Markets leap on reports of Liz Truss’s tax cuts U-turn. No time to dally | Nils Pratley

As PM ponders which measures to junk from mini-budget, pound rises by two cents against dollar

Financial markets don’t hang around. Primed for UK government U-turns, they leaped on the first reports that Liz Truss is now getting down to the task of deciding which tax measures – with the freeze on corporation tax to the fore – will have to be junked from the mini-budget. The pound rose by two cents against the dollar.

Gilts, or government IOUs, were also in demand on the whiff of a return to a version of fiscal responsibility. The yield on the 30-year gilt, which had been screaming crisis at 5.1% only 24 hours earlier, descended to 4.5% – to the great relief, one assumes, of the governor of the Bank of England, whose vow to stop buying gilts next week now looks slightly more credible. The message to the UK from markets was unmistakable: here is your escape chute, now please take it.

Over in Washington, Kwasi Kwarteng insisted he was going nowhere and that “our position hasn’t changed”, but the jig is surely up. A U-turn is being priced in, and the market action will be furious if expectations are disappointed. International investors simply won’t fund the chancellor’s original mini-budget on terms that make sense for the government; the price in higher borrowing costs, for households and businesses, would wipe out any benefits from the hopeful go-go growth stuff.

The next stage in the market end of this drama will inevitably be a demand for quick resolution. The 31 October date for the next fiscal event is too far away and George Osborne’s point is almost unanswerable: “Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable U-turn on the mini-budget,” said the former chancellor.

Quite. Never mind the hit to political egos and careers, the whole process will go down easier without another round of gyration in gilt prices. Time to get on with it.

Climate minister flunks test on Bulb nationalisation

Business secretary Jacob Rees-Mogg and climate minister Graham Stuart leave 10 Downing Street.
Business secretary Jacob Rees-Mogg and climate minister Graham Stuart leave 10 Downing Street. Photograph: Neil Hall/EPA

Given all of the above, one assumes Jacob Rees-Mogg, business secretary and occasional Guardian columnist, hasn’t had time to get his head around the lessons to be drawn from the nationalisation of Bulb a year ago. Instead, the climate minister, Graham Stuart, was rolled on to give the government’s official response to good recommendations from the business select committee a couple of months ago. On two fronts, Stuart flunked it.

Why, we’ve all been wondering, didn’t the government order the administrators of Bulb to put hedging contracts in place to cover Bulb’s forward energy purchases? All energy supply companies hedge – it is how the industry works. When gas prices climbed even higher after Bulb’s failure, the costs to the public purse rose massively.

Actually, we know why the government hesitated. The Treasury deemed hedging to be “too risky”, Kwarteng told the committee in May when wearing his former ministerial hat. So, given that the approach backfired, the real question is whether the government would do things differently if it finds itself nationalising another energy company? Stuart just gave a non-answer about Bulb’s power purchasing strategy being kept under “close and constant review”.

Worse, he dodged the pressing question of who will pick up the tab for rescuing Bulb. Since £4bn is a credible estimate of the final loss before the likely sale to Octopus Energy, it’s not a trivial matter. The liability can either be swallowed by the public purse, or ministers can exercise their right under the “special administration regime” to shove the cost on to everybody’s energy bills. If it’s the latter, it equates to about £150 for every household.

Again, the government ducked for cover in its formal answer. It intends to use “the shortfall mechanism placed on suppliers”, which is another way of saying a levy would be added to bills; the only qualification is that the timing hasn’t been decided.

Come on, it would be absurd to hit consumers with the cost of Bulb’s blow-out when ministers are desperately trying to remove items from bills. As the committee chair Darren Jones said, it would also be regressive; better to take the hit via general taxation.

Many reforms to the energy market are complicated – not least the vital question of where to set the revenue cap on renewable and nuclear generators so that it extracts a fair deal for consumers but also encourages investment. Bulb is supposed to be the easy bit. The government needs to rethink.


Nils Pratley

The GuardianTramp

Related Content

Article image
In 2022 Liz Truss tried to bin economic orthodoxy – but what is it?
Rishi Sunak soon rowed back from his predecessor’s chaotic experiment, reasserting the seven pillars of UK Treasury wisdom

Larry Elliott Economics editor

27, Dec, 2022 @3:00 PM

Article image
The Bank of England governor plans to stick – but it is a gamble
Andrew Bailey’s tough stance fuels the danger that ending one form of emergency intervention creates a need for a bigger one

Nils Pratley

12, Oct, 2022 @6:10 PM

Article image
OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget
Predictions handed to chancellor expected to paint gloomy picture for UK economy amid sweeping tax cuts

Richard Partington Economics correspondent

07, Oct, 2022 @5:20 PM

Article image
Fresh storms threaten Bank of England’s high-wire act
Index-linked gilts join list of things Bank is prepared to buy as dreaded phrase ‘material risk to financial stability’ returns

Nils Pratley

11, Oct, 2022 @6:35 PM

Article image
Pound falls below $1.09 for first time since 1985 following mini-budget
Sell-off as investors take fright at prospect of surge in government borrowing to cover huge tax cuts

Richard Partington and Angela Monaghan

23, Sep, 2022 @2:03 PM

Article image
The mini-budget that broke Britain – and Liz Truss
From soaring mortgage costs to a sterling slump, the fiscal event set off a chain of chaos that led to PM’s downfall

Richard Partington Economics correspondent

20, Oct, 2022 @4:22 PM

Article image
Bank of England completes sale of £19bn emergency bond purchases after mini-budget
Bloomberg estimates Bank made profit of £3.5bn after intervening to prevent run on pension funds

Richard Partington Economics correspondent

12, Jan, 2023 @6:33 PM

Article image
Meltdown averted – but risk of repeat is obvious question Bank needs to answer | Nils Pratley
BoE has spelt out what was at stake when events last week turned extreme, though surely not unimaginable

Nils Pratley

06, Oct, 2022 @6:56 PM

Article image
Cliff edge looms for UK’s financial system
BoE’s move to end bond buying is a big gamble given the magnitude of the bind Britain is in

Richard Partington

12, Oct, 2022 @6:55 PM

Article image
Public patience is wearing thin. Ofwat must wield the big stick | Nils Pratley
Putting water companies on the naughty step and doling out tame financial penalties in not enough

Nils Pratley

08, Dec, 2022 @7:25 PM