Truss mini-budget was ham-fisted but growth plan conversation still needed

Published

1 year ago

September 18, 2023

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It’s worth saying at the outset that not everything that went wrong last autumn – with Britain’s financial markets plunged into chaos and the pound sliding to the lowest level ever against the US dollar – can be laid at the door of Liz Truss.

There were plenty of other explanations for why the UK was vulnerable to a financial shock.

Most glaringly of all, the Bank of England was in the process of reversing quantitative easing, its epic bond-buying scheme. Financial markets were being asked, all of a sudden, to buy an extra slug of the government bonds they sold to the Bank years ago. It was a recipe for indigestion.

The economy was still recovering from the pandemic, from lockdowns and the supply chain disruption that ensued.

The public finances were in a particularly weak position, with the national debt having rocketed higher to finance the furlough scheme.

Much of the economic data at that point suggested the UK was worse hit than any other major economy and the pound was already sagging, dropping against the US dollar from early 2022.

Britain, in other words, looked vulnerable. There were bombs buried throughout financial markets. But here’s where things get less flattering for the former PM because there’s little doubt that what pushed the UK over the edge was the behaviour of Ms Truss and her team.

You can see as much when you look at various metrics of financial stress, from the strength of the pound to the height of government bond yields to the credit default rates which signal how likely the UK is to default on its debts.

All of them peaked in the days after the mini-budget. And all of them dropped back down again as it became clear the prime minister was going to resign. The pound has recovered and the main explanation behind higher government bond yields is not credibility but rising interest rates.

Ms Truss acknowledged her part in this on Monday when she said “it is certainly true that I didn’t just try to fatten the pig on market day; I tried to rear the pig and slaughter it as well. I confess to that.”

However, this is not an incidental problem. This was the major problem at the time. Markets were not passing judgement on the intricacies of the mini-budget and its various measures. They were making a bigger, simpler statement: we don’t trust you.

The problem wasn’t the Truss plan for growth, it was the ham-fisted nature of the way she was going about it. At a time when the UK (like many developed economies) was on the financial precipice, this tipped the country over the edge.

In one sense, those on the right of the Tory party should be reassured by such a verdict. What happened last autumn shouldn’t end the long-running debates over what we should do with taxes. It shouldn’t end the conversation about how to boost economic growth.

Indeed, Britain still faces many of the same issues it did last year: weak growth, high current account and budget deficits, a wayward set of economic policies and some big question marks about monetary policy.

Markets weren’t casing a verdict on all that stuff. It’s far more simple than that. They lost faith in the government. It squandered its credibility and for a few weeks we danced on the edge of crisis.

Then Liz Truss left office and the credibility crisis ended. Time to move on.

Business

Spending calculator: Which prices are rising and falling fastest?

Published

2 hours ago

January 15, 2025

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Spending calculator: Which prices are rising and falling fastest?

Inflation unexpectedly fell to 2.5% in December, following two consecutive months of increases.

Today’s inflation rate is above the Bank of England’s 2% target but lower than the forecast of 2.6% by economists.

This means that prices are still rising but at a slower pace than before.

But how does all of this affect the cost of groceries, clothing and leisure activities? Use our calculator to find out.

Which prices are increasing fastest?

Hair gel was the item with the largest price increase, with prices for 150-200ml rising by more than a third from £3.04 to £4.08.

The cost of olive oil also continues to rise. Prices for 500ml to one litre have risen from £7.40 to £9.11, an increase of 23%.

Olive oil has consistently had high price increases and experts have put that price rise down primarily to poor olive yields due to last year’s heatwaves in southern Europe.

However, they expect a significantly better harvest in the 2024-25 season, thanks to significant rainfall in Spain. The harvest could be double the size of last year’s, which may lead to lower prices in the coming months.

Food and drink products are responsible for seven of the 10 biggest increases since last year.

Top five price rises:

• Hair gel (150-200ml): up 34%, £3.04 to £4.08
• Olive oil (500ml-1litre): up 23%, £7.40 to £9.11
• Large chocolate bar: up 23%, £1.73 to £2.12
• White potatoes (per kg): up 20%, 74p to 89p
• Iceberg lettuce (each): up 20%, 82p to 98p

Overall, 45 of the 156 types of food and drink tracked by the ONS have actually become cheaper since last year.

