Former chancellor Kwasi Kwarteng has said he warned Liz Truss she was going too fast with her ill-fated economic plans.
In his first interview since he was sacked by the then PM, Mr Kwarteng told TalkTV he had warned her to “slow down” after September’s mini-budget.
He said he told her it was “mad” to fire him and she would only last “three or four weeks” if she did.
“Little did I know it was only going to be six days,” he added.
Mr Kwarteng was dramatically fired by Ms Truss in October, two weeks after their tax-cutting mini-budget sparked turmoil on financial markets.
After abandoning almost all of the plan in a bid to stay in power, she announced her resignation a few days later after support from Tory MPs ebbed away.
Speaking to TalkTV Mr Kwarteng said that he had warned Ms Truss about going at a breakneck speed with economic measures after the mini-budget.
“She said, ‘Well, I’ve only got two years’ and I said, ‘You will have two months if you carry on like this’. And that is, I’m afraid, what happened.”
He also said: “I think the prime minister was very much of the view that we needed to move things fast. But I think it was too quick.”
In the interview he acknowledged he had to “bear some responsibility” for the pace of the changes, which were “too quick”.
He also revealed he found out he was going to be sacked when he saw a journalist tweeting about it while he was in the car going to Downing Street, after being summoned back from a trip to the US.
He said he had told her: “Prime ministers don’t get rid of chancellors.”
The former chancellor said he did not think the prime minister could fire him “just for implementing what she campaigned on.”
At the annual meetings of the World Bank and IMF this month, lobbyists circulated photographs of Ghana’s Finance Minister Ken Ofori-Atta sitting together with Britain’s Chancellor of the Exchequer Kwasi Kwarteng.
Before the end of the week, Chancellor Kwarteng was on a flight back to London, forced to cancel his participation in the rest of the summit because his job was at risk. Within days, the British government had collapsed, and Prime Minister Liz Truss had joined Kwarteng on the back benches.
This week Ghana’s Ofori-Atta faces a rebellion from MPs in his own party, calling for his resignation and accusing him of mismanaging the economy. The risk that London’s political drama plays out similarly in Accra must worry Ofori-Atta and President Nana Akufo-Addo.
Common shaky ground
On the surface, both men are relatively similar; Ghanaian economists and bankers are in charge of the fiscus of two countries with a shared colonial experience.
However, there is a deeper layer to the symbolic ties between the Chancellor and the Minister.
Kwasi Kwarteng’s woes are universally acknowledged to have stemmed from his botched mini-budget. At a time of widespread anguish about inflation and interest rate hikes in America, the mini-budget, with its ideological flourish of “the largest tax cuts since 1972” and unfunded growth pills, rang of neoliberal excess.
Interestingly, the heaviest backlash came from the markets. A Conservative Prime Minister and her Chancellor didn’t expect the blowback to come from the financial heartlands.
After all, caps on bankers’ bonuses were to be scrapped, and the highest tax rate (for the top 1.1%, roughly a third of whom work in financial services) was to be brought down from 45% to 40%. Planned corporation tax increases were dropped.
And a raft of regulations bogging down business was to be cut’ more free zones, with even fewer taxes and regulations, created. A Conservative newspaper, the Daily Mail, crooned: “A Tory budget at last!”
Surely the grandees of the historic square mile of central London, the fount of global capitalism, would jump on board? The charm offensive of the Chancellor, himself a JPMorgan alum and longtime finance guy, must have seen to that?
They didn’t.
Analysts deciphered the consequences of a mini-budget to include a massive spate of borrowing at a time of rising interest rates, an undoing of the Bank of England’s efforts to tackle inflation, and a squeeze of middle-class incomes (in the ~£60,000 to ¬£120,000 band), with potential effects on demand.
The market took a longer horizon and broader-demographic perspective. That aligns with the increasingly nuanced view of the link between pro-growth tax cuts and market benefit that has emerged from the vast literature on the Trump tax cuts.
So, the markets revolted.
Yields on long-term government securities, a measure of investors’ sense of the state’s creditworthiness and likely cost of future borrowing, rose by a staggering 150 basis points. The pound sterling sank immediately.
Lunging for stability, the blindsided Bank of England announced a £65 billion program to buy back government bonds caught in therout, reversing an earlier plan to sell £80 billion more into the market. Only the wholesale repudiation of the Kwarteng-Truss mini-budget could calm the markets.
Off the straight and narrow
It is mainly the short-lived tenor of Britain’s most recent episode of fiscal adventurism that marks it out from Ghana.
In their six years in power, the ruling party in Ghana has sought to transform the country’s finances into a rollercoaster capital market play. It has devised various unprecedented fiscal devices to do so.
It has securitised future tax streams, grabbed the cash up-front, and splashed on massive capital and welfare projects. The securitisation extravaganza has touched taxes meant to fund the educational sector, energy sector levies, and road taxes.
As future revenue streams have been packaged into products on the capital markets and sold and spent upfront, the government’s budget has become rigid, unable to respond to international pressure. The government’s love for fiscal gaming encouraged support for a domestic debt securities market (GFIM) in Ghana.
At its birth in 2015, total trade turnover hovered around cedis 5 billion in local currency units. In the first nine months of this year, trade volumes exceeded cedis170 bn.
Even adjusted for inflation, it has grown ten times, but almost all securities traded are government-issued. This means they reflect more than anything the government’s unrelenting use of the capital markets to fund a degree of fiscal expansion never before witnessed. And not just domestically.
From tripling Eurobond issuances, to opening up domestic debt to foreign investors, Ghana’s government took capital market liberalisation to every possible extreme. At one point, Ghana ranked number five worldwide for foreign ownership of domestic debt.
International capital maestros like Michael Hasenstab, at the height of his “Emerging Markets Bond King” reputation, piled in. In 2017, Ghana rode on the back of such powerbrokers to launch Africa’s largest-ever dollar-denominated domestic bond.
Bills, bills, bills
All this fiscal brinksmanship came at a cost: debt servicing.
Today, Ghana is on course to spend nearly 60% of all government revenue just dealing with debt. This is up from about 10% a decade and a half ago when the international community forgave a chunk of Ghana’s debt pile from previous decades of excesses.
Now, Ghana’s capital market friends have brought out the whips. They have shut her out of the market and are dumping the bonds they bought previously.
Their actions have finally driven Ghana to the IMF for much-needed disciplining. Inflation is hovering around 40% and the cedi has plunged from about 5.8 to the dollar at the beginning of the year to more than 14.5 to the dollar.
It seems that the government’s bubbly enthusiasm for capital market devices, and the massive hoard of fees and commissions (some shared by companies founded by the Finance Minister and his deputy), have not been sufficient to keep the love story going.
These days, far from endearing politicians to the markets, neoliberal fiscal adventurism is a sure way to invite their painful censure.
The gilt market was returned to its pre-Liz Truss mini-budget level shortly after Rishi Sunak was declared as Tory leader.
Gilts, or UK government bonds, are an essential part of our financial markets.
Following the mini-budget, the Bank of England was forced to intervene to prevent the gilt market from worsening.
UK government bonds were already staging a rally as Monday began and this rally became more aggressive as it became clearer that Rishi Sunak would likely face an unopposed run to the top job, business reporter Sharon Marris writes.
The 30-year gilt had been pummelled after Kwasi Kwarteng’s mini-budget in September but it recovered late on Monday to levels seen before Mr Kwarteng’s tax-cutting plans had prompted a markets meltdown.
Investors are betting that Mr Sunak, a former chancellor with a background in finance, will stick with the economic policies announced by current chancellor Jeremy Hunt, which have calmed the markets in recent days.
The former deputy governor of the Bank of England says the future Prime Minister will have to keep Jeremy Hunt as chancellor.
Prof Charlie Bean has been telling BBC Radio 4’s World At One programme that appointing a new chancellor would “generate volatility”.
He says any change to Hunt’s economic programme would be “problematic”,
“It is a significant tying of hands.”
Prof Bean praises Hunt for doing “quite a good job” of calming the markets and setting out a broad direction by “unwinding two-thirds” of the cost of Kwasi Kwarteng’s mini-budget which caused financial chaos last month.
