Having sealed her chancellor’s fate, the markets could seal the prime minister’s fate
So farewell, then, Trussonomics.
The demise of the country’s second shortest-lived chancellor also brings with it the demise of the country’s shortest-lived economic movement.
Liz Truss came into office promising to boost the country’s growth rate through a forensic combination of tax cuts, reforms to the country’s supply side (for which read: things like planning reform) and spending restraint. This was, if you squint a little bit, not dissimilar to the kinds of policies espoused by Ronald Reagan and Margaret Thatcher.
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It always looked risky – especially at such a fragile point for the global economy. We are coming to the end of a 12-year period of cheap money, something which is causing a near-nervous breakdown in financial markets. Central banks are in the process of raising interest rates and trying to feed the glut of bonds they bought during the financial crisis back in the market.
As if that weren’t enough, Europe is facing one of its bleakest economic winters in modern memory, with a war raging in Ukraine and energy prices touching historic highs. It is hard to think of many less auspicious periods to attempt an untested new economic manifesto.
Yet Ms Truss and her former chancellor Kwasi Kwarteng pushed on all the same. And unlike Thatcher, whose first few budgets were grisly austerity packages which no one much enjoyed, Ms Truss and Mr Kwarteng aimed to turn Thatcherism on its head. Instead of fixing the public finances first and then cutting taxes second, they opted to spend the fruits of economic growth before that growth had even been achieved.
The mini-budget of 23 September was a small document with extraordinarily large consequences. Ironically, the more expensive the measures were, the less controversial they turned out to be. The scheme to cap household energy unit costs will potentially cost hundreds of billions of pounds, yet (and we know this because it was pre-announced long before the mini-budget) investors barely batted an eyelid. They carried on lending to this country at more or less the same or equivalent rates.
The same was not the case for the rest of the mini-budget’s policies. Shortly after they were announced – everything from the abolition of the 45p rate (actually quite cheap in fiscal terms) to the cancellation of Rishi Sunak’s corporation tax rise – markets began to lurch in what was, for Ms Truss, and most UK households, the wrong direction. The pound sank, the yields on government debt, which determine the interest rates across most of the economy, began to climb.
That was bad enough. When Mr Kwarteng announced gleefully a couple of days later on television that he had more tax cuts up his sleeve, the trot out of the country became a stampede. The pound fell, briefly, to the lowest level against the dollar in the history of, well, the dollar.
Even more worryingly, those interest rates on government bonds rose at an unprecedented rate, causing all sorts of malfunctions throughout the money markets.
The most obvious – and the one that perhaps will have the longest legacy – is the rise in mortgage rates. But the unexpected consequences were even more worrying, among them a crisis in funds used by pension schemes. That sparked a “run dynamic” which compelled the Bank of England to step in with an emergency support scheme.
Even at this point, we were into unprecedented territory. Never before had the Bank been forced to intervene quite like this. Never before had it had to do so as a result of a government’s Budget.
The intervention, however, had some success, bringing down the relevant interest rates and bringing markets back from the edge. But there was a sting in the tail: a deadline. Today, 14 October.
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Analysis: PM’s new tax U-turn
In hindsight perhaps it’s obvious that this, then, would always have been the day when the government might face another existential crisis. Investors were always going to be nervous ahead of the Bank’s withdrawal from this neck of the bond market. And that is precisely what happened: after the governor reiterated, on a panel in Washington, that he was indeed serious, all eyes then turned to the chancellor. Could he say something to reassure markets?
In the event, the answer was: no. But something else changed matters: growing rumours of a U-turn. That brings us to this morning. The chancellor, pulled back from Washington early, was dismissed. The U-turn began. The corporation tax freeze is to be abandoned. The coming medium-term fiscal plan will involve austerity and a big dose of fiscal pain. The upshot is that Trussonomics, which was hinged clearly on tax cuts like these, is dead in the water.
However, the bigger question concerns what happens next. Those markets, which Ms Truss said explicitly were the reason for her U-turn, are still pretty frantic. No one knows how they’ll fare on Monday, but, whether right or wrong, another grisly day will almost certainly be seen as a sign of the government’s failure. And, having sealed the fate of her chancellor, the markets could well seal the fate of the prime minister.
