Britain has been through the boom since last month’s mini budget. Not only did Kwasi Kwarteng’s not-so-little plan trigger a domestic financial crisis and rising mortgage costs for millions, but he lit the blue paper for his and her close friend’s political downfall, Liz Truss.
Everything was supposed to be so different. Truss had spent the summer promising to reverse National Insurance and corporation tax hikes in the Tory leadership race. These promises, more its popular energy price freezewould have been a lot for the new government to announce at the supposed tax and spending relief event.
Instead, it was a one-off, ideologically-driven occasion that vindicated Truss’ defeated political rival, Rishi Sunak. As he had warned, there was indeed a run on sterling, gilt market freefall and scare off global investors. Even the International Monetary Fund (IMF) stepped in with a superb public reprimand.
Rarely has a budget caused so much political and economic damage. Not even George Osborne’s “mess” budgetwhen he was forced in 2012 to waive the pasty tax, comes close.
Initially hailed by its supporters as “finally a real conservative budgetthe “mini” tax event included the biggest tax cuts since 1972financed by a vast expansion of borrowing, and with only a vague attempt at argument, it could be paid for by an unlikely economic boom.
Economists have balked at the idea that £45bn of unfunded tax cuts for the wealthy could ever catalyze economic growth and be self-financing in the way the government has backed it. Not just reviews of a supposed “anti-growth coalition“, but also from Goldman Sachs, Bank of America and the IMF. With inflation at a 40-year high, rising recession risks and higher borrowing costs in advanced economies, it was a big gamble at the wrong time.
The international reaction was swift and overwhelming. The the pound fell to its all-time low against the dollar, while gilt prices collapsed. Over four days, yields on long-term government bonds – which move inversely to prices – rose more than the annual increase in 23 of the past 27 years.
After decades with a reputation for sound economic management – albeit strained by Brexit – former close allies have likened Britain to a “emerging market turning into submerged market” amid the implosion of financial markets. Some have compared the collapse to the Suez Crisis of 1956, after which Britain’s power on the world stage was permanently diminished.
The Bank of England intervened with a promise to buy up to £65billion in government bonds to prevent the collapse of the funds responsible for managing the money on behalf of British pensioners. Bank Governor Andrew Bailey was not immune to criticism for the choppy market conditions. The central bank has been blamed in some quarters for a small interest rate hike the day before the mini-budget, disappointing investors who had bet on a bigger shot.
But although Team Truss seeks to draw comparisons with other countries experiencing the same global economic shocks triggered by Russia’s war in Ukraine, City economists spoke of a “moron bountyfor Brittany. Bond yields rose in other G7 countries, but not as much as in the UK.
He came with a heavy price. More than 5 million families could face an average increase in their annual income mortgage payments of £5,100 by the end of 2024, according to the Resolution Foundation think tank. Although partly caused by global issues, nearly a quarter of the sum – £1,200 – is believed to be the result of the moronic bounty. City economists believe this would have far outweighed any benefit from Kwarteng’s tax cuts.
After promising ‘growth, growth, growth’, the most likely outcome of Truss’ failed experiment, however, is likely to be a repeat of the austerity of the 2010s as the government scrambles to undo the damage caused to Britain’s international position by promising to balance the books.
Kwarteng replacement Jeremy Hunt will look to move on with a debt reduction planwhich is still in pencil for Oct. 31, though the leadership contest to replace her may force a postponement.
If it goes as planned, most analysts expect the Halloween event to contain gruesome measures to rein in government spending. Benefits could be increased below the rate of inflation, even as households have been hit hardest by their standard of living for half a century, with the poor hardest hit.
For Truss, there was the highest political price to pay for his budget bet. The market turmoil proved a powerful narrative for the mass of critics of her party who never wanted her as leader. In contact with free markets, the reputation of its liberal brand of libertarian economics was trashed.
It took just six minutes on Monday for Hunt to announce the most great turnaround in modern British political history. Almost every policy Truss has campaigned on has been unchecked. After dropping Trussonomics, it was only a matter of time before the curators got rid of its architect as well.