He says there could be some “tweaking at the margins” of Hunt’s plans – but it would be “problematic” if the new PM came in and said they wanted a more significant change in the economic package ahead of the financial statement on 31 October.
Surging inflation means the cost of servicing government debt hit a record level last month, according to figures from the ONS, which also reported that consumers were now back buying less than they were before the COVID pandemic.
The latest official data on the state of the public finances and consumer spending makes for grim reading as the country awaits its next leader.
The report pointed to a record debt interest payment total of £7.7bn for the month of September – much of which could be attributed to rising inflation as a quarter of payments on the £2.4trn debt mountain are linked to the RPI measure.
Government spending increased by £5.8bn to £79.3bn as a result of the jump in interest, the ONS said.
It separately revealed that retail sales volumes fell 1.4% on the previous month, meaning that “consumers were now buying less than before the pandemic”.
The declines was far worse than the 0.5% decline that economists had forecast.
It was likely to reflect not only the deteriorating cost of living crisis that has squeezed consumer budgets this year but also the impact of store closures for the funeral of the Queen.
Image: Many retailers closed their stores out of respect for the Queen on the day of her state funeral on 19 September
The borrowing figures cover the start of Kwasi Kwarteng’s short and turbulent tenure as chancellor.
He was appointed on 6 September before being fired weeks later following the market chaos that followed the tax giveaway mini-budget on 23 September.
While the contentious measures have now been largely overturned by the new Chancellor Jeremy Hunt, the backlash temporarily raised the interest rate demanded by investors to hold UK government debt.
That has fed into fixed-rate mortgage costs.
Image: Much of the borrowing – the second-highest September total on record – came while Kwasi Kwarteng was chancellor
It also led to the pound falling to a record low against the US dollar– with continued sterling weakness adding to the country’s import costs and therefore inflation.
The chancellor’s medium-term fiscal plan, due on Halloween, will aim to restore market confidence in the UK’s public finances.
But it will now fall under the oversight of a new PM following the resignation of the ill-fated mini-budget’s architect, Liz Truss.
The Tories expect their new leader to be in place in a week’s time – days before Mr Hunt is due to outline how he plans to balance the books while also maintaining a measure of support for struggling households and businesses.
A survey by the City watchdog found that almost 32 million people, or 60% of adults, were already finding it a heavy burden or somewhat of a burden to pay their bills because of the growing cost of living crisis.
The Financial Conduct Authority’s financial lives survey, which was taken between February and June, said the total was up six million from 2020 when the economy went into lockdown to fight the COVID-19 pandemic.
Another closely watched survey, compiled by GfK, found that confidence among British consumers remained close to the lowest level on record last month.
The chancellor said in the wake of the ONS data: “Strong public finances are the foundation of a strong economy.
“To stabilise markets, I’ve been clear that protecting our public finances means difficult decisions lie ahead.
“We will do whatever is necessary to get drive down debt in the medium term and to ensure that taxpayers’ money is well spent, putting the public finances on a sustainable path as we grow the economy.”
Earlier today, Armed Forces Minister James Heappey stated that the mini-budget was approved by the entire cabinet.
He stated that the full cabinet had agreed to it before it was submitted to the Commons, and he also continued to make the case for the Ministry of Defence to preserve its promised money, despite the fact that Chancellor Jeremy Hunt was expected to tell all government departments to find savings.
Now, Pat McFadden, Labour’s shadow chief secretary to the Treasury, has said the “frank admission” that ministers approved the disastrous mini-budget showed the Conservatives had “lost all economic credibility”.
“They couldn’t run a bath let alone a major G7 economy,” he said.
“They have put a Tory premium on people’s mortgages and reduced the UK to nervously watching its gilt yields day by day.
“Labour will match the financial stability the country needs with a proper plan for growth based on the efforts of the whole country, not tired and failed trickle-downeconomics.”
Prime Minister Liz Truss went into “waxworks mode” in the Commons Wednesday and her performance lacked “emotional intelligence”, according to body language expert Judi James.
Speaking to Sky News today, Ms James said the body language of the prime minister was “hard to fathom” and “bizarre”.
Analysing the scenes, she said: “I would imagine the best way to describe it would be a lack of intelligence.”
Ms James went on to say Commons leader Penny Mordauntlooked like “somebody on a sinking ship for over an hour armed with a teacup” before Ms Truss “bounced in” and “started laughing and chatting behind her”, which was “strange”.
“There was no bonding going on between the two women,” she said.
The body language expert said the Tory leader then fell into “waxworks mode” and did not join in, before adding that her facial expression became “frozen” and her eyes “looked like somebody who was fighting sleep”.
“You know if you go to see a bad play or go to the cinema and you can feel your eyes beginning to droop. It was that kind of blinking going on,” Ms James continued.
“And then the only other sign we got from her body language is what I call her ‘poker tell’.
“When she doesn’t like something her chin moves from side to side.
“But apart from that, very little endorsement signals going on. Normally we’d expect to see her looking at Hunt and nodding, but she just sat there looking glazed and looking at the opposition but without any real focus .”
Asked if Ms Truss’s body language gave a hint as to whether she was determined or defeated, Ms James added: “She is determined in the brain cells, but I think generally her body is telling her she is defeated.”
Liz Truss has insisted that she will lead the Conservatives into the next general election, despite U-turns that have left her fighting for her authority.
The Prime Minister apologized for making mistakes after new chancellor Jeremy Hunt scrapped almost all of her tax-cutting proposals to calm market turbulence.
She went on to say that her month-old premiership “hasn’t been perfect,” but that she had “corrected” flaws.
And she said it would have been “irresponsible” not to change course.
In an interview with the BBC, she said she was still committed to boosting UK economic growth,but acknowledged it would now take longer to achieve.
“I remain committed to the vision, but we will have to deliver that in a different way,” she said.
It comes after a dramatic day at Westminster after Mr Hunt announced that nearly all the tax cuts announced at last month’s mini-budget would be scrapped.
The decision has been welcomed by investors but has left Ms Truss’s economic agenda in tatters only weeks into her time in No 10.
Liz Truss told the BBC’s Chris Mason she was “sorry for the mistakes that have been made”.
In her interview, Ms Truss said she accepted responsibility for going “too far, too fast” – and she wanted to “say sorry for the mistakes that have been made”.
She added that she remained committed to a “low tax, high growth economy” – but preserving economic stability was now the “priority”.
“I do think it is the mark of an honest politician who does say ‘yes, I’ve made a mistake. I’ve addressed that mistake. And now we need to deliver for people.
“It would have been completely irresponsible for me not to act in the national interest in the way I have.”
Shadow Treasury minister James Murray said the PM’s apology “after weeks of blaming everyone else” would not “undo the damage” caused by her mini-budget.
“No sorry can change the fact that this crisis was made in Downing Street but is being paid for by working people,” he added.
IMAGE SOURCE, JESSICA TAYLOR/UK PARLIAMENT Image caption, Liz Truss sat in the Commons for half an hour as Mr Hunt outlined the U-turns to MPs
Ms Truss watched on silently as Mr Hunt delivered a Commons statement to explain to MPs why the economic strategy, outlined last month by Kwasi Kwarteng, was being torn up.
The chancellor warned that “decisions of eye-watering difficulty” on tax and spending remain ahead of an economic statement on 31 October, when he will give further details of a plan to reduce the UK’s debt burden.
He said further windfall taxes on energy companies – a policy repeatedly rubbished by Ms Truss during her Tory leadership campaign – could not be ruled out, along with changes to the pension triple lock.
Ms Truss refused a Labour request to explain the U-turns to MPs herself before Mr Hunt’s statement, with Commons leader Penny Mordauntsaying the PM had been “detained on urgent business”. The prime minister later arrived in the Commons taking her seat beside Mr Hunt before he began his statement.
Labour leader Sir Keir Starmer accused the PM of leaving an “utter vacuum” in government, while one of his MPs jibed she had been “cowering under a desk”.
In total, £32bn of the £45bn in tax cuts announced at last month’s mini-budget have now been ditched, including plans to cut the basic rate of income tax from 20p to 19p from April.
Cuts to dividend taxes and VAT-free shopping for international tourists have also been scrapped, along with a freeze on alcohol duty rates.