But that’s a few days away – a long time in both politics and markets.
Liz Truss appoints Jeremy Hunt as chancellor. Pic: Andrew Parsons / No 10 Downing Street
In the meantime, here is something to dwell on: an alternative version of history. In a parallel universe, Ms Truss and Mr Kwarteng did things slightly less hastily. They decided their emergency Budget would simply deal with the energy price shock coming this winter. They promised an OBR statement and hatched plans for a growth-generating budget in a few months’ time.
In that parallel universe, interest rates probably wouldn’t have risen so high. The rises would, anyway, have been blamed on the Bank of England, not the government. The government would have enjoyed some kudos for having prevented energy-related penury this winter and made merry in their honeymoon. Things could have been oh-so different.
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Now, all of this is of course imponderable. But it does rather underline an important point: none of this was inevitable. This wasn’t a crisis like 1992 – where the UK faced monetary pressures suffered by nearly every other nation in Europe. It was simply a succession of very unfortunate decisions at precisely the wrong moment.
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 chancellor, Jeremy Hunt, will talk to Sky News tomorrow morning. Tune in from 7am on Saturday.
A former Bank of England chief economist has told Sky News that “repeated mistakes” by the government have been “sucking all life” from the economy ahead of the budget.
Andy Haldane said the country had to find a new way of treating the build-up to the annual fiscal event, as budget rumour and speculation – initiated in part by ministers and via leaks – had fed acts of self-harm for the past two years.
“It’s been a bad hand played, in truth, pretty poorly,” he said of the chancellor’s stewardship during his appearance on Mornings with Ridge and Frost.
“So mistakes have been made and repeated mistakes. And the worst of that, I would say, is it’s repeated mistakes.”
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The build up to this budget, and Rachel Reeves‘s first speech last October, have each been dominated by talk of crisis for the public finances.
Mr Haldane told Sophy Ridge: “The black hole narrative that you and I discussed a year ago, sucking all life or energy and light from the economy, has been a mistake repeated this time as well.
“So not enough has been done to give growth a chance to create that stability. It’s only 16 months since Keir Starmer said I want to tread more lightly on our lives. That has singularly not happened. That speculation is proof positive of that.”
Mr Haldane, who served on the Bank’s rate-setting committee for seven years, was speaking after official figures last week showed a bigger than expected climb in the UK’s unemployment rate to 5% – a level not seen since the COVID pandemic.
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Why is the economy flatlining?
The Office for National Statistics (ONS) also reported weaker than forecast economic growth during the third quarter of the year, slowing to 0.1%.
He argued there was a clear link between the data and the looming budget, which takes place next week.
“If you speak to businesses, speak to consumers, their fearfulness about where the axe will fall is causing them, not unreasonably, to save rather than spend, to not put their balance sheet to work and that has taken the legs from beneath growth in the economy,” he said.
Asked if that was the government’s fault or inevitable, he replied: “The process has become far too elongated and far too leaky, to be honest.
“You know, we have this pretty much daily speculation about the next tax rise… we need to re-engineer that process to either make it watertight, like the Bank of England’s monetary policy decisions or a genuinely open consultation.
“Right now, we have this halfway house of leaks and speculation which serves absolutely no one. Least of all the economy.”
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Minister on income tax U-turn
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He made his remarks after the events of last Friday that saw the chancellor apparently rule out a Labour manifesto-breaking hike to income tax.
That was despite Ms Reeves using a speech earlier this month to prepare the ground for such a move – to the horror of many Labour MPs.
Treasury sources insisted the U-turn could be explained by better than expected economic forecasts by the Office for Budget Responsibility (OBR).
Business
Inside the town where 6 out of 7 children grow up in poverty – and live in fear of homelessness
The cobbled streets of Newport in Middlesbrough survive from the Victorian era.
The staggering levels of child poverty here also feel like they belong in a different time.
Six out of every seven children in Newport are classified as living in poverty.
Six out of every seven children in Newport are classified as living in poverty
The measure is defined by the Child Poverty Action Group as a household with an income less than 60% of the national average.
