No 234: A Crazy Month of Events

 NOW that Liz Truss's government is over, this is a good time to summarise the events of the past month, though an economic lens.

The Mini-Budget: Liz Truss and her Chancellor (Kwasi Kwarteng) announce a radical budget, based around tax cuts, many of them favouring the rich, worth £60bn, and spending to support household energy bills of at least £100bn. They refuse to consult with the established authority set up to overview and approve government financial plans - the OBR (Office of Budget Responsibility). The government suggest its plans will help increase UK's GDP Growth Rate to 2.5%, but this is not verified by the OBR.

The Market Reaction: there is extreme doubt in the calculations behind the mini-budget, whether the Growth  Rate will increase that much, how the borrowing will be paid back, and what the future impacts of that borrowing might be. As a result currency markets begin to sell the Pound due to this lack of confidence in the UK economy, and the Pound-Dollar exchange rate falls to almost £1 to $1. Meanwhile, buyers of bonds begin to insist on higher interest rates to lend to the UK government, pushing the rate of 10 Year UK Gilts from less than 1% in January to over 5%.

The Pension Fund Near Collapse: due to complex deals and contracts, the changes in bond rates trigger Pension Funds to get into severe trouble, needing to find huge amounts of money to back themselves up. There is real fear that millions of people will lose their pensions as their funds get into danger of going bust.

The Bank of England Rescue: this danger is so severe that the Bank of England intervene, spending up to £5bn a day on UK government bonds, pushing the rates on them back down and thereby saving the pension funds.

The Rise in Mortgage Rates: banks start to fear that the Bank of England will need to raise its base rate of interest to protect Pound Exchange Rates. They withdraw their new mortgages from the housing market, and reintroduce them at much higher rates. This affects many households, whether they are buying a house for the first time, or need to renew current mortgages.

The First U-Turn: the government withdraws its plan to get rid of the 45% top income tax rate. This would have affected the 160,000 highest earners in the UK, and was a very unpopular suggestion, despite the government's argument that the tax cut would "trickle down" to benefit the rest of the economy. 

Poor GDP and Wage Figures: in a big surprise, GDP Growth from August was announced as being -0.3%. Nobody really expected a negative figure until next year. Real wage growth in August was also negative - the high rate of inflation being far above average wage rises.

The Chancellor Is Sacked: after massive pressure, Kwarteng loses his job. Some commentators say that it seems unfair to blame the ex-Chancellor completely for the turmoil since Liz Truss argued for all these economic policies when she was campaigning to be leader.

The Second U-Turn: very soon afterwards, it is announced that the plan to keep Corporation Tax at 19% has been abandoned, and instead it will go up to 25% as was previously planned.

The New Chancellor Changes Almost Everything: the new Chancellor, Jeremy Hunt is a more moderate and experienced figure. He announced that almost all of the tax cuts from the mini-budget will now not happen. The main one to remain is the cancellation of a rise in National Insurance. A bigger surprise is a reduction of the help given to households for energy bills. This was originally due to last for two years, but has now been reduced to just six months.

Very High Inflation Figures: inflation in September was 10.1% , up from 9.9% in the previous month.

Liz Truss Resigns: as well as economic pressures, political unrest starts to build up. After only 44 days, Truss resigns, becoming the shortest serving Prime Minister in UK history.

Stability returns but... : the combination of Jeremy Hunt and the new PM Rishi Sunak are enough to calm the markets. Currently the Pound is trading at $1.16, and the 10 year bond rate is around 3.5%.

The next big event will be on November 17th, when a full financial statement will be made. In direct reversal of the AD boosting, growth focused intent of the mini-budget, everyone expects a budget of austerity. Apparently, a shortfall of £40bn in government finances needs to be corrected, and it is expected that half of this will be from tax rises, and half from government spending cuts.