Leadership threats
The government’s energy support package, a policy repeatedly championed by Ms Truss in defence of her premiership, will also be scaled back after six months.
The reversals have prompted some Tory MPs to talk privately about how Ms Truss could be ejected from office, despite party rules preventing a formal leadership challenge for a year.
Tactics reportedly under consideration include submitting no-confidence letters in a bid to force party bosses into a rule change or changing the rules to allow MPs to bypass party members and pick a new leader themselves.
Liberal Democrats leader Ed Davey called for a general election, telling the BBC “the damage has already been done” by the mini-budget.
Shadow Chancellor Rachel Reeves echoed calls for Ms Truss’s removal, telling BBC Breakfast the “only thing left from the Prime Minister’s plan is higher mortgage rates and higher bonuses for bankers”.
Ms Reeves said Labour would fund a longer-running energy bill support package by scrapping non-dom status.
However, there is little agreement over who should take over from Ms Truss if she is removed.
Defence Secretary Ben Wallace has quashed rumours that he could replace Ms Truss should she resign.
Speaking to the Times, he said he will be holding on to his current job and accused Tory MPs of playing “political parlour games”.
Five of the PM’s own MPs have called publicly for her to resign, with others briefing journalists that they think her time in office is up.
Liz Truss has departed the chamber after only being there for about a half hour.
Before leaving, the Prime Minister, who was nowhere to be found in the Commons duringan urgent question from Labour on the economy earlier this afternoon, heard her new chancellor, Jeremy Hunt, defend the government’s new economic plan.
Earlier today, the government scrapped almost all of its tax-cutting measures in the mini-budget from just over three weeks ago.
Market estimatesfor the Bank of England’s bank rate are at their lowest since the mini-budget, which is excellent news for individuals with mortgages.
Market forecasts peaked soon after the mini-budget at 6.1%, but have since dropped to just over 5%.
It was just three weeks ago the then-Chancellor Kwasi Kwarteng unveiled his tax-cutting mini-budget to MPs, which caused economic turmoil in the UK,as the value of the pound plummeted.
Today, Mr Hunt said there “were mistakes” in last month’s announcement, and pointed out some taxes may have to rise and others might not fall as much as planned.
The BoE is due to announce its next decision on interest rates, which will impact household mortgages, on 3 November and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%, both of which would be much bigger moves than usual.
The UK government will reverse “almost all” of the tax cuts announced in last month’s mini-budget in an emergency move aimed at calming investors.
New chancellor Jeremy Hunt said the strategy, which includes keeping income tax at current levels, would bring in £32bn.
The move comes after economists warned the original plans would leave a £60bn black hole in the public finances.
Mr Hunt said his priority was to restore “economic stability”.
The government’s mini-budget on 23 September sparked alarm among investors. The then chancellor Kwasi Kwarteng announced huge tax cuts on top of a plan to subsidise energy prices for two years. He did not give any detail on how the the tax cuts and extra spending would be paid for.
“At a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut,” added Mr Hunt, referring to the plan to Mr Kwarteng’s plan bring down the basic rate of income tax by 1p.
Mr Hunt noted that the instability on financial markets had a wider impact affecting “the prices of things in shops, the cost of mortgages and the values of pensions”.
Immediately after the mini-budget, investors began demanding higher rates of interest to lend to the government as the UKwas deemed a higher risk investment and borrowing costs surged to worrying levels.
The turmoil forced pension funds to sell bonds due to concerns over their solvency, and threatened to create a downward spiral in bond prices as more were offloaded which left some funds close to collapse.
The Bank of England was forced to step in to buy bonds to try and stabilise their price.
The turmoil also fed through to the mortgage market, where hundreds of products have been suspended due to concerns about how to price these long-term loans.
The Institute for Fiscal Studies (IFS) warned last week that that the chancellor would need to make “big and painful” spending cuts to put the country’s finances on a sustainable path.
The think tank predicted that with a weaker economy and promised tax cuts, there would be a large shortfall in revenue.
It calculated the government would have to spend £60bn a year less by 2026-27.
The prime minister has tweeted to align herself with the announcements made by chancellor Jeremy Hunt (who some Tory MPs are referring to as “de-facto PM) this morning…
The British people rightly want stability, which is why we are addressing the serious challenges we face in worsening economic conditions.
We have taken action to chart a new course for growth that supports and delivers for people across the United Kingdom. https://t.co/P3yglx6efZ
Liz Truss agreed to Jeremy Hunttearing up her mini-budget during a meeting over the weekend.
The prime minister’s official spokesman said: “The chancellor and prime minister discussed these measures and agreed on them over the weekend.”
In a briefing with journalists, the spokesman was asked if Ms Truss would rule out resigning, to which he responded that the PM was working very closely with the chancellor.
The spokesman repeated the admission that the mini-budget “went too far, too fast”.
Ms Truss will be in the House of Commons for Jeremy Hunt’s statement there later today, and will also be meeting with Conservative MPs.
“The prime minister wants to continue to engage with her cabinet colleagues as part of a series of engagements carried out both with cabinet and with Parliament more broadly,” the spokesman said.
Asked whether the government’s commitment to increase defence spending remained, the spokesman said the prime minister and chancellor “remain committed” to increasing defence spending, but added, “the long-term ability to fund increased defence spending will depend on the economic stability and on a healthy growing economy.”
Shadow chancellor Rachel Reeves says “the damage has been done” by the mini-budget.
Responding to Jeremy Hunt’s statement today, Ms Reeves said the “Conservatives have lost all credibility”, and that they cannot provide the “confidence and stability” the chancellor said was needed.
Ms Reeves said: “There will continue to be a huge cost to families because of the actions of this Tory government.
“We are still flying blind with no OBR forecastsand no clarity of the impact of their mistakes.
“The humiliating climb-down on their energy plan begs the question yet again – why won’t they bring in a windfall tax on energy producers to help foot the bill?
“Only Labour offers the leadership and ideas Britain needs to fix the economy and get out of this mess.”
The decision by Jeremy Hunt not to amend the energy price guarantee between now and April next year is incredibly welcome” according to Carl Emmerson, deputy director of the Institute of Fiscal Studies (IFS).
Speaking to Sky News, Mr Emmerson said when the government first announced the energy price guarantee he was “sympathetic” to the idea that the policy might be needed for this winter, but “it always looked rather odd” that the country was committing to it for two years.
Mr Emmerson said: “I’m very pleased to see that the government is now taking an approach saying, well, yes, this big scheme will be in place this winter. We can’t do better than that in the short run.
“But it’s now reopening the idea that we can design something that will be cheaper for the taxpayer, hopefully, targeted towards those who really need it, but also preserves incentives that people have to cut back on their energy use for the following winter.”
Mr Emmerson went on to say the chancellor’s medium-term fiscal plan was a “very big tax rising announcement”.
“A week ago it looked very difficult. We were talking about how would you do this without any tax rises because that was clearly a steer from Liz Truss and the then chancellor,” he said.
“And it looked like you’d have to make some incredibly difficult decisions around working age, welfare, capital spending, and around day-to-day spending on public services.
“Now, there may well still be a need to squeeze spending, given the chancellor’s tax announcement today.
“We’re not necessarily going to be not paying for public services going forward, but it might be the kind of more credible, more deliverable end of the scale rather than what we were looking at just a few days earlier.”
On Monday,the pound gained and government borrowing costs fell as investors welcomed the news that Chancellor Jeremy Hunt is speeding up tax and spending cuts.
In morning trading, sterling gained 1% against the dollar, trading around $1.13.
The interest rate – or yield – on UK government bonds fell as a result of the announcement.
The drop in yields suggests financial markets are welcoming the prospect of changes to economic plans.
Monday is the first time the UK government bond market has reopened since the Bank of England’s emergency support programme ended on Friday.
On Friday, Prime Minister Liz Truss sacked Kwasi Kwarteng as Chancellor and said the mini-budget “went further and faster than markets were expecting”.
The mini-budget was blamed for causing turmoil in the financial markets. The aftermath of Mr Kwarteng’s announcements on 23 September saw the pound slumped to a record low of $1.03 and the cost of government borrowing rise sharply.
“The chancellor will make a statement later today, bringing forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability,” a Treasury spokesman said.
