Britain has been through the wringer since last month’s mini-budget. Not only was Kwasi Kwarteng’s not-so-mini plan the trigger for a domestic financial crisis and higher mortgage costs for millions, it lit the blue touchpaper for his political downfall and that of his close friend, Liz Truss.
It was all supposed to be so different. Truss had spent the summer promising to cancel the rise in national insurance and corporation tax in the Conservative leadership race. Those pledges, plus her popular energy price freeze, would have been plenty for the new government to announce in the supposedly stripped-back tax and spending event.
Instead, it was a bumper, ideologically driven occasion that left Truss’s defeated political rival, Rishi Sunak, vindicated. As he had warned, there was indeed a run on sterling, gilt market freefall and spooked global investors. Even the International Monetary Fund (IMF) intervened with a stunning public rebuke.
Rarely has a budget caused such political and economic damage. Not even George Osborne’s “omnishambles” budget, when he was forced in 2012 to back down from the pasty tax, comes close.
Initially hailed by her supporters as “at last, a true, Tory budget”, the “mini” fiscal event included the biggest tax cuts since 1972, funded by a vast expansion in borrowing, and with only a vague attempt to argue it could be paid for by an unlikely economic boom.
Economists balked at the idea that £45bn of unfunded tax cuts for the rich could ever catalyse economic growth and pay for itself in the way the government argued. Not just critics from a supposed “anti-growth coalition”, but also from Goldman Sachs, Bank of America and the IMF. With inflation at a 40-year high, rising recession risks and higher borrowing costs across advanced economies, it was a big gamble at the wrong moment.
The international reaction was swift and damning. The pound fell to its lowest-ever level against the dollar, while gilt prices collapsed. Over four days, long-dated government bond yields – which move inversely to prices – rose by more than the annual increase in 23 of the past 27 years.
After decades with a reputation for sound economic management – though severely tested by Brexit – former close allies compared Britain to an “emerging market turning itself into a submerging market” amid the financial market implosion. Some have likened the meltdown to the Suez Crisis of 1956, after which Britain’s power on the world stage was permanently diminished.
The Bank of England intervened with a promise to buy up to £65bn of government bonds to save funds responsible for managing money on behalf of UK pensioners from collapse. Andrew Bailey, the Bank’s governor, was not immune to criticism for the choppy market conditions. The central bank was blamed in some quarters for a small rise in interest rates the day before the mini-budget, disappointing investors who had bet on a bigger move.
But despite Team Truss reaching for comparisons to other countries suffering the same global economic shocks unleashed by Russia’s war in Ukraine, City economists spoke of a “moron premium” for Britain. Bond yields were rising in other G7 countries, but not by anywhere near as much as in the UK.
It has come with a heavy price. More than 5 million families could face an average rise in annual mortgage payments of £5,100 between now and the end of 2024, according to the Resolution Foundation thinktank. Though partly caused by global problems, almost a quarter of the sum – £1,200 – is thought to be a result of the moron premium. City economists reckon this would have far outweighed any benefit from Kwarteng’s tax cuts.
After promising “growth, growth, growth”, the likeliest outcome of Truss’s failed experiment is, however, likely to be a rerun of the 2010s austerity, as the government scrambles to repair the damage to Britain’s international standing by promising to balance the books.
Kwarteng’s replacement, Jeremy Hunt, will look to push ahead with a debt-cutting plan, which is still pencilled in for 31 October, although the leadership competition to replace her could force a postponement.
If it does go ahead as planned, most analysts expect the Halloween event to contain ghoulish measures to rein in public spending. Benefits could be increased below the rate of inflation, even as households face the biggest hit to their living standards in half a century, with the poor hardest hit.
For Truss there has been the steepest of political prices to pay for her budget gamble. The market turmoil has proven a powerful narrative for the mass of critics in her party who never wanted her as leader. On contact with free markets, the reputation of her free-market brand of libertarian economics has been trashed.
It took just six minutes on Monday for Hunt to announce the most stunning U-turn in modern British political history. Almost every policy Truss campaigned on was unpicked. After ditching Trussonomics, it was only going to be a matter of time before the Tories got rid of its architect too.