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.
Tory MPs turn on Truss as PM scrambles to save job after sacking chancellor – latest updates
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.
Business
Energy minister says ‘there’s no shortcut’ to bringing down bills – as price cap rise announced
Households and businesses will have to wait for energy bills to fall significantly because “there’s no shortcut” to bringing down prices, the energy minister has told Sky News.
Speaking as Chancellor Rachel Reeves considers ways of easing the pressure on households in next week’s budget, energy minister Michael Shanks conceded that Labour’s election pledge to cut bills by £300 by converting the UK to clean power has not been delivered.
It comes as Ofgem announced the average annual energy bill will rise by 0.2% in January, despite wholesale costs falling.
Major forecasters Cornwall Insight had predicted a 1% drop – but the energy regulator has moved in the opposite direction. Between January and March, the typical annual dual fuel bill will be £1,758 – up from the current £1,755 cap.
The UK has the second-highest domestic and the highest industrial electricity prices among developed nations, despite renewable sources providing more than 50% of UK electricity last year.
“The truth is, we do have to build that infrastructure in order to remove the volatility of fossil fuels from people’s bills,” Mr Shanks said.
“We obviously hope that that will happen as quickly as possible, but there’s no shortcut to this, and there’s not an easy solution to building the clean power system that brings down bills.”
His comments come amid growing scepticism about the compatibility of cutting bills as well as carbon emissions, and growing evidence that the government’s pursuit of a clean power grid by 2030 is contributing to higher bills.
While wholesale gas prices have fallen from their peak following the Russian invasion of Ukraine in 2022, energy bills remain around 35% higher than before the war, inflated by the rising cost of reducing reliance on fossil fuels.
The price of subsidising offshore wind and building and managing the grid has increased sharply, driven by supply chain inflation and the rising cost of financing major capital projects.
In response, the government has had to increase the maximum price it will pay for offshore wind by more than 10% in the latest renewables auction, and extend price guarantees from 15 years to 20.
The auction concludes early next year, but it’s possible it could see the price of new wind power set higher than the current average wholesale cost of electricity, primarily set by gas.
Renewable subsidies and network costs make up more than a third of bills and are set to grow. The cost of new nuclear power generation will be added to bills from January.
The government has also increased so-called social costs funded through bills, including the warm home discount, a £150 payment made to around six million of the least-affluent households.
Gas remains central to the UK’s power network, with around 50 active gas-fired power stations underpinning an increasingly renewable grid, and is also crucial to pricing.
Because of the way the energy market works, wholesale gas sets the price for all sources of electricity, the majority of the time.
At Connah’s Quay, a gas-fired power station run by the German state-owned energy company Uniper on the Dee estuary in north Wales, four giant turbines, each capable of powering 300,000 homes, are fired up on demand when the grid needs them.
Energy boss: Remove policy costs from bills
Because renewables are intermittent, the UK will need to maintain and pay for a full gas network, even when renewables make up the majority of generation, and we use it a fraction of the time.
“The fundamental problem is we cannot store electricity in very large volumes, and so we have to have these plants ready to generate when customers need it,” says Michael Lewis, chief executive of Uniper.
“You’re paying for hundreds of hours when they are not used, but they’re still there and they’re ready to go at a moment’s notice.”
Michael Lewis, chief executive of Uniper
He agrees that shifting away from gas will ultimately reduce costs, but there are measures the government can take in the short term.
“We have quite a lot of policy costs on our energy bills in the UK, for instance, renewables incentives, a warm home discount and other taxes. If we remove those from energy bills and put them into general taxation, that will have a big dampening effect on energy prices, but fundamentally it is about gas.”
The chancellor is understood to be considering a range of options to cut bills in the short term, including shifting some policy costs and green levies from bills into general taxation, as well as cutting VAT.
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Tories and Reform against green energy
Stubbornly high energy bills have already fractured the political consensus on net zero among the major parties.
Under Kemi Badenoch, the Conservatives have reversed a policy introduced by Theresa May. Shadow energy secretary Claire Coutinho, who held the post in the last Conservative government, explained why: “Net zero is now forcing people to make decisions which are making people poorer. And that’s not what people signed up to.
“So when it comes to energy bills, we know that they’re going up over the next five years to pay for green levies.
“We are losing jobs to other countries, industry is going, and that not only is a bad thing for our country, but it also is a bad thing for climate change.”
Claire Coutinho tells Sky News net zero is ‘making people poorer’
Reform UK, meanwhile, have made opposition to net zero a central theme.
“No more renewables,” says Reform’s deputy leader Richard Tice. “They’ve been a catastrophe… that’s the reason why we’ve got the highest electricity prices in the developed world because of the scandal and the lies told about renewables.
“They haven’t made our energy cheaper, they haven’t brought down the bills.”
Mr Shanks says his opponents are wrong and insists renewables remain the only long-term choice: “The cost of subsidy is increasing because of the global cost of building things, but it’s still significantly cheaper than it would be to build gas.
“And look, there’s a bigger argument here, that we’re all still paying the price of the volatility of fossil fuels. And in the past 50 years, more than half of the economic shocks this country’s faced have been the direct result of fossil fuel crises across the world.”
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