Mr Hunt is expected to fast-track many billions of pounds worth of tax and spending measures from his debt plan, announcing them a fortnight earlier than expected.
It is the latest of a series of U-turns on policies announced in the mini-budget.
The announcement of the £18bn U-turn on corporation tax on Friday and the firing of Mr Kwarteng did not appear to reassure investors, with UK government borrowing costs climbing on Friday afternoon.
Investors warned that whatever Mr Hunt announces will need to “add up”.
“I think you’ll see a positive reaction to the statement, assuming that the math adds up a bit more than it did before,” Shanti Kelemen, chief investment officer at M&G Wealth, told the BBC.
“What we saw on Friday, as we had markets rise in the lead up to the news that Kwarteng was resigning, but then as soon as it happened, we had a sell-off afterwards.
“So I think it’ll be important that the actual content of what’s being delivered adds up and has some more meat and numbers behind it than what we’ve seen previously.”
The Bank of England stepped in to stabilize the financial markets following the mini-budget, announcing an emergency bond-buying scheme.
Ms Kelemen said that the latest moves from the chancellor showed he acknowledged the government’s role in reassuring the markets.
“They’ve recognized that the uncertainty is damaging the economy,” she said.
“You also see the Bank of England won’t be supporting markets this week. So I think it shows the government is taking a bit more responsibility rather than relying on the Bank of England to buy all the debt.”
The shift in the government’s economic policies and market turmoil in recent weeks has led to Goldman Sachs downgrading its forecasts for UK economic growth.
The investment bank revised its 2023 UK economic output forecast from a 0.4% drop to a 1% contraction.
Goldman said it expected a “more significant recession in the UK” in part due to “significantly tighter financial conditions” and the planned higher corporation tax rate from next April.
Consultancy Pantheon Macroeconomics said the prime minister’s decision to appoint Mr Hunt as chancellorhad “done little to shrink the risk premium embedded in UK assets”.
“Households and businesses, therefore, are still facing a huge increase in their borrowing costs,” their analysts said.
They added the forthcoming real-term reduction in government spending looked “set to be bigger than in the 2010s”.
Labour leader Sir Keir Starmerhas hit out at what he called the “grotesque chaos” of chancellor Kwasi Kwarteng’s sacking, as he accused Liz Truss of putting “party first and country second”.
It comes as the turmoil continued within the Conservative party this morning, as new chancellor Jeremy Hunt rowed back on Liz Truss’s promises on tax cuts and public spending.
Mr Hunt told Sky News there were “mistakes” in the mini-budgetand warned of tough times ahead.
Hunt warns of ‘difficult decisions’; follow politics’ latest
“We won’t have the speed of tax cuts we were hoping for, and some taxes will go up”, he said.
He also said that all government departments would have to “find more efficiencies than they were planning to find”.
Mr Hunt was appointed chancellor on Friday, an hour after his predecessor Kwasi Kwartengwas sacked after just 38 days on the job.
The Bank of England‘s help with the markets has finished today (see 4.04 pm post).
But what have today’s events done to the markets?
As Sky News business presenter Ian King explained: “30-year-gilts spiked earlier this week – hitting 5.1%, the highest level since 2002.
“That was on the back of comments made by Andrew Bailey, the governor of the Bank of England overnight on Tuesday that said pension funds only had three days in which to sort this issue out with today being the final deadline.
“The Bank started buying gilts more heavily on Wednesday and Thursday.
“You can see there on the chart the rumours in the middle of yesterday that the government was going to have to U-turn further on its mini-budget.
“And then we had rumours Kwasi Kwarteng was going to go – so you saw yields fall very, very sharply.
“They fell to as low as 4.1% this morning – a colossal move in terms of the scope of these things from 5.1% on Wednesday.
“Then we had confirmation that Mr Kwarteng had resigned – or been sacked – and you saw Liz Truss speak.
The higher the bond yield is, the more the government is going to have to pay for borrowing money.
The pound has also been tumultuous today – falling with Mr Kwarteng’s sacking, rising on Mr Hunt’s appointment, and falling on Ms Truss’s press conference.
Labour leader Sir Keir Starmer has said Kwasi Kwarteng’s sacking does not “undo the damage” already inflicted by Liz Truss’s government through the mini-budget.
“Changing the chancellor doesn’t undo the damage made in Downing Street,” he posted on Twitter.
Changing the Chancellor doesn’t undo the damage made in Downing Street.
Liz Truss’ reckless approach has crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage. 1/2
Liz Trusssays she “acted decisively” as her first consideration is what is in the national interest.
Asked why she should stay as prime minister now her economic plan has been dismantled, the PM says: “I am determined to see through what I’ve promised – deliver higher growth, a more prosperous the United Kingdom.”
Ms Truss says her priority is “delivering the economic stability this country needs”.
She repeats: “I have to act in the national interest as prime minister.”
PM Liz Trusssays she met the “former chancellor” Kwasi Kwateng today.
“I was incredibly sorry to lose him,” she says.
“He is a great friend and he shares my vision to set this country on the path to growth. Today, I have asked Jeremy Hunt to become the new chancellor. He’s one of the most experienced and widely respected government ministers and parliamentarians, and he shares my convictions and ambitions for our country.
“He will deliver the medium-term fiscal plan at the end of this month. He will see through the support we are providing to help families and businesses, including our energy price guarantee.
“That’s protecting people from higher energy bills this winter. And he will drive our mission to go for growth, including taking forward the supply-side reforms that our country needs. We owe it to the next generation to improve our economic performance, to deliver higher wages, new jobs, and better public services, and to ease the burden of debt.
“I have acted decisively today because my priority is ensuring our country’s economic stability as prime minister.”
Liz Trussis now giving a press conference in Downing Street.
She has confirmed that the corporation will rise to 25% from 19% in a major policy U-turn.
It is the second reversal of a mini-budget policy after the government decided not to scrap the 45p highest income tax threshold.
“It is clear that parts of our mini-budget went further and faster than markets were expecting, so the way we are delivering our mission now has to change,” she said
Justice Secretary Brandon Lewis is the first cabinet minister out of the blocks to congratulate Jeremy Hunton his appointment as chancellor this afternoon.
“Congratulations Jeremy Hunt and look forward to working together to drive growth for everyone in the UK,” he posted on social media.
“Legal services are a huge part of the UK economy delivering jobs in all parts of the country.”
Congratulations @Jeremy_Hunt and look forward to working together to drive growth for everyone in the UK, legal services are a huge part of the UK economy delivering jobs in all parts of the country. https://t.co/ZzZcxZQuFq
Labour and Lib Dem MPs are weighing in with their opinions on the recent sacking of Kwasi Kwartengas chancellor.
Jeremy Hunt was announced as his replacement shortly after.
MPfor Wolverhampton South East Pat McFadden says changing the chancellor “will not get the PM off the hook” and that she is a 100% co-owner of the mini-budget”, while others call for a general election.
Kwasi Kwartenghas confirmed he has today been sacked as chancellor after just 38 days in the role.
Publishing a letter he has written to Prime Minister Liz Truss on Twitter, Mr Kwarteng said it had been “an honour” to serve as her first chancellor.
Describing the “incredibly difficult” situation Ms Truss’s government inherited, Mr Kwarteng’s letter adds: “However, your vision of optimism, growth and change was right.
“As I have said many times in the past weeks, following the status quo was simply not an option.
“For too long this country has been dogged by low growth rates and high taxation – that must still change if this country is to succeed.”
Despite growing calls for further U-turns over the government’s controversial mini-budget, Mr Kwarteng describes his Medium-Term Fiscal Plan – due to be unveiled on 31 October – as “crucial”.
He says he believes the PM’s “vision is the right one”, adding that he looks forward “to supporting you and my successor” from the back benches.
Mr Kwarteng’s letter concludes: “Your success is this country’s success and I wish you well.”
Discussion is happening at all levels in the Conservative partyabout whether the prime minister can survive – even if she replaces her chancellor.
As one senior minister in her government put it to me this morning before reports that Kwarteng would be sacked: “I honestly don’t think either of them, Liz or Kwasi have a clue, I don’t think they know what they’re doing.”