More than half of children across the whole of the constituency of Middlesbrough and Thornaby East are growing up in poverty.
As a long-awaited new strategy on child poverty is expected from the government, much of the focus on tackling the problem has been placed on lifting the two-child cap on benefits for families.
Researchers say there is direct link between areas with the highest rates of child poverty and those with the highest proportion of children affected by that two-child cap.
The two-child benefit cap means Gemma Grafton and Lee Stevenson receive no additional universal credit for three-month-old Ivie
Mother-of-three Gemma Grafton said: “Maybe if families do have more than two children, give them that little bit of extra help because it would make a difference.”
Three months ago, she and partner Lee welcomed baby Ivie into the world. With two daughters already, the cap means they receive no additional universal credit.
“You don’t seem to have enough money some months to cover the basics,” said Lee.
“Having to tell the kids to take it easy, that’s not nice, when they’re just wanting to help themselves to get what they want and we’ve got to say ‘Try and calm down on what you’re eating’ because we haven’t got the money to go and get shopping in,” added Gemma.
Katrina Morley, of Dormanstown Primary Academy, says lack of sleep affects concentration
Tracey Godfrey-Harrison says parents ‘are crying that they’re failing’
The couple had to resort to paying half of the rent one month, something they say is stressful and puts their home at risk.
Those who work in the area of child poverty say they are engaged in a battle with child exploitation gangs who will happily step in and offer children a lucrative life of crime.
“Parents are crying that they’re failing because they can’t provide for their children,” said Tracey Godfrey-Harrison, project manager at the Middlesbrough Food Bank.
“In today’s society, it’s disgraceful that anyone should have to cry because they don’t have enough.”
In the shadow of a former steelworks, Dormanstown Primary Academy serves pupils in a community hit hard by the economic collapse that followed.
The school works with charities and businesses to increase opportunities for pupils now and in the future.
Katrina Morley, the academy’s chief executive, said: “A child who hasn’t been able to sleep properly can’t concentrate. They’re tired. We know that the brain doesn’t work in the same way. A child who is hungry can’t access the whole of life.
“When you face hardship, it affects not just your physiology but your emotional sense, your brain development, your sense of worth. They don’t get today back and their tomorrow is our tomorrow.”
Dormanstown Primary Academy serves pupils in a community hit hard by the closure of a steel plant
Barney’s Baby Bank founder Debbie Smith says local people ‘are struggling with food’
The school’s year six pupils see the value of things like the on-site farm shop for families in need.
They are open about their own worries, too.
Bonnie, 10, said: “I think that’s very important because it ensures all the people in our community have options if they’re struggling.
“It can be life-changing for families in poverty or who have a disadvantage in life because they don’t have enough money and they’re really struggling to get their necessities.”
Mark, also 10, said: “I worry about if we have nowhere to live and if we haven’t got enough money to pay for our home. But at least we have our family.”
They also see the homelessness in the area as the impact of poverty. “I think it actually happens more often than most people think,” said Leo, “because near the town, there’s people on the streets and they have nowhere to go.”
The school is one of many calling for the lifting of the two-child cap.
The need for life’s essentials has prompted more than 50 families to register for help at Barney’s Baby Bank in the last 11 months. Nappies, wipes, clothing, shoes, toys, are a lifeline for those who call in.
Founder Debbie Smith said local people “are struggling with food. They’re obviously struggling to clothe their babies as well. It’s low wages, high unemployment, job insecurity and that two-child benefit cap”.
“Middlesbrough does feel ignored,” she added.
A government spokesperson said: “Every child, no matter their background, deserves the best start in life. That’s why our Child Poverty Taskforce will publish an ambitious strategy to tackle the structural and root causes of child poverty.
“We are investing £500m in children’s development through the rollout of Best Start Family Hubs, extending free school meals and ensuring the poorest don’t go hungry in the holidays through a new £1bn crisis support package.”
Read more on Sky News:
Progress ‘being made’ on poverty
Warning over ‘great poverty distraction’
But what is the message to those making the decisions from the North East?
“Come and do my job for a week and see the need and the desperation the people are in,” said Ms Godfrey-Harrison. “There needs to be more done for people in Middlesbrough.”
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