Having sealed her chancellor’s fate, the markets could seal the prime minister’s fate | Politics News
Goodbye, then, Trussonomics.
The the fall of the country’s second shortest-lived prime minister also entailed the collapse of the country’s shortest-lived economic movement.
Liz Truss took office promising to boost the country’s growth through a legal combination of tax cuts, reforming the country’s supply (read: things like plan reform) and spending restrictions. This, if you take a glance, is no different from the kinds of policies that Ronald Reagan and Margaret Thatcher espoused.
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It always looks risky – especially at such a fragile time for the global economy. We are approaching the end of a 12-year period of cheap money, something that is causing a near-nervous collapse in financial markets. Central banks are in the process of raising interest rates and trying to get the bonds they bought during the financial crisis back into the market.
As if that weren’t enough, Europe is facing one of the bleakest economic winters in modern memory, with war raging in Ukraine and energy prices hitting historic highs. It’s hard to think of many less good times to try to make a new economic manifesto that hasn’t been tested.
However, Ms. Truss and her former prime minister Kwasi Kwarteng have pushed for the same. And unlike Thatcher, whose first few budgets were ghastly austerity packages that no one enjoyed much, Ms. Truss and Mr. Kwarteng aim to debunk Thatcherism. Instead of fixing public finances first and then cutting taxes second, they chose to spend the fruits of economic growth before that growth was achieved.
The September 23 Small Budget is a small document with huge consequences. Ironically, the more expensive the measures are, the less controversial they are. The household energy unit cost cap plan will likely cost hundreds of billions of pounds, however (and we know this because it was announced long before the small budget was in place) Investors are barely paying attention. They continue to lend to the country at the same or less interest rate.
The same is not true for the remaining policies of the small budget. As soon as they were announced – everything from abolishing the 45p rate (which is actually quite cheap financially) to the cancellation of Rishi Sunak’s corporate tax hike – the market started to wobble, for her Truss and most UK households, in the wrong direction. The pound fell, and yields on government debt, which determine interest rates across most economies, began to rise.
That was bad enough. When Mr. Kwarteng gleefully announced a few days later on television that he was going to cut more taxes, fleeing the country became a stampede. The British pound fell, shortly, to its lowest level against the dollar in the history of, well, the dollar.
Even more worrisome, government bond yields rose at an unprecedented rate, causing all sorts of hiccups across money markets.
The most obvious – and the one that will probably last the longest – is the rise in mortgage rates. But the unexpected consequences were even more worrisome, among them a crisis in funds used by pension plans. That caused a “running impetus” that forced the Bank of England to engage with an emergency support program.
Even at this point, we’ve entered unprecedented territory. Never before has the Bank been forced to intervene quite strongly like this. Never before has it had to do so due to the Government Budget.
However, the intervention has had some success, reducing the interest rates involved and bringing the market back from the edge. But there’s one thing that stings at the tail end: deadlines. Today, October 14.
In hindsight, it is perhaps clear that this will always be the day when the government may face another existential crisis. Investors are always worried about the Bank’s withdrawal from this stock bond market. And that’s exactly what happened: after the governor reiterated, on a panel in Washington, that he was serious, all eyes then turned to the prime minister. Can he say something to reassure the market?
In this event, the answer is: no. But another thing has changed significantly: there are more and more rumors of a flip-flop. That brings us to this morning. The prime minister, withdrawn from Washington early, was removed from office. The turn begins. The corporation tax freeze will be removed. The upcoming medium-term fiscal plan will involve austerity and large financial burdens. As a result, Trussonomics, which was clearly oriented towards tax cuts like this, died at home.
The bigger question, however, concerns what happens next. The markets that Ms. Truss said were clearly the reason she turned around, are still pretty rambunctious. No one knows how they will go on Monday, but, rightly or wrongly, another day of terror will almost certainly be seen as a sign of government failure. And, after sealing the fate of her prime minister, the markets can also seal the fate of the prime minister.
But that’s a few more days – a long stretch of time on both politics and markets.
In the meantime, here’s something to watch out for: an alternate version of history. In a parallel universe, Ms. Truss and Mr. Kwarteng made things a little less hasty. They decided their Emergency Budget would simply deal with the energy price shock coming this winter. They promised an OBR statement and set out budget plans that would generate growth over a period of several months.
In that parallel universe, interest rates probably wouldn’t have gone that high. Anyway, this increase is to be blamed on the Bank of England, not the government. The government will be entitled to some kudos for stopping energy-related money loss this winter and having fun on their honeymoon. Things could be very different.
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Now, all of this is of course not obligatory. But it really underscores an important point: none of this is inevitable. This is not a crisis like 1992 – where the UK faced monetary pressures that most other countries in Europe suffered. It was simply a succession of very unfortunate decisions at the wrong time.
At a time of market turmoil and war in Europe, Ms. Truss and Mr. Kwarteng chose to take a gamble. It did not pay off.
:: The new Prime Minister, Jeremy Hunt, will speak to Sky News tomorrow morning. Tune in from 7 a.m. Saturday.