Crumpet lovers have reason to celebrate. Prices for a pack of 6-9 crumpets have dropped by 9%, while another breakfast favourite, peanut butter, has seen an 8% drop.

Overall, 139 out of the 444 products in our database are cheaper than they were 12 months ago.

Top food price decreases:

• Pulses (390-420g): down 12%, 76p to 67p
• Crumpets (pack of 6-9): down 9%, £1.01 to 92p
• Peanut butter (225-350g): down 8%, £2.18 to £2.00
• Mayonnaise (390-500g / 420-540ml): down 7%, £2.20 to £2.04
• Canned tomatoes (390-400g): down 7%, 70p to 65p

Among non-supermarket items, kerosene has seen the largest price drop, falling by 17%.

What is the effect of long-term inflation?

The price changes described above compare the cost of items to where they were a year ago.

However, inflation has now been at high levels for an extended period of time.

The war in Ukraine, COVID, Brexit, and other supply chain pressures have all contributed to spiralling costs in recent years.

Inflation reached a 40-year high of 11.1% in October 2022.

While the headline inflation figure has come down markedly, any amount of inflation means that prices are still rising, and building on already inflated costs.

We’ve compared the costs of shopping items with what they were three years ago to see what the cumulative impact of inflation has been.

The biggest price rise for groceries over that time has been for olive oil (500ml to one litre), which has increased nearly two-and-a-half times (150%), from £3.64 to £9.11 in the past three years.

Iceberg lettuce is up by four-fifths, with one costing 98p now compared with 54p in December 2021.

Use our calculator to see how much prices in your shopping basket have risen in total since three years ago.

Who is worst affected?

Richard Lim, chief executive of Retail Economics, says: “It’s the least affluent households that are going to see much higher rates of inflation as they spend more of their income on food and energy.”

We’ll continue to update our spending calculator over the coming months so you can see how you’ll be affected.

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Methodology

The ONS collects these prices by visiting thousands of shops across the country and noting down the prices of specific items. There are upwards of 100,000 prices published every month, from more than 600 products.

The items that form the “official shopping basket” change each year to reflect how the purchasing habits of the population have changed. For example in March 2021, after a year of the pandemic, hand gel, loungewear bottoms and dumbbells were added, while canteen-bought sandwiches were among the items removed.

Where there aren’t the exact equivalent items available at a survey shop, ONS officials pick the best alternative and note that they’ve done this so it’s weighted correctly when the averages are worked out.

Shops are weighted as well, so the price in a major chain supermarket will have a greater impact on the average than an independent corner shop.

We will be updating these figures each month while the cost of living crisis continues.

During the pandemic, more of the survey was carried out over the phone and work is ongoing to digitise the system to be able to take in more price points by getting data from supermarket receipts, rather than making personal visits.

Data journalists: Daniel Dunford, Amy Borrett, Ben van der Merwe, Joely Santa Cruz and Saywah Mahmood
Interactive: Ganesh Rao
Design: Phoebe Rowe, Brian Gillingham

The Data and Forensics team is a multi-skilled unit dedicated to providing transparent journalism from Sky News. We gather, analyse and visualise data to tell data-driven stories. We combine traditional reporting skills with advanced analysis of satellite images, social media and other open-source information. Through multimedia storytelling, we aim to better explain the world while also showing how our journalism is done.

Business

Inflation falls slightly after two months of rises

Published

5 hours ago

January 15, 2025

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Inflation falls slightly after two months of rises

There’s been a surprise fall in inflation to 2.5% after two months of rises, official figures show.

It means prices are still rising but at a slower pace than before, according to Office for National Statistics (ONS) data for December.

Economists had expected the figure to remain at 2.6%, the level recorded in November.

Inflation is still above the 2% target of interest rate setters at the Bank of England but exactly as they had forecast in November.

What does it mean for interest rates?

It means there is more chance of an interest rate cut when the Bank’s rate-setting Monetary Policy Committee meets in three weeks’ time.

Before the inflation announcement markets thought there was a 62% chance of a cut but following the release that rose to 83%.