“They’ve got one shot to satisfy the markets,” the minister said – with a full U-turn on the corporation tax freeze and perhaps more: “The worst possible thing, now the markets have priced in a U-turn on corporation tax would be mealy-mouthed partial U-turn.”
“But my instinct is she won’t survive. She’s introduced herself to the country in the worst way imaginable, and people’s views of her are quite settled now.
“Even if she stays, you can’t have a chancellor who has lost the confidence of the markets, that’s never happened before that I can remember”. The minister said the prime minister might need a complete reboot of the Treasury team to restore confidence, but having jettisoned key parts of her economic programme, “she is a husk.”
This minister and others point out that her controversial supply-side reforms are likely to be opposed in parliament – as are spending cuts on the scale that may be needed to pay for her measures.
Other MPs also say she will need a humiliating change of direction to survive. One long-serving MPsaid: “It’s unfair for Kwasi to go in the sense that it was all her idea, but politics isn’t fair. It’s a matter of survival for her now, there are discussions going on but it’s not organized yet.”
DISCLAIMER: Independentghana.com will not be liable for any inaccuracies contained in this article. The views expressed in the article are solely those of the author’s and do not reflect those of The Independent Ghana
The pound has gained as speculation about a possible U-turn on the mini-budgethas increased.
On Friday morning, sterling was trading above $1.13 versus the dollar as the chancellor returned home early from the United States for urgent discussions in Downing Street.
In September, the currency touched a record low of $1.03 as markets responded negatively to Kwasi Kwarteng’s mini-budget.
In it he promised billions of pounds of tax cuts but did not explain how he would fund them.
Government borrowing costs have also fallen, after surging to worrying levels in the days after the mini-budget.
The Bank of Englandhas been buying government bonds – known as gilts – to try to stabilise their price and prevent a sell-off that could put some pension funds at risk of collapse.
However, that support is due to come to an end on Friday.
There has been speculation it may be extended, although this was dismissed by the Bank’s governor, Andrew Bailey, earlier this week.
The government has already U-turned on its plan to scrap the top rate of income tax, but many Conservative MPs think a further change of plan is imminent.
Russ Mould, investment director at AJ Bell, said the financial markets were already pricing in a government U-turn.
“They started to [price it in] yesterday,” he told the BBC’s Today programme.
Mr Mould pointed to the fact that the yields – or the effective interest rate – on UK government bonds have been falling back in anticipation of a reversal to the tax-cutting plans. On Friday morning, the yield on bonds that borrow money over 30 years fell to 4.47%.
“Gilt yields came down… and sterling rose against the dollar to $1.13 and against the euro to €1.16, so I think they are starting to either expect, demand, sniff out that there will be some degree of U-turn possibly on corporation tax, dividend tax, other areas,” Mr Mould said.
Asked what would happen if there is no U-turn, Mr Mould said: “You would expect the gains that we’ve started to see, to unwind.”
Bank of England support
The government raises the money it needs for spending by selling bonds – a form of debt that is paid back plus interest in anywhere between five and 30 years.
Pension funds invest in bonds because they provide a low but usually reliable return over a long period of time.
However, the sharp fall in their value after the mini-budget forced pension funds to sell bonds, threatening to create a “downward spiral” in their prices as more were offloaded, which left some funds close to collapse.
This sparked an emergency intervention by the Bank of England,which stepped in to buy bonds and prevent their price falling further.
There has been strong speculation that the Bank will extend the scheme, which is due to end on Friday.
But on Tuesday, Mr Bailey dashed those hopes, telling pension funds: “You’ve got three days left now and you’ve got to sort it out.”
Bethany Payne, global bonds fund manager at Janus Henderson, told the BBC it was not clear whether pension funds have done enough to strengthen their finances.
“The risk is that we don’t know how pension funds have used this window of time and whether they have used it effectively by raising cash and doing everything they need to,” she said.
“So the true test of the market will be this afternoon and Monday morning to see whether they have done enough.”
The Bank of England is set to stop its government bond-buying scheme today after attempting to reassure the UK’s financial markets.
The Bank launched the unprecedented intervention after the chancellor’s mini-budget caused chaos within the markets, as well as a potential pension pots crisis.
It promised to buy up to £65bn in government bonds – which are known as gilts – from those who wanted to sell them.
The government issues bonds to raise money for public spending, often used to service pension funds and the life insurance market.
Banks and big financial institutions that buy the gilts from the government at auction can sell them on to smaller financial institutions, traders or investors on the open market.
The price – or rate – at which they are bought and sold will be higher if investors think the government is able to repay the debt when the bond matures.
But when confidence in the UK economy falls, so does the bond price.
This increases the yield, the rate of interest, or the cost of borrowing, as investors seek to protect their money.
How much did the BoE spend on bonds?
The scheme launched by the Bank of England was designed to restore confidence in the government’s finances – increasing bond prices and decreasing the yields it has to pay on them.
Initially, the Bank’s intervention seemed to push down yields on these gilts.
But on Wednesday, yields had surged as high as 5.1%, the same level they reached before the Bank’s initial intervention.
As part of the programme, the Bank bought around £4.35bn of bonds on Wednesday and £4.7bn on Thursday in an increased effort to help soothe the markets.
It brings the total bond buying to £17.8bn.
Ultimately, it has helped to prop up pension funds at a time when they were already under a lot of strain from global financial pressures.
Another U-turn expected
Chancellor Kwasi Kwarteng and Prime Minister Liz Truss are now under pressure to reinstate a planned increase in corporation tax from April.
On Thursday night, the chancellor announced he would be returning to the UK from the US earlier than planned, amid growing expectations of a government U-turn on corporation tax.
The widely anticipated move appeared to reassure the finance industry after Bank of England Governor Andrew Bailey spooked the markets by insisting that the emergency support would not be extended.
Mr Kwarteng has also that there would be “no real cuts to public spending”, appearing to double down on comments made in the House of Commons by the PM on Wednesday.
The government’s plans revolve around securing an increase in economic growth – with a target of an annual rise of around 2.5% in gross domestic product.
The crucial date will be 31 October, when the forecasts presented by the Office for Budget Responsibility alongside the chancellor’s statement will give an assessmentof whether such a plan is realistic.
In its latest economic update, Deutsche Bank said: “Since our last growth update, the UK economic outlook has weakened further.
“We now see the UK in a recessionary orbit with growth likely to remain subdued for much of the next year or so, with GDP slowing from 4.5% this year (previously: 3.5%) to -0.5% next year (previously: 0%), and rising by 1% in 2024 (previously: 1%).
“We now expect GDP to return to its pre-pandemic level only in 2024, with growth recovering to its trend rate (1.25%) around the middle of the decade.”
The UK’s biggest mortgage lenders will urge the chancellor to extend a government home loans initiative that helps first-time buyers get onto the property ladder.
Sky News understands that executives from major banks and Nationwide, Britain’s biggest building society, will ask Kwasi Kwartengto commit to renewing the Mortgage Guarantee Scheme, which is scheduled to expire at the end of the year.
Launched in the spring of 2021, the scheme gives lenders an option to underwrite through the government the losses incurred on mortgages above 80% of the purchase price of a property.
The request to extend the scheme will form part of the banks’ agenda as they and the Treasury seek to address the disruption in the mortgage market following Mr Kwarteng’s ‘mini-Budget’ last month.
Lenders will also highlight the need for stability in financial markets in order to price home loans properly and will flag potential risks under the City watchdog’s new ‘consumer duty’ from agreeing to unaffordable mortgage loans.
Hundreds of mortgage deals have been pulled or frozen by banks in the last fortnight as a result of volatility in how banks price such loans.
The chief executive of the City watchdog told The Sunday Times at the weekend that he wanted lenders to justify the withdrawal of fixed-rate mortgage products.
“If a product is withdrawn for a temporary period, we want to understand when they’re going to come back to the market so that those people who may need to refinance are able to proceed with their plans,” Nikhil Rathi told the newspaper.
As Liz Truss prepares for her first conference speech as prime minister today, a word cloud created by the research group JL Partners has revealed the most commonly used words used to describe the current leader and her rival Keir Starmer.
When asked to give a view this week on the Tory leader after the mini-budget, the public most commonly used the words “incompetent”, “useless” and “untrustworthy”.
