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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Ukraine’s president is offering an olive branch to Donald Trump with a dramatic public message aimed at mending their relationship and ending Russia’s war.
Volodymyr Zelenskyy chose social media – the US leader’s favourite mode of communication – to make his point.
He did not go so far as to apologise for a fiery bust-up with Mr Trump at the Oval Office last Friday – a move that some members of the US administration have called for, even though it was the American president and his deputy JD Vance who laid into Mr Zelenskyy.
Instead, he described the encounter as “regrettable”, saying it “did not go the way it was supposed to be” and it was “time to make things right”.
Ukrainian forces fire a missile towards Russian troops near Chasiv Yar. Pic: Reuters
Most significantly though was his spelling out of a vision for the first stage of how Russia’s war with Ukraine could end.
Pushing back on false claims by Trump allies such as Elon Musk that Mr Zelenskyy wants an endless war, he said that Ukraine is committed to peace and is ready to come to the negotiating table as soon as possible.
Crucially, he said: “We are ready to work fast to end the war, and the first stages could be the release of prisoners and truce in the sky – ban on missiles, long-ranged drones, bombs on energy and other civilian infrastructure – and truce in the sea immediately, if Russia will do the same.”
Appealing to the US president’s ego, he praised Mr Trump’s “strong leadership” and repeated his gratitude for past American support – again responding to criticism from the American commander in chief and his team that he is not showing enough gratitude.
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He also said Kyiv was ready to sign a key minerals deal with Washington – something else Mr Trump is seeking.
This message appears to be an attempt by Mr Zelenskyy to steer his relationship with Mr Trump back on track and to map out his idea for an end to the war – a conflict that Ukraine did not seek but which was brought to its land by Russia’s invading forces.
Donald Trump and Volodymyr Zelenskyy at the White House on Friday, before their Oval Office bust-up. Pic: AP
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Key now will be how the US president responds.
Will Mr Zelenskyy’s expression of regret and clear wish to end the war provide enough of an off-ramp for Mr Trump to defuse the row and – for the sake of Ukraine’s ability to defend itself – switch back on the flow of military assistance to the country?
Another major factor, of course, is how Vladimir Putin reacts and whether he could countenance a limited ceasefire in a war that he started and – unlike Mr Zelenskyy – appears to have no genuine desire to halt.
Donald Trump’s 25% tariffs on goods from Mexico and Canada have come into effect, as has an additional 10% on Chinese products, bringing the total import tax to 20%.
The US president confirmed the tariffs in a speech at the White House – and his announcement sent US and European stocks down sharply.
The tariffs will be felt heavily by US companies which have factories in Canada and Mexico, such as carmakers.
Mr Trump said: “They’re going to have a tariff. So what they have to do is build their car plants, frankly, and other things in the United States, in which case they have no tariffs.”
There’s “no room left” for a deal that would see the tariffs shelved if fentanyl flowing into the US is curbed by its neighbours, he added.
Mexico and Canada face tariffs of 25%, with 10% for Canadian energy, the Trump administration confirmed.
And tariffs on Chinese imports have doubled, raising them from 10% to 20%.
Canada announced it would retaliate immediately, imposing 25% tariffs on US imports worth C$30bn (£16.3bn). It added the tariffs would be extended in 21 days to cover more US goods entering the country if the US did not lift its sanctions against Canada.
China also vowed to retaliate and reiterated its stance that the Trump administration was trying to “shift the blame” and
“bully” Beijing over fentanyl flows.
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What is America’s trade position?
Mr Trump’s speech stoked fears of a trade war in North America, prompting a financial market sell-off.
Stock market indexes the Dow Jones Industrial Average and the Nasdaq Composite fell by 1.48% and 2.64% respectively on Monday.
The share prices for automobile companies including General Motors, which has significant truck production in Mexico, Automaker and Ford also fell.
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Consumers in the US could see price hikes within days, an expert has said.
Gustavo Flores-Macias, a public policy professor at Cornell University, New York, said “the automobile sector, in particular, is likely to see considerable negative consequences”.
This is due to supply chains that “crisscross the three countries in the manufacturing process” and ” because of the expected increase in the price of vehicles, which can dampen demand,” he added.
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The Trump administration is gearing up to bring in other tariffs in the coming weeks.
On 2 April, reciprocal tariffs will take effect on all countries that impose duties on US products.
He is also considering 25% tariffs on goods from the EU “very soon” after claiming the bloc was created to “screw the United States”.
A truck has collided with a bus in southern Bolivia, killing at least 31 people, according to police – just two days after a deadly crash claimed at least 37 lives.
Officers said the bus rolled some 500m (1,640ft) down a ravine after the collision on Monday, which took place on the highway between Oruro, in the Bolivian Altiplano, and the highland mining city of Potosi.
The driver of the truck has been arrested, while the cause of the accident is under investigation.
Police spokesperson Limbert Choque said men and women were among the dead, and 22 people suffered injuries.
Rescue teams operating at the site of the crash. Pic: Bolivia’s attorney general/Reuters
Bolivia’s President, Luis Arce, expressed condolences for the victims on social media: “This unfortunate event must be investigated to establish responsibilities,” he said in a post on Facebook.
“We send our most sincere condolences to the bereaved families, wishing them the necessary strength to face these difficult times.”
The crash happened between Oruro and Potosi
On Saturday morning, a crash between two buses killed more than three dozen people in the same region.
It happened between Colchani and the city of Uyuni, a major tourist attraction and the world’s largest salt flat.
People stand near the wreckage of one of the two buses involved in a crash on Saturday. Pic: Reuters/Potosi Departmental Command
Coincidentally, one of the buses was heading to Oruro, where one of the most important carnival celebrations in Latin America is currently taking place.
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More than 30 people were also killed after a bus crash on 17 February.
In that crash, police said the driver appeared to have lost control of the vehicle, causing it to drop more than 800m (2,600ft) off a precipice in the southwestern area of Yocalla.
Bolivia’s mountainous, undermaintained and poorly supervised roads are some of the deadliest in the world, claiming an average 1,400 fatalities every year.
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