Beyond the headline consumer price index (CPI) measure of inflation are more figures that will be welcome news for the Bank and for Chancellor Rachel Reeves who has faced increasing pressure over her handling of the economy.

Two metrics closely watched by the Bank fell more than expected.

The persistently high services inflation, which is impacted by rising wages, fell from 5% a month before to 4.4%, far below the 4.9% forecast by economists.

Similarly core inflation – which tracks price rises without energy and food which can be volatile – dropped to 3.2% from 3.5% in November.

Inflation data takes on outsized significance in determining the likelihood of a rate cut as the ONS’s labour force data, which assesses the health of the jobs market, has by its own admission been unreliable.

Why has the inflation rate come down?

Inflation was slowed by restaurants and hotels putting up their prices by less than before. Tobacco prices also rose less than the same month a year earlier.

Acting to push up inflation was the growing cost of fuel and second-hand cars.

Much-needed good news

Wednesday’s data brings much-needed good news for the chancellor who has faced criticism over her handling of the economy after a week of market turmoil brought the pound down and government borrowing costs up.

Borrowing costs came down and the pound, which can measure investor confidence in the UK economy, was up to $1.22.

Responding to the data Ms Reeves said: “There is still work to be done to help families across the country with the cost of living. That’s why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.”

Business

Chancellor Rachel Reeves accused of refusing to ‘face up to her own failures’ amid market turmoil

Published

17 hours ago

January 14, 2025

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Chancellor Rachel Reeves accused of refusing to 'face up to her own failures' amid market turmoil

Chancellor Rachel Reeves has been accused of refusing to “face up to her own failures” by “jetting off to Beijing” during a week of market turmoil.

Shadow chancellor Mel Stride accused the chancellor of ducking difficult questions as the “government was losing control of the economy” while Ms Reeves visited China over the past week with a delegation including the governor of the Bank of England and the heads of HSBC, Standard Chartered and Schroders.

On Monday, both long-term 30-year and 10-year government borrowing costs rose, with the 30-year effective interest rate (the gilt yield) reaching a new high of 5.47% – a rate not seen since mid-1998.

The pound also hit a 14-month low, prompting questions over the chancellor’s future.

Politics latest: Chancellor defends her records

She received a slight reprieve on Tuesday morning as the pound recovered some loss and ticked up slightly to $1.22, while government borrowing costs dipped slightly.

But the Conservatives used Ms Reeves’s absence over the past week to attack her, with Mr Stride telling the Commons: “While the government was losing control of the economy, where was the chancellor?

“Her trip to China had not even begun when my urgent question was taken in the House last week, she was still in the country, but she sent the chief secretary rather than face up to her own failures.

“So can I ask (Rachel Reeves) why she chose not to respond herself? The chancellor, of course, ducked the difficult questions by jetting off to Beijing.

“I believe that in Labour circles, they are calling it the Peking duck.”

But Ms Reeves dismissed the criticism and vowed to stick to the fiscal rules she set out in the October budget – to get day-to-day spending through tax receipts and get debt down as a share of the economy.

“We remain committed to those fiscal rules and we will meet them at all times,” she said.

She also defended her trip to China, saying engaging with countries around the world will “deliver growth”, and said she brought up human rights issues with China.

“Leadership is not about ducking these challenges, it is about rising to them,” she told the Commons.

“And the economic headwinds that we face are a reminder that we should, indeed we must go further and faster in our plan to kickstart economic growth that plunged under the last government.”

The chancellor said her trip to China has meant greater access to the Chinese market for British firms and helped safeguard the UK’s national security.

New agreements were made on vaccine approvals, fertiliser, whisky labelling, legal services, automotives and accountancy to “unlock £1bn of value for the UK economy”, she said.

Ms Reeves said she raised the case of imprisoned British citizen and media tycoon Jimmy Lai with every minister she met in China.

She said she also raised concerns about Russia’s war in Ukraine, human rights, restrictions on rights and freedoms in Hong Kong and the “completely unjustified sanctions against British parliamentarians”.

“A key outcome of this dialogue is that we have secured China’s commitment to improve existing channels so that we can openly discuss sensitive issues and the ways in which they impact our economy because if we do not engage with China, we cannot raise our real concerns,” she said.

“This dialogue is just one part of our engagement with trading partners right across the world.”