Economic Illiteracy

Izzy Finkel

For a mini-budget it provoked an outsized reaction. As the new chancellor announced his plans for tax cuts, the pound fell and kept falling. With the currency wallowing near a 37-year low against the dollar, spare a thought for Liz Truss: if you profess yourself a free-market ideologue, you ought to register some contrition when the market says your policies stink.

The new prime minister’s supporters were valiantly trying to stopper their ears. ‘With one move, Britain’s competitiveness, its investor friendliness and its attractiveness to top talent has been hugely amplified,’ Allister Heath wrote in the Telegraph. Actual investors don’t share his high spirits. They’re dumping UK government bonds at a record pace, sending five-year yields soaring on Friday by the biggest jump ever. The kind of ‘competitiveness’ that’s achieved by compensating bondholders more generously to buy your debt is competitiveness secured at a very high price.

Credit markets run on belief and the incredulity provoked by the chancellor exposes the Treasury to a perilous feedback mechanism. The government’s plans were expensive even before they managed, through the sheer power of their own economic illiteracy, to undermine confidence and thereby raise the cost of the external borrowing that will pay for them. Not only is the budget unjust – Kwasi Kwarteng promised to make the country more unequal through income-tax changes that deliver 50 per cent of gains to the top 5 per cent of earners; they benefit the south at the expense of the north, men at the expense of women, and the rich at the expense of us all – but the new administration can’t even get right-wing orthodoxy right.

The budget’s critics are the same bankers whose bonuses it vows to plump. The verdict from the markets was clear enough to most observers; for the rest, major banks’ in-house economists and strategists put the sentiment into words. ‘I can’t believe what we have just seen,’ an analyst at Bank of America wrote: a massive fiscal stimulus with ‘no credible plan to pay for it’. Truss said she was going for growth; Eurasia Group preferred ‘going for broke’. Perhaps most damning of all, Goldman Sachs economists told clients they’d be leaving their GDP growth forecasts unchanged as a result of the day’s announcements. A £221 billion plan widely decried as short-termist is also going to achieve nothing in the short term.

It’s hard to understand who this costly bonfire of credibility is meant for. Not the bankers whose bonuses have been unshackled: they know that a weaker currency means their pay is worth less. Not homeowners, though they are disproportionately represented among the 81,326 Tory members who inflicted Truss on the nation: the average house buyer’s £2500 stamp-duty saving evaporates with the rise in interest rates that will be necessary to tame inflation from a weaker pound. Kwarteng’s own salary is at least £2000 chunkier after the income-tax cut he’s delivered himself, but with such riches the chancellor can surely afford to spare some thought for his reputation.

The refrain in the BBC coverage – ‘the government has defended its sweeping range of tax cuts from criticism that they favour the better-off’ – misses the mark. It’s a favour most would rather do without. It’s no longer unlikely that the pound reaches parity with the dollar, which would at least simplify the mental arithmetic on a holiday to the US if you could afford it.

The Bank of England, which will be forced to hike rates next month, seems to be keeping its sense of humour. It chose the day of the chancellor’s announcement to remind us that the deadline for a full shift to polymer bank notes is looming: soon your money won’t be worth the paper it’s printed on.


  • 28 September 2022 at 11:49am
    Graucho says:
    This from the BoE
    "To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury."

    Are we buying back our own IOUs with more IOUs? Someone please unconfuse me.

    • 30 September 2022 at 4:45pm
      sterilepromontory says: @ Graucho
      The bank is putting a floor under the price of gilts. If successful, the gesture itself will prevent further selling of gilts by people who think their price could fall indefinitely. I assume it's paying for the gilts with cash reserves. BofE, like Fed, is market-maker of last resort. But, yes, both gilts and cash are government liabilities.

    • 1 October 2022 at 12:31am
      Graucho says: @ sterilepromontory
      Thank you for the explanation. So to support the price of 30 year bonds which are keeping money out of circulation, the bank has been forced to buy them and put more money into circulation, which by some theories will do little to dampen the current inflationary fire.

  • 30 September 2022 at 7:19am
    steve kay says:
    Thanks for your synopsis of act 1, Izzy. Now, what happens next, and how does it end?

  • 30 September 2022 at 9:15am
    Camus says:
    The news is that it's time for another economic disaster. I recommend "The Big Short" and "Margin Call" for some insights into the workings of Capitalism when markets are in the low yield mode. The first movie tells about 2008 and the Lehmann collapse - the mortgage fiasco - and the second is an account of a company that looks suspiciously like Lehmann as it demolished itself. The movies show that such disasters always benefit a few very wealthy speculators who move Billions into new projects whenever it suits them. Jeremy Irons plays the part of a multi-billionaire in "Margin Call" who fires hundreds while he philosophies about the booms and crashes of the last two hundred years.