Word cloud for Liz Truss after the mini-budget
In comparison, the words used to describe the prime minister before the mini-budget were “determined”, “strong” and “competent”.
Word cloud for Liz Truss before the mini-budget
The prime minister is currently facing the tough task of restoring Torymorale after a conference that has seen a U-turn over a totemic tax policy, cabinet dissent, and the threat of another major split over the level of benefits.
Meanwhile, the most commonly used words to describe Mr Starmer were “boring”, “leader” and both “competent” and “untrustworthy”.
Giving his keynote Conservative Party conference speech following the 45p tax rate cut U-turn earlier this morning, Kwasi Kwarteng began by saying: “What a day.
“It has been tough, but we need to get on with the job in hand.”
The chancellor continues: “No more distractions, we have a plan and we have to get on and deliver it.”
But the chancellor acknowledges that his tax-cutting mini-budget caused economic turmoil, saying: “I know the plan we put forward 10 days ago caused a little turbulence. I get it.”
It’s hard to think of another episode like this. There have been budget U-turns before, but it’s hard to think of any which came so soon after they were announced and were not just an obscure technical consequence of a bigger measure (for instance George Osborne’s pasty tax).
The question now, however, is whether this change of mind changes the mind of the millions of investors who have, in the past week, been eschewing UK investments. That resulted in a fall in the pound and a sharp increase in government borrowing rates.
Yet – and this is something those inside Number 10 have pointed out themselves – the removal of the 45p rate was not all that expensive when compared to the other bits of the mini-budget: around £2bn of a total £45bn package.
They saw no arithmetic link between the measure in numerical terms and the reaction from currencies and bonds. The most straightforward conclusion, then, was that rather than responding to this 45p rate, investors seemed instead to be responding to something broader: a crisis of confidence in the government’s economic leadership.
Whether the abolition of the 45p rate is enough to change that view remains to be seen. In the immediate wake of the news, the pound rallied against the US dollar and money markets responded by reducing their expectations of future interest rates.
That is, from the government’s perspective, quite promising. But these are just small moves and we shall have to see what happens next.
Perhaps they will decide this is a sign of readiness from the government to try to rebuild their credibility; that they have moved away from the denial stage. Or perhaps not: we shall see.
DISCLAIMER: Independentghana.com will not be liable for any inaccuracies contained in this article. The views expressed in the article are solely those of the author’s and do not reflect those of The Independent Ghana
Source: Skynews, Ed Conway, data and economics editor
The chancellor stated that the government has changed its mind about wanting to eliminate the 45p income tax rate.
Kwasi Kwarteng told the BBC the proposals, announced just 10 days ago, had become “a massive distraction on what was a strong package”.
“We just talked to people, we listened to people, I get it,” he added.
The decsion, which marks a humiliating climbdown for Prime Minister Liz Truss, comes after several Tory MPs voiced their opposition to the plan.
Ex-cabinet minister Grant Shapps had warned the prime minister would lose a Commons vote on the proposal.
The plan to scrap the 45p rate, paid by people earning over £150,000 a year, had been criticized as unfair at time of rising living costs.
On Sunday, the prime minister had told the BBC she was absolutely committed to it as part of a package to make the tax system “simpler” and boost growth.
But the measure has seen remarkable opposition from the markets, opposition parties and a growing number of Tory MPs.
Increasingly, it seemed Ms Truss did not have the numbers to get it through.
On Sunday, senior Tory Michael Gove hinted he would not vote for the plan when it came to Parliament, saying “I don’t believe it’s right”.
The former cabinet minister said the PM’s decision was “a display of the wrong values”.
Mr Shapps also urged Ms Truss to U-turn, warning her not to have a “tin ear” to voters’ concerns about rising living costs.
“I don’t think the House is in a place where it’s likely to support that,” he told the BBC on Sunday.
The U-turn, suggestions of which were first reported by the Sun, comes on the second day of the Conservative conference in Birmingham, with Mr Kwarteng due to speak later on Monday.
The currency touched a record low last week after Mr Kwarteng’s mini-budget – which contained around £45bn of unfunded tax cuts – created turmoil on the markets.
Liz Truss and her ministersarrived as anticipated in a combative, flinty tone, ready to stick with their mini-maxi budget.
In her no-surrender speech on the 45p top tax rate, the prime minister paid homage to Thatcher by blaming international forces for domestic interest rate increases that are driving up mortgage and business costs for millions of people.
Conservative party chairman Jake Berry went further, suggesting markets can overreact.
The only contrition so far has been an acknowledgment that the communications around the growth plan weren’t up to scratch.
So far so expected.
But a number of unexpected things have already happened today.
First is the public scale of the opposition the PM is already experiencing.
Mel Stride, chair of the Treasury Select Committee, wants to bring forward the Office for Budget Responsibility forecasts.
Others are planning to speak publicly.
Secondly is the huge disquiet from dozens of Tories not in Birmingham who are contemplating how to stop – in their view – Ms Truss wrecking the reputation for financial probity of the Conservative Party.
One Tory MP even suggested they would contemplate voting to force a general election soon, arguing it could be in the national interest, even if that meant expulsion from the party and being ostracised by everyone who they have worked with in the last decade.
Thirdly, confusingly, Liz Truss has knocked down her relationship with her Chancellor Kwasi Kwarteng.
She appeared to blame him for the 45p tax row, saying it was his decision, as she admitted it wasn’t put to the cabinet.
This prompted even Truss loyalist Nadine Dorries to raise an eyebrow, saying “there is a balance, and throwing your chancellor under a bus on the first day of the conference really isn’t it. Fingers crossed things to improve and settle down from now.”
Last week, Sky News outlined how Ms Truss needed convincing by Mr Kwarteng to acknowledge the Bank of England’s concerns.
This creates a toxic impression the two are not getting along. This isn’t a straightforward start to Ms Truss’s first conference.
After the mini-budget, Prime Minister Liz Trussacknowledged there had been “disruption” in the UK economy.
She declared in a letter to The Sun that she had “acted forcefully” and would maintain a “iron grip” on the country’s finances.
The government unveiled £45bn of tax cuts funded by borrowing last week – but did not accompany it with the usual economic assessment of the plans.
That worried investors causing the pound to slump and forcing the Bank of England to step in to reassure markets.
Ms Truss has resisted calls to reverse the cuts or to bring forward the publication of the independent fiscal watchdog’s economic forecasts and analysis of her tax plans.
The prime minister said she was “committed” to publishing the Office for Budget Responsibility (OBR) forecast on 23 November, the same day the chancellor is due to set out further economic plans, after she met the OBR on Friday.
But some Conservative MPs want to see this sooner to reassure the financial markets after turbulent trading.
The Treasury argues it should wait until additional changes are announced.
Ms Truss wrote in the Sun: “I am going to do things differently. It involves difficult decisions and does involve a disruption in the short term.”
She reiterated her commitment to “get the economy growing”, with plans to stimulate growth expected to include measures in eight areas – business regulation, agriculture, housing and planning, immigration, mobile and broadband, financial services, childcare, and energy.
And she insisted she would maintain an “iron grip on the national finances”.
Her chancellor, Kwasi Kwarteng, writing in the Telegraph newspaper, insisted that November’s statement would include a “credible plan” to get the public finances back on track, with a “commitment to spending discipline”.
“The British taxpayer expects their government to work as efficiently and effectively as possible, and we will deliver on that expectation,” Mr Kwarteng said.
But senior minister Simon Clarke told the Times newspaper the government needed to explain more about how it would control spending, as well as boost economic growth.
“We have acquired spending habits that outstrip our ability to pay for it. That needs to change,” he said.
He suggested the government was looking to make significant cuts and “trim the fat” when it comes to public spending.
“I think it is important that we look at a state which is extremely large, and look at how we can make sure that it is in full alignment with a lower tax economy.”
Ms Truss confirmed on Thursday that she was looking for cuts across the government as a way to pay for the mini-budget measures.
Waveney MP Peter Aldous said the timing of last Friday’s plan had been “hopelessly wrong”, and the rest of the details should be brought forward to October.
Liberal Democrat leader Sir Ed Davey argued that the government, by waiting until 23 November, was allowing the UK economy to “fly blind” for two months.
