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.
Business
JPMorgan Chase unveils plans to build new £10bn ‘landmark tower’ in London – double the size of The Shard
Plans have been announced for a new “landmark tower” in London with double the floor space of Britain’s tallest building, The Shard.
JPMorgan Chase unveiled details of the proposed office block after banks escaped having their taxes raised in the budget earlier this week.
The US multinational bank said the new building in Canary Wharf, in the east of the capital, would have a floor space of three million square feet. The Shard, in London Bridge, covers 1.3 million square feet.
However, the final design of the tower, including its height, is still being finalised.
A spokesperson for the firm told Sky News that they hoped to have clarity “soon” on how tall the building would be and the number of storeys. But it is expected to be one of the biggest office blocks in Europe.
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JPMorgan Chase boss Jamie Dimon reportedly signed off on the plans late last week.
It came after Sir Keir Starmer’s business envoy Varun Chandra flew out to New York to personally “offer assurances about the government’s business-friendly policies,” the Financial Times reported on Friday.
The Shard is the tallest building in western Europe. Pic: Reuters
The company also warned in a press release that its plans were “subject to a continuing positive business environment in the UK”, as well as planning permission from local authorities.
JPMorgan Chase said the project could contribute up to £9.9bn to the UK economy over six years, including by generating 7,800 jobs, many of them in the construction industry.
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The tower would house up to 12,000 people and serve as JPMorgan Chase’s main UK headquarters and its most significant presence in Europe, the Middle East and Africa.
The firm, which employs 23,000 people in the UK, said the tower would be “one of the largest and most sophisticated in Europe”.
The building is being designed by British architects Foster and Partners, known for landmarks projects including the new Wembley Stadium and London’s Millennium Bridge.
Mr Dimon said: “London has been a trading and financial hub for more than a thousand years, and maintaining it as a vibrant place for finance and business is critical to the health of the UK economy.
“This building will represent our lasting commitment to the city, the UK, our clients and our people.”
Mr Dimon added: “The UK government’s priority of economic growth has been a critical factor in helping us make this decision.”
Chancellor Rachel Reeves said she was “thrilled” about the announcement, while Mayor of London Sir Sadiq Khan said it represented a “huge vote of confidence in the capital’s future”.
Business
‘Sticking to Labour manifesto pledge costs millions of workers’, Resolution Foundation says
Sticking to Labour’s manifesto pledge and freezing income tax thresholds rather than raising income tax has hurt low- and middle-income earners, an influential thinktank has said.
Millions of these workers “would have been better off with their tax rates rising than their thresholds being frozen”, according to the Resolution Foundation’s chief executive, Ruth Curtice.
“Ironically, sticking to her manifesto tax pledge has cost millions of low-to-middle earners”, she said.
Chancellor Rachel Reeves announced in her budget speech that the point at which people start paying higher rates of tax has been held. It means earners are set to be dragged into higher tax bands as they get pay rises.
The chancellor felt unable to raise income tax as the Labour Party pledged not to raise taxes on working people in its election manifesto.
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Budget: What does the public think?
But many are saying that pledge was broken regardless, as the tax burden has increased by £26bn in this budget.
When asked by Sky News whether Ms Reeves would accept she broke the manifesto pledge, she said:
“I do recognise that yesterday I have asked working people to contribute a bit more by freezing those thresholds for a further three years from 2028.”
“I do recognise that that will mean that working people pay a bit more, but I’ve kept that contribution to an absolute minimum”.
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The Resolution Foundation thinktank, which aims to raise living standards, welcomed measures designed to support people with the cost of living, such as the removal of the two-child benefit cap, which limited the number of children families could claim benefits for.
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The announced reduction in energy bills through the removal of as yet unspecified levies was similarly welcomed.
The chancellor said bills would become £150 cheaper a year, but the foundation said typical energy bills will fall by around £130 annually for the next three years, “though support then fades away”.
More to come
This budget won’t be the last of it, Ms Curtice said, as economic growth forecasts have been downgraded by independent forecasters the Office for Budget Responsibility (OBR), and growth is a “hurdle that remains to be cleared”.
“Until that challenge is taken on, we can expect plenty more bracing budgets,” she added.
It comes despite Ms Reeves saying as far back as last year, there would be no more tax increases.
Ultimately, though, the foundation said, “The great drumbeat of doom that preceded the chancellor’s big day turned out to be over the top: the forecasts came in better than many had feared.”
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