get our economy growing, get Britain moving, and also deal with inflation,” she said.
“And of course, that means taking controversial and difficult decisions. But I’m prepared to do that as prime minister, because what’s important to me is that we get our economy moving.”
Truss took office on Sept. 6.
The measures unveiled last Friday included the biggest set of tax cuts since the 1970s, projected to total £45 billion ($48.6 billion). It sparked a historic sell-off in U.K. government bonds and a rapid fall in the value of the pound against the dollar, with sterling hitting an all-time low Monday.
Analysts said investors were expressing a lack of confidence in the government’s ability to grow the economy while taking on additional debt, as it spends what is expected to cost at least £100 billion on energy support packages over the coming years. Critics of the plan have said it is likely to increase inequality and lead to higher prices on imports due to the weaker pound.
Meanwhile, expectations of faster and higher rate rises by the Bank of England caused mortgage lenders to pull products. The central bank Wednesday said it would suspend the planned start of gilt selling next week and instead begin temporary purchases of long-dated U.K. government bonds in an effort to calm market volatility.
Asked how she thought the announcement had gone, Truss said: “It has made sure that people and businesses will be paying lower taxes, it’s opened up new road projects, new infrastructure projects, which will mean that we can get on with doing the things that will help people whether it’s getting to work, setting up their own business and growing the economy.”
She blamed President Vladimir Putin’s war in Ukraine for accentuating the energy crisis and putting economic pressure on governments around the world.
Analysts have highlighted that the U.K. bond market appears caught in a crossfire between Bank of England rate hikes intended to cool demand and fight inflation, and the U.K. Treasury now attempting to avoid a recession by introducing inflationary fiscal measures.
Truss said she and Finance Minister Kwasi Kwarteng were working closely with the Bank of England but that it was important the bank was independent and made decisions on rates.
She added: “A lot of the measures that we’ve announced won’t happen overnight. We won’t see the growth come through overnight. But what’s important is that we’re putting this country on a better trajectory for the long term.”
— Additional reporting by Anmar Frangoul