“Families and businesses can’t afford to wait any longer for this government to fix their botched, unfair budget,” he said.
IMAGE SOURCE,PA MEDIA Image caption, Leading members of the Office of Budget Responsibility arriving at 10 Downing Street for a rare meeting with the prime minister
What is the Office for Budget Responsibility?
The Office for Budget Responsibility is the independent watchdog for the government’s finances.
It usually produces economic forecasts twice a year, to accompany each autumn budget and spring statement.
It scrutinises government plans, to increase taxes or borrowing for example, and predicts what the likely impact on the overall economy will be.
These forecasts are so important because a strong one gives investors confidence to put money into the UK economy – whereas a weak one is likely to have the opposite effect.
The government can request forecasts from the OBR at any time to get independent advice on big moves.
But it did not take the OBR up on its offer ahead of last week’s mini-budget. This is thought to have undermined confidence in the markets.
This led to the pound dropping to its lowest rate against the dollar in 37 years on Monday, before returning to its previous level.
The government’s tax-cutting plan faced criticism from the International Monetary Fund, and the pound dropped to a 37-year low of $1.03 on Monday.
On Friday, the sterling rose to $1.12 – close to the level the currency was at before the mini-budget was announced.
Despite that, the rating agency Standard & Poor’s cut the outlook for its AA credit rating for British government debt from “stable” to “negative” on Friday, because of the prospect of higher borrowing needed to fund the pledges.
In recent days, the Conservatives have posted some of their worst opinion poll ratings in more than 20 years.
A poll published on Thursday by Survation put the party on 28%, more than 21 points behind Labour, while a separate survey by YouGov put the Tories on 21%, 33 points adrift.
Labour’s shadow business secretary Jonathan Reynolds said ministers should “get back to Parliament, revoke the changes, and start again to try and rebuild confidence”.
And Conservative MP Martin Vickers urged the prime minister not to scrap the 45p tax rate and the bankers’ bonus cap, describing the move as “a political own goal”.
However, another Tory backbencher, Andrea Leadsom, said the mini-budget was “unashamedly pro-growth”, and that the markets were “wrong to be jittery” about the changes.
For more than six decades, some of the UK’s most devastating economic events have happened under an autumn cloud. Is history repeating itself?
The poet and banker T S Eliot got it wrong – April is not the cruelest month, at least when it comes to financial crises. Autumn is crueller.
The months of September, Octobe,r and November are when gestating economic turbulence tends to burst into full-blown economic storms.
The precedent of the calendar should give the prime minister and chancellor something additional to worry about as the government insists the present shocks to sterling, inflation and mortgages are nothing to worry about in spite of the Bank of England having to intervene with £65bn worth of reserves.
The big daddy of them all, the Wall Street Crash in the United States, is dated to September and October 1929. In the UK, the economic crises of the post-Second World War period have had an autumnal flavour.
Timeline of tumbles
November 1967: The Wilson government’s “pound in your pocket” devaluation took the value of a pound sterling down to $2.47.
October 1974: At the second general election of that year, Labour consolidated its victory over Ted Heath’s Conservative government. Heath’s chancellor, Sir Anthony Barber, quit politics after his disastrous “dash for growth”.
October 1976: The “Crisis What Crisis” crisis when the UK needed a $3.9bn bailout loan from the IMF. Free-floating exchange rates pushed the pound to a then-record low of $1.57.
26 October 1989: Nigel Lawson, at the time the longest-serving Chancellor, resigned from Margaret Thatcher’s government over economic policy differences, precipitating the year-long Tory turmoil that resulted in her resignation as prime minister.
October 1990: John Major, the Conservative prime minister, took the pound into the European Exchange Rate (ERM) mechanism, having failed to announce the decision at the Conservative Party conference days before.
Image:The pound crashed out of the ERM after John Major’s decision to take it in
16 September 1992: Black Wednesday. The pound crashed out of the ERM after the failure of the Major government’s panic measures, which briefly lifted interest rates as high as 15%. Although it had only been re-elected that summer and although the new chancellor, Kenneth Clarke, adopted a new economic strategy, the government’s fortunes never recovered. Labour and Tony Blair won the election in May 1997 by a landslide.
September 2007. The building society Northern Rock closed its doors to savers. To continue trading, it had to seek support from the Bank of England as lender of last resort. By February 2008 the mortgage lender had to be nationalised. It was an early harbinger of:
September 2008 banking crisis: Overextension and insecure loans resulted in the bankruptcy of Lehman Brothers and the need for taxpayer bailouts of lending institutions on both sides of the Atlantic.
Gordon Brown “saves the world [banking system]” by marshaling an emergency meeting of the G20. In the UK, the public stakes taken to support major banks resulted in a squeeze on public spending and the “austerity” policies followed by subsequent governments.
October 2016: The pound dropped 28% after the vote to leave the EU, hitting a then-record low of US$1.14.
September 2022: Markets lose confidence in UK economic managementafter an uncosted “fiscal event” announcement by the new chancellor, Kwasi Kwarteng, on 23 September. The pound dips to a new record low of $1.03 before recovering to around $1.08.
Gilt yields, the driver of domestic inflation, surged – even as pension funds obliged to sell them courted bankruptcy until the Bank of England made its intervention. Hundreds of mortgage products were withdrawn, paralysing the housing market. The International Monetary Fund publicly rebuked the government for proposing huge tax cuts without the funds to pay for them.
That is where the UK finds itself today, on top of the cost of living crisis it already faced, in large part because of Russia’s attack on Ukraine and the consequent rises in energy prices.
It is too soon to tell where the economy is going to end up. Each of the autumnal plunges listed above had different causes resulting from the same mix of political and financial ambitions, and human hubris, greed, ambition, and overconfidence.
But why in autumn?
The reasons economic crises come to a head in the autumn are speculative. It is certainly a time of year for stocktaking in Western market economies after a break or slowdown over the summer holiday period.
Autumn, mid-October this year, is when the International Monetary Fund and the World Bank hold their annual joint meeting. With the year’s three-quarters done, it is natural to look back and assess whether things have gone well or badly. If there are problems, governing politicians and markets are likely to take steps to correct them, which sometimes only leads to bigger mistakes.
Autumn crunch points are stronger in this country because of the long summer parliamentary recess and the ritual of the annual party conference season.
If they had to change leader, and Tory MPs decided Boris Johnson had to go, they were determined to have a new leader in place in time for a relaunch at the Conservative Party conference next week in Birmingham.
No need for an ethics watchdog
Ms Truss, in turn, was so anxious to hit the ground running that she launched her new economic strategy without running it through the usual channels of the Office of Budget Responsibility (OBR) and having sacked Sir Tom Scholar, the long-standing permanent secretary at the Treasury.
The OBR is not the only regulatory institution treated with contempt by Ms Truss. She has also closed down the National Security Council and the Independent Office of Tax Simplification and suggested she will not need a No 10 ethics watchdog.
Her role model Margaret Thatcher – who like Sir Tony Blair avoided economic smashes while in office – played by the rules and conventions. She believed in balancing the books and famously observed, “You can’t buck the markets.”
The new prime minister thinks she and her chancellor know better, commenting: “We have had a consensus of the Treasury, of economists, with the Financial Times, with other outlets, peddling a particular type of economic policy for 20 years. It hasn’t delivered growth.”
Gamble
One can quibble with the accuracy of this statement, noting the early decade of this century was mostly characterized by on or above-trend growth and that since 2010, a Conservative government has been in charge, of which Ms Truss has been a supporter and member.
What matters is that Ms Truss has decided to gamble the economy on a new policy of pursuing growth at all costs even when her proposals seem contradictory, such as simultaneous borrowing, tax cuts, and huge government spending, to stabilize energy markets only temporarily.
Her opponent for the leadership, Rishi Sunak, warned of the consequences of her plans but was rejected by the party membership.
DISCLAIMER: Independentghana.com will not be liable for any inaccuracies contained in this article. The views expressed in the article are solely those of the author’s and do not reflect those of The Independent Ghana
Experts said a rise in the cost of long-term borrowing due to the market turmoil meant the cost to lenders of offering new mortgage deals was too expensive.
Sterling fell to an all-time low earlier against the US dollar after Chancellor Kwasi Kwarteng pledged further tax cuts at the weekend on top of Friday’s mini-budget where he announced the biggest tax cuts in 50 years.
The pound had been sliding as global markets reacted to the sharp increase in government borrowing required to fund the cuts.
A weak pound makes it more expensive to buy imported goods and risks pushing up the rising cost of living even further. Imports of commodities priced in dollars, including oil and gas, are also more expensive.
UK inflation, the rate at which prices rise, is already rising at its fastest rate for 40 years.
Some economists had predicted the Bank of England would call an emergency meeting in the coming days to raise interest rates in a bid to stem the fall, as well as calm rising prices.
But the Bank of England instead said it was “monitoring developments in financial markets very closely” and would make a full assessment at its next meeting on 3 November.
Investors are now predicting that interest rates could more than double by next spring to 5.8% from their current 2.25%, to curb high inflation, which is expected to be fuelled by the huge tax cuts announced in Friday’s mini-budget.
‘Not affordable’
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said if interest rates rise as predicted, the average household refinancing a two-year fixed rate mortgage in the first half of next year would see monthly payments jump to £1,490 from £863.
“Many simply won’t be able to afford this,” he said.
A late afternoon double dose of attempted reassurance – firstly from the Treasury, and then from the Bank of England.
What’s new from the Treasury is a timeline with dates attached. There will be a series of statements from various cabinet ministers about ideas we heard about on Friday.
And then in just under two months, a parliamentary moment. What’s being described as the “Medium Term Fiscal Plan” – and the Office for Budget Responsibility’s number crunching.
In short, what the Treasury is attempting to say is this: don’t panic, we know what we’re doing.
Well, let’s see what the markets do next.
The market volatility following Mr Kwarteng’s mini-budget has also been linked in part to the government’s decision not to publish a forecast of expected UK growth and government borrowing from independent forecaster the Office for Budget Responsibility.
Martin Weale, Professor of Economics at King’s College London and former member of the Bank of England’s Monetary Policy Committee, which votes on interest rates, told BBC Radio 4’s PM programme that people “are concerned that the government has no plan for bringing the national debt under control.”
“Sterling has fallen because market traders have been frightened by the government’s policies, and I think they got further frightened by the sense over the weekend that this was only the first installment of some tax cuts.”
But Lord David Frost, Conservative peer and former chief Brexit negotiator, said the reaction on global markets was “an overreaction”.
“I don’t think anything has gone wrong, actually, Liz Truss promised change, a different economic approach to get us back to growth and away from stagnation.”
He said as part of this change in approach, interest rates would rise and the government would need to provide additional support via tax cuts, and whilst it would need to reduce spending medium term, the details of that would come in November.
The government said its financial plan set for 23 November would include full growth and borrowing forecasts from the Office for Budget Responsibility.
It also pledged to set out further details on the government’s spending rules, including how it will try to decrease debt.
Paul Dales, the chief UK economist at Capital Economics, said given the pound had fallen back since the statements from the Bank and the Treasury the markets “may well need more reassurance and some actual action”, saying a change in policy from the government or an interest rate hike from the Bank at an emergency meeting before 3 November may be necessary.
The key announcements in Chancellor Kwasi Kwarteng’s mini-budget: stamp duty, energy bills, and alcohol duty.
Here are the key points from Chancellor Kwasi Kwarteng’s mini-budget statement to MPs:
• The basic rate of income tax will be cut to 19p in the pound from April 2023. Will mean 31 million people will be better off by an average of £170 per year.
• The 45% higher rate of income tax is to be abolished.
• It was already announced that April’s National Insurance hike is to be reversed from 6 November – saving money for businesses and 28 million workers. The 1.25 percentage points increase was introduced under former chancellor Rishi Sunak.
• Planned duty rises on beer, cider, wine, and spirits canceled
• Stamp duty to be cut from “today”. Nothing will be paid for the first £250,000 of the property’s value – double the current amount allowed. The threshold for first-time buyers is to be increased from £300,000 to £425,000. The value of the property on which first-time buyers can claim relief is to also go up from £500,000 to £625,000.
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• Household bills to be cut by an expected £1,000 this year with aid from an energy price guarantee and a £400 grant. Millions of the most vulnerable households will receive additional payments, taking their total savings this year to £2,200.
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• Total cost of energy package, including business support, over the next six months estimated at £60bn. It is “entirely appropriate for the government to use our borrowing powers to fund temporary measures to support families and businesses”.
• Treasury estimates tax cut measures will cost nearly £45bn a year in 2026.
• Independent forecasters expect the government’s energy plan “will reduce peak inflation by around five percentage points”.
• Bank of England independence is “sacrosanct”.
• Government to set out its fiscal approach more fully in the future and the Office for Budget Responsibility will publish an economic and fiscal forecast before the end of the year.
• The EU-inspired cap on bankers’ bonuses is to be scrapped as part of efforts to “reaffirm” the UK’s status as a financial services hub. “All the bonus cap did was to push up the basic salary to bankers or drive activity outside Europe”, the chancellor said.
• Planned rise in corporation tax to 25% next year is cancelled. “We will have the lowest rate of corporation tax in the G20. This will plough almost £19 billion a year back into the economy”, Mr Kwarteng said.
• Will legislate to require trade unions to put pay offers to a member vote so strikes can only be called once negotiations have fully broken down.
• To cut taxes for businesses in designated sites for 10 years to support investment, jobs, and growth. In talks with 38 local and mayoral combined authority areas in England about “investment zones”. Aims to roll out more widely across the UK.
• Universal Credit Claimants who earn less than the equivalent of 15 hours a week at the National Living Wage, 120,000 people, will be required to meet regularly with their Work Coach and take active steps to increase their earnings or face having their benefits reduced. The aim is to reduce vacancies in the economy.
• Will simplify IR35 rules – governing how temporary contractors are paid – by scrapping reforms in 2017 and 2021 that added “unnecessary complexity and cost” for many businesses.
• Introducing VAT-free shopping for overseas visitors.
• Changing regulations to increase investment by pension funds into UK assets, benefiting savers and boosting economic growth, and incentivizing investment into Britain’s science and tech companies.
• Annual Investment Allowance – tax relief for businesses on plant and technology investment – to remain at £1m permanently, rather than letting it return to £200,000 in March 2023.
As he announced his mini-budget, Chancellor Kwasi Kwarteng promised to “turn the vicious cycle of stagnation into a virtuous cycle of growth.”
He is proposing the largest tax cuts since 1988, which will be paid for by a significant increase in borrowing.
It is being seen as a major change of direction for the government under new Prime Minister Liz Truss.
It comes as the Bank of England warns the UK may already be in recession.
In a departure from Boris Johnson’s economic policies, Mr Kwarteng has scrapped plans to push up taxes to pay for public services with the aim of kick-starting the UK’s sluggish economy.
In a statement to the Commons, he said: “Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.
“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s.
“We are determined to break that cycle. We need a new approach for a new era focused on growth.”
The government normally releases an independent forecast of how major tax changes will impact the economy, but Mr Kwarteng has opted not to do this, as his statement is not technically a Budget.
However, Mr Kwarteng promised the Office for Budget Responsibility would publish a full economic forecast before the end of the year, with a second to follow in the new year.
The Institute for Fiscal Studies thinks tank has published its own analysis, saying: “The government is choosing to ramp up borrowing just as it becomes more expensive to do so, in a gamble on growth that may not pay off.”
Mr Kwarteng confirmed a planned corporation tax increase from 19% to 25% would also be scrapped.
The chancellor also announced an increase to the threshold people in England starts paying stamp duty on home purchases to £250,000.
For first-time buyers, the threshold will rise to £425,000.
There are likely to be changes in income tax.
Mr Kwarteng confirmed the cap on bankers’ bonuses would be lifted and new investment zones would be established, where businesses would benefit from tax cuts and planning rules would be relaxed to encourage house building.
The cost of cutting these taxes is estimated at about £30bn a year.
The statement also included details of the cost of the government’s plan to cap energy bills for households and businesses.
Mr Kwarteng said these estimated costs were “particularly uncertain, given volatile energy prices” but based on recent prices the total cost of the package for the six months from October was expected to be around £60bn.
