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.
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The Chancellor borrowed more than expected at the start of the new tax year, piling more pressure on the public finances ahead of next month’s spending review.
Data from the Office for National Statistics (ONS) showed estimated net borrowing of £20.2bn in April – higher than the £17.9bn forecast by economists and the fourth highest April total on record.
That was despite a £1.7bn projected boost from employer national insurance contributions – hiked in October’s budget to help get the public finances in order and which kicked-in on 6 April.
The main reasons for the rise in borrowing included increases in public sector pay, along with higher benefits and state pensions, the ONS said.
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The data will do nothing to ease nerves over the state of the nation’s coffers amid renewed concerns Rachel Reeves may be forced to act again, in the autumn budget, to meet her own “non-negotiable” fiscal rules.
They say she must balance day-to-day spending with revenues by 2029-30, while improving public services and targeting accelerated economic growth.
The Chancellor was forced to restore a £10bn buffer at the spring statement in March, led by planned welfare curbs, after the economy flatlined.
A further restoration of headroom may be on the cards in October, given that stronger growth in the first quarter of the year is forecast to prove elusive across the rest of 2025.
The run-up to next month’s spending review – which sets budgets for government departments – has been dominated by a political row over one of her first actions in the role, which saw universal winter fuel payments stopped.
Prime Minister Sir Keir Starmer confirmed on Wednesday that a U-turn, of sorts, is on the cards.
The prospect of a higher bill ahead will do nothing to ease the cost of servicing government debt, with bond market investors continuing to demand a higher premium to hold UK gilts.
Their concerns include not only the forecasts for slowing growth but also persistent inflation.
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What the inflation increase means for you
One good bit of news for Ms Reeves was a downwards revision by the ONS to its government borrowing figure for the last financial year.
The total dropped by almost £4bn to £148.3bn.
The shift was explained by higher tax receipts but the sum still remained about £11bn above the updated forecast by the Office for Budget Responsibility.
Darren Jones, chief secretary to the Treasury, said of the ONS figures: “After years of economic instability crippling the public purse, we have taken the decisions to stabilise our public finances, which has helped deliver four interest rate cuts since August, cutting the cost of borrowing for businesses and working people.
“We’re fixing the NHS, with three million more appointments to bring waiting lists down, rebuilding Britain with our landmark planning reforms and strengthening our borders, delivering on the priorities of the country through our plan for change.”
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Bitcoin hits new record high
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There is a growing school of thought that Ms Reeves will need to raise taxes in October if she is to meet her commitments, including her fiscal rules.
Lindsay James, investor strategist at wealth management firm Quilter, said: “The decision to hold off on tax rises in the spring budget increasingly looks like a temporary reprieve.
“As borrowing continues to outstrip forecasts and debt interest costs remain elevated, pressure is building on the chancellor to make tougher choices.”
Bitcoin has surged to a new all-time high – breaking through $111,000 for the first time.
It means every single person who has bought it since 2009 (and held onto it) will be sitting on a profit.
The surge follows a pretty dramatic 2025 for Bitcoin (BTC), with Donald Trump’s presidency making this digital asset even more volatile than usual.
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BTC had first managed to hit $109,000 on 20 January – the day Mr Trump was inaugurated – with investors hopeful that he would introduce a slew of pro-crypto policies.
Despite the president coming good on some of those promises, the world’s biggest cryptocurrency soon fell, amid accusations these policies didn’t go far enough.
The White House has confirmed the US will treat Bitcoin seized from criminals as an investment, but there was disappointment when it was confirmed the government would not be buying additional coins for its “strategic reserve” using taxpayers’ money.
Bitcoin also took a battering in the immediate aftermath of Mr Trump’s controversial “Liberation Day” tariffs – slumping to lows of $75,000 in April as investors dumped riskier assets.
There are several factors behind this recent comeback, with laws designed to regulate the crypto sector now advancing through the US Senate for the first time.
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Feb: Hackers steal $1.5bn in cryptocurrency.
Interest in Bitcoin is also growing among hedge funds and financial institutions, while some companies are now in a race to buy as much of this cryptocurrency as possible.
One company called Strategy now has a war chest of 576,230 BTC worth $63bn – resulting in handsome profits of more than $23bn.
Part of BTC’s appeal lies in how it has a limited supply of 21 million coins, whereas the amount of traditional currencies in circulation often increases over time.
The latest milestone will likely contribute to a euphoric atmosphere when the president hosts a controversial dinner tomorrow for 220 of the biggest investors in $TRUMP, his very own cryptocurrency.
It also coincides with Bitcoin 2025 – the biggest crypto conference in the world – which is due to begin in Las Vegas on Tuesday – and growing financial market concerns about the size of the US government’s ballooning debt pile.
Nigel Green, chief executive of global financial advisory firm deVere Group, expects Bitcoin to set new milestones in the coming months.
“$150,000 no longer looks ambitious – it looks cautious,” he wrote in a note.
“Several forces have aligned to propel the market. A cooler-than-expected US inflation print, an easing in trade tensions between Washington and Beijing, and the Moody’s downgrade of US sovereign debt have all steered investors toward alternatives to traditional fiat-based stores of value.
“Bitcoin, often likened to digital gold, is soaking up that demand.
“In a world where sovereign credibility is fraying, investors are shifting decisively into assets that can’t be diluted or manipulated. Bitcoin has become not just a speculative play, but a strategic